How much can you inherit before paying inheritance tax?
Short answer
The nil-rate band is £325,000 per person, with a further £175,000 residence nil-rate band where a home passes to direct descendants. Unused allowances transfer between spouses, so a married couple can pass up to £1 million before 40% tax applies.
Inheritance tax is charged at 40% on the value of an estate above the available allowances. There are two of them, and they stack.
The two bands
- Nil-rate band — £325,000 per person, frozen at that level until at least 2030.
- Residence nil-rate band — a further £175,000 where a home that was the deceased's residence passes to direct descendants: children, grandchildren, stepchildren and adopted children, but not siblings, nephews or nieces. It tapers away by £1 for every £2 the estate exceeds £2 million, which can produce a marginal rate above 40% for estates just over that line.
- Transfer between spouses — whatever percentage of each band the first spouse did not use passes to the survivor, claimed on form IHT402 at the second death. A couple can therefore reach £650,000, or £1 million where a qualifying home passes to direct descendants.
Exemptions and reliefs that come off first
Transfers between spouses and civil partners are wholly exempt, lifetime or on death, where both are UK-domiciled. Gifts to UK charities are exempt, and leaving 10% or more of the net estate to charity cuts the rate on the remainder from 40% to 36%. Business property relief and agricultural property relief can give up to 100% relief on qualifying business and farming assets.
On the lifetime side, the annual exemption is £3,000, small gifts are £250 per person per year, wedding gifts are £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else, and regular gifts out of surplus income are exempt without limit provided you can document the pattern. Everything else is a potentially exempt transfer needing seven years to fall out of the estate, with taper relief from year three reducing the tax rather than the gift.
Tax must normally be paid within six months of the end of the month of death, before interest starts, and often before the grant is issued — the classic cash-flow squeeze, eased by paying tax on land and buildings in instalments over ten years and by HMRC's direct payment scheme with banks.
One change worth planning for: most unused pension funds currently sit outside the estate, but reforms announced for April 2027 will bring them into the calculation. Take updated advice as that date approaches.
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