UK Inheritance Tax: Thresholds, Nil-Rate Bands & the 40% Rate (2025/26)

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UK Inheritance Tax affects a growing number of estates as frozen thresholds collide with rising asset values. This guide explains the £325,000 nil-rate band, the £175,000 residence nil-rate band, how allowances transfer between spouses to reach £1 million, the 40% rate, and how the freeze is pulling more families into the tax.

What is Inheritance Tax and who pays it?

Inheritance Tax is charged on the value of a person’s estate — their property, money, investments and possessions — when they die, above a tax-free threshold. It’s paid by the estate before assets are distributed to beneficiaries, usually by the executors. Some lifetime gifts can also fall within IHT if the giver dies within seven years.

Most estates don’t pay IHT because they fall below the thresholds, but the proportion is rising as frozen allowances meet decades of house-price growth. For families with property and savings, particularly in higher-value areas, IHT planning has become a mainstream concern rather than something only the very wealthy need to consider.

What is the nil-rate band?

The nil-rate band is the amount of an estate that’s taxed at 0% — currently £325,000. It has been frozen at this level since 2009 and is set to remain frozen for years to come. Anything above the available nil-rate band (and any other allowances) is taxed at 40%. The long freeze means its real value has eroded substantially against inflation and rising asset prices.

This freeze is the single biggest driver of more estates paying IHT. As house prices and investments have grown while the £325,000 threshold stayed put, estates that would once have been comfortably exempt now exceed it. The frozen nil-rate band is, in effect, a stealth tax increase pulling more families into IHT each year — fiscal drag applied to inheritance.

What is the residence nil-rate band?

The residence nil-rate band (RNRB) gives an additional £175,000 of allowance when a home is passed to direct descendants — children, grandchildren and their lineal heirs. Combined with the £325,000 nil-rate band, an individual leaving their home to children can pass on up to £500,000 tax-free. The RNRB is tapered away for very large estates above a set threshold.

The RNRB has specific conditions: it only applies to a residence, only when left to direct descendants, and tapers for estates over the high-value threshold. It’s a valuable but conditional allowance, and estates that don’t include a qualifying home left to qualifying heirs miss out on it. Understanding whether your estate qualifies is key to knowing your true IHT-free amount.

How do allowances transfer between spouses?

Transfers between spouses and civil partners are exempt from IHT, and crucially, any unused nil-rate band and residence nil-rate band pass to the survivor. This means a surviving spouse can have up to two full nil-rate bands (£650,000) plus two residence nil-rate bands (£350,000) — potentially £1 million of allowance — when they later die.

This transferable allowance is the foundation of married-couple IHT planning. By leaving everything to each other on the first death (exempt), the couple preserves both sets of allowances for use on the second death when assets pass to children. Reaching the £1 million combined figure depends on the estate including a qualifying home and the allowances being properly claimed.

How is the 40% rate applied?

IHT is charged at 40% on the value of the estate above the available allowances. So an estate of £800,000 with £500,000 of allowances (nil-rate plus residence band) pays 40% on the £300,000 excess — £120,000. A reduced 36% rate applies where at least 10% of the net estate is left to charity, an incentive that can benefit both the charity and the remaining beneficiaries.

Because the rate is a flat 40% above the threshold, the tax can be substantial on larger estates. This makes reducing the taxable estate — through gifts, reliefs and exemptions — the focus of IHT planning. Even modest planning can save tens of thousands, and for larger estates the potential savings run much higher, which is why advance planning matters so much.

Why are more estates paying Inheritance Tax?

The combination of a nil-rate band frozen at £325,000 since 2009 and decades of rising house prices and investment values has pushed many more estates over the threshold. An estate that was comfortably exempt fifteen years ago may now face a significant IHT bill purely because asset values rose while the allowance didn’t. The freeze is set to continue, deepening this effect.

This fiscal drag means IHT is no longer just a concern for the wealthy. Ordinary families who own a home, especially in higher-value regions, increasingly find their estates exposed. The practical consequence is that IHT planning — once a niche concern — has become relevant to a broad swathe of homeowners, making understanding the thresholds and reliefs widely valuable.

A practical example: a couple’s estate

Consider a married couple with a home worth £600,000 and other assets of £350,000, total £950,000, leaving everything to their children. On the first death, everything passes to the survivor IHT-free. On the second death, the estate can use two nil-rate bands (£650,000) plus two residence nil-rate bands (£350,000) — £1 million of allowance — so the £950,000 estate pays no IHT at all.

Had the couple not been married, or not left the home to direct descendants, the position would be very different, with much of the estate potentially taxed at 40%. The example shows how the transferable allowances and residence nil-rate band combine to protect family homes, and why structuring wills to capture these allowances is central to IHT planning.

How are lifetime gifts counted toward IHT?

Gifts made within seven years of death can use up the nil-rate band before the rest of the estate, affecting how much allowance remains for assets passing on death. Larger gifts made within seven years are added back when calculating the estate’s IHT, which is why a programme of lifetime giving must be planned with the seven-year rule firmly in mind.

This interaction means the nil-rate band isn’t only about the value at death — recent gifts draw on it too. Executors must establish what gifts were made in the seven years before death to calculate the IHT correctly, and individuals planning gifts should keep clear records. The interplay between lifetime gifts and the nil-rate band is central to how the whole IHT calculation works.

How is an estate valued for IHT?

The estate is valued at the date of death, covering all assets — property, savings, investments, possessions and business interests — less debts and liabilities like a mortgage or funeral costs. The net figure is then compared against the available allowances to determine the taxable amount. Accurate valuation, especially of property and unquoted shares, is critical and sometimes requires professional valuations.

Executors are responsible for valuing the estate correctly and reporting it to HMRC, and undervaluation can lead to penalties. Certain assets, like jointly owned property and pensions, have specific treatment. Getting the valuation right is the foundation of the IHT calculation, and for larger or more complex estates, professional help ensures both accuracy and that all available reliefs and allowances are properly applied.

Why understanding the thresholds matters

Knowing where your estate stands against the nil-rate bands is the starting point for any IHT planning. An estate comfortably below the combined allowances needs little action; one approaching or exceeding them benefits from gifts, reliefs and careful will drafting. Because the freeze pulls more estates over the threshold each year, periodic review is essential rather than a one-off check.

For families with property and savings, the difference between an estate that uses its allowances well and one that doesn’t can be a six-figure IHT bill. Understanding the £325,000 nil-rate band, the £175,000 residence band and the transferable allowances — and how they apply to your specific estate — is what turns IHT from an unavoidable shock into something that can be planned for and substantially reduced.

Common Inheritance Tax mistakes to avoid

Frequent IHT errors include not claiming a predeceased spouse’s transferable allowances, drafting wills that waste the residence nil-rate band by not leaving the home to direct descendants, ignoring the freeze as asset values rise, and assuming an estate is exempt without checking. Each can mean an estate pays IHT it could have avoided.

Avoiding them means drafting wills that capture all available allowances, ensuring executors claim transferable bands, reviewing the estate’s value periodically against the frozen thresholds, and planning ahead where the estate approaches the limits. Because the tax is 40% above the threshold, even straightforward steps to use the allowances fully can save substantial sums for the next generation.

How do wills affect the IHT outcome?

A well-drafted will is essential to capturing the IHT allowances. Leaving everything to a spouse uses the spousal exemption and preserves the nil-rate bands; leaving the home to direct descendants secures the residence nil-rate band; and structuring gifts and trusts within the will can further reduce the tax. A poorly drafted will, or none at all, can waste allowances and increase the bill.

Dying without a will means the intestacy rules decide who inherits, which may not use the allowances efficiently or reflect your wishes. Reviewing and updating your will as your circumstances and the rules change ensures the estate plan actually delivers. For anyone whose estate approaches the thresholds, the will is the central document that turns IHT planning into reality.

What happens if IHT can’t be paid immediately?

IHT is generally due within six months of death, before probate is granted, which can create a liquidity problem when the estate’s value is tied up in property. To help, HMRC allows the tax on certain assets like property to be paid in instalments over several years, and banks can sometimes release funds to pay IHT before probate.

This timing challenge is one reason life insurance written in trust and careful estate liquidity planning matter. Executors facing an illiquid estate need to understand the payment options and instalment rules to avoid being forced into a quick property sale. Planning ahead for how the IHT will actually be funded — not just how much it will be — is an important and often overlooked part of estate planning.

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