Inheritance Tax (IHT) can be tricky to understand, and many people wonder how much of their inheritance will be taxed. If you’re concerned about how much of the money or property you’ll inherit will go to the government, you’re not alone.
In this guide, we’ll explain how IHT works in the UK and how much you can inherit without paying tax. Some notable exemptions help reduce the amount you might owe. Let’s understand them one by one in simple terms.
📜Inheritance Tax Benefits
Not everything is taxed from your inherited estate. If certain conditions are met, you can even ward off the entire payable tax. Let’s understand the complex IHT benefits in simpler terms so you can save a bigger slice from going away in taxes.
1️⃣The Nil-Rate Band (NRB)
The nil-rate band is the cornerstone of IHT. The tax system has not moved since 2009, and unless politicians decide to suddenly bring in change, it will stay as it is at least until 2028. Under this system, you can receive up to £325,000 or less of inherited estate tax-free.
Anything above this figure, however, will be charged as IHT at a 40% rate. That percentage might seem significant, but remember that it is levied only above the NRB.
For example, if the estate is worth £450,000, the first £325,000 is sheltered, leaving £125,000 potentially taxable. At 40%, the bill comes in at £50,000. This tax can be reduced with certain strategies, which we will discuss further in this blog.
2️⃣Residence Nil-Rate Band (RNRB)
The Residence NIL-Rate Band was designed to give families extra tax-free allowance on their main home so rising house prices don’t secretly push them into paying more inheritance tax.
Under this tax band, if your parents, foster parents, grandparents, or stepparents leave their main residence to you, your inherited estate qualifies for an additional £175,000 tax-free allowance. So, combined with NRB, you can save £500,000.
However, there are some pitfalls to watch out for:
🔴Value taper: If the value of your overall estate (house, savings, shares, jewellery, etc.) exceeds £2 million, the RNRB gets reduced by £1 for every £2 above that threshold, meaning it disappears completely once the estate reaches £2.35 million.
For example, if the estate is worth £2,010,000, for every £2 above £2,000,000 (which is £10,000 here), you lose £1, which becomes £10,000 ÷ 2 = £5,000. This £5,000 is reduced from your home allowance, leaving behind £175,000 – £5,000 = £170,000.
By this calculation, if the estate values more than £2.35 million, your allowance completely goes away.
🔴Downsizing relief: If your parent(s) sell the family home or downsize and live on the money, you can still claim a slice of the Residence Nil‑Rate Band (the extra tax‑free allowance) so long as they’ve kept good paperwork showing the sale and what happened to the proceeds.
🔴One‑property limit: That extra allowance can be used against only one home—the main residence your parents nominate. It can’t be spread across several rental or buy‑to‑let properties.
3️⃣Married Couples & Civil Partners
Marriage or civil partnership brings two major IHT advantages. Let’s understand them:
💍Spouse (or Civil‑Partner) Exemption
When the first partner dies, everything they leave directly to the surviving spouse or civil partner is 100% free of Inheritance Tax (IHT), whatever the value. Because no tax is paid at the first death, the family wealth stays intact and can keep growing until it eventually passes on to someone else.
💷Transferable Allowances (Nil‑Rate Band and Residence Nil‑Rate Band)
Each person has two tax‑free allowances: the Nil‑Rate Band (NRB, £325,000) and—if a home goes to direct descendants—the Residence Nil‑Rate Band (RNRB, £175,000).
If the first partner leaves everything to the survivor, they have not used their allowances. Those unused portions can be inherited by the surviving spouse or civil partner and applied when they later die.
When the last living partner dies, their estate gets twice the normal tax‑free limit—up to £1 million—before the 40% inheritance tax applies. This tax benefit significantly reduces (and sometimes eliminates) the IHT bill you and other heirs would otherwise pay.
Let’s understand these benefits with an example:
Suppose Partner 1 dies in June 2025, leaving the entire estate—say, £600,000—to Partner 2. Because of the spouse exemption, no IHT falls due, and Partner 1’s full NRB (£325,000) and RNRB (£175,000) remain untapped.
Partner 2 then passes away in 2030. The estate now sits at £1.1 million. Partner 2 has their own £500,000 allowance plus the inherited £500,000 from Partner 1, yielding a combined shield of £1 million.
Only the £100,000 above that threshold is taxable, giving an IHT liability of £40,000 instead of £240,000 had no allowances been available.
4️⃣Annual Gift Allowances
Most people think only about the tax‑free limits used after someone dies, but they can also shrink the part of their estate that could be taxed while they’re still alive. Three exemptions are essential to understand this:
🔶Annual exemption
Giving away up to £3,000 each tax year to a friend or loved one can save it from falling towards inheritance tax. Moreover, if this amount wasn’t used last year, it can be carried over once, offering the potential of gifting £6,000.
🔶Small-gift exemption
Another way to avoid IHT is by giving small gifts of up to £250 to as many people as an estate holder chooses. However, they can’t give both a £3,000 and a £250 gift to the same person in the same year.
🔶Gifts out of surplus income
They can also regularly give money from their extra income—like a leftover salary or pension—as long as it doesn’t affect their usual lifestyle. In this case, it is crucial to keep records, like bank statements or a simple note, to prove these gifts came from the spared income.
Used consistently over, say, ten years, these exemptions can remove tens of thousands of pounds from the IHT equation.
5️⃣Potentially Exempt Transfers
Larger gifts, those that exceed the amounts mentioned above, are classified as Potentially Exempt Transfers (PETs).
If an estate owner lives for seven years after making a big gift, that gift is ignored for inheritance tax purposes. But if they die sooner, the gift comes back into their estate and could be taxed — though the tax gets smaller the longer you live after giving it.
Let’s understand these exemptions in detail:
👉If the person dies within 3 years of giving the gift, the full 40% tax may apply.
👉If they die between 3 and 4 years, the tax drops to 32 %.
👉If they die between 4 and 5 years, the tax falls to 24 %.
👉If they die between 5 and 6 years, the tax is cut to 16 %.
👉If they die between 6 and 7 years, only 8% tax is due.
👉If they live more than 7 years after making the gift, no inheritance tax is charged on that gift.
Even though making big gifts (PET) needs planning ahead, they are still one of the strongest ways for families whose estates are close to—or well over—£500,000 for one person or £1 million for a couple to cut future inheritance tax.
6️⃣Inheritance Tax Reduced Rate
Normally, anything in an estate that is above the tax‑free limits is taxed at 40%. But there is a way to cut that rate to 36%.
If a person writes in their will that at least 10% of the estate’s net value will go to one or more registered charities, then the heir needs to pay only 36% of tax.
💰What is “net value”?
👍First, add up everything the person owned: house, savings, investments, valuables, and so on.
✌️Then subtract any debts they still owed—like a mortgage, loans, or credit‑card bills.
👌The amount left is the net value.
Giving to charity not only supports a good cause but also lowers the tax bill on the rest of the estate, leaving more money for the other heirs.
🔚Ending Thoughts
Inheritance tax sounds scary, but knowing the rules helps you keep more of what your family leaves you. First, understand the tax‑free limits: £325,000 for everyone, plus £175,000 if the main home comes to you, and up to £1 million for couples.
Talk with a trusted adviser and start planning early so less money goes to tax and more stays with you. If you want to learn more about IHT, we can help. Come over at AccountX London 2025—the UK’s biggest accounting event, and let’s have a live chat.
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