How Inheritance Tax Works in the UK (And How to Prepare)

Inheritance Tax affects a growing number of UK estates — particularly those holding property — as property values have risen while the nil-rate band has been frozen since 2009. Understanding how IHT works, and the straightforward steps available to reduce exposure, is increasingly relevant for anyone who owns a home and expects to leave meaningful assets to family.

The Nil-Rate Band

Every individual has a nil-rate band of £325,000 — the value that can be left at death without incurring IHT. Above £325,000, IHT applies at 40%.

The nil-rate band has been frozen since 2009 and is set to remain at this level until at least 2030. With average UK house prices now well above £300,000 in many areas, a single person owning a modest home is potentially within range of IHT exposure when other assets are added.

The Residence Nil-Rate Band

When a main home is left to direct descendants (children, grandchildren, step-children), an additional Residence Nil-Rate Band (RNRB) of up to £175,000 per person is available. This adds to the standard nil-rate band:

• Standard nil-rate band: £325,000
• Residence nil-rate band: up to £175,000
• Total per individual: up to £500,000 before 40% IHT applies

For a married couple both using full allowances: up to £1 million before 40% IHT. The RNRB tapers by £1 for every £2 by which the estate exceeds £2 million — reducing its value for larger estates.

Spousal Exemption: No IHT Between Married Couples

Assets left to a spouse or civil partner at death are completely exempt from IHT — with no upper limit. An estate worth £5 million can pass entirely to a surviving spouse with zero IHT. This makes the IHT question primarily about what happens when the second spouse dies.

Additionally, any unused nil-rate band and RNRB from the first spouse’s estate can be transferred to the surviving spouse, potentially doubling the allowances available on the second death.

The 7-Year Rule

Gifts made during your lifetime are completely exempt from IHT if you survive 7 years after making them. Gifts made within 7 years may be taxable — on a sliding scale where the IHT rate reduces by 20% for every year after year 3 (taper relief):

• 0-3 years before death: 40% IHT rate on potentially exempt transfer
• 3-4 years: 32% effective rate
• 4-5 years: 24% effective rate
• 5-6 years: 16% effective rate
• 6-7 years: 8% effective rate
• 7+ years: 0% — fully exempt

Annual Gift Exemptions

• £3,000 annual gift exemption per donor per year (unused allowance carries forward one year)
• £250 small gift exemption per recipient per year (to any number of people)
• Wedding gifts: up to £5,000 to children, £2,500 to grandchildren, £1,000 to others

For couples specifically — and the crucial difference between married and cohabiting couples for IHT purposes — our article on marriage and cohabitation tax benefits covers the inheritance tax implications in detail.

Frequently Asked Questions

Does IHT apply to pension funds?

Currently, pension funds typically fall outside the estate and are not subject to IHT on death. However, changes are expected from April 2027 that will bring certain unused pension funds into the IHT net — a significant proposed change for anyone with substantial pension savings.

Can I reduce IHT by giving away my house?

Giving away your home while continuing to live in it typically doesn’t remove it from your estate for IHT purposes — this is known as a “gift with reservation of benefit.” To be effective, the gift must be genuine (you no longer benefit from the asset).

For official IHT guidance including rates, allowances, and how to report, visit HMRC’s inheritance tax page.