Nobody enjoys thinking about inheritance tax. But at 40% on everything above the nil-rate band, getting it wrong can cost your family a small fortune. Despite only affecting around 4–5% of estates, the amount HMRC collects in IHT has shot up in recent years thanks to rising property prices and frozen thresholds. If you own a home in the South East, there’s a decent chance this affects you.
The Nil-Rate Band
The standard nil-rate band (NRB) is £325,000. The first £325,000 of your estate is tax-free. Sounds reasonable, until you realise this threshold has been frozen at £325,000 since 2009. That’s 17 years without a change, while house prices have roughly doubled. It’s frozen until at least April 2028, dragging more and more estates into the IHT net every year.
Residence Nil-Rate Band (RNRB)
If you leave your home to direct descendants (children, grandchildren, stepchildren), you get an extra £175,000 on top. So individually, you could pass on up to £500,000 tax-free.
For married couples and civil partners, unused NRB and RNRB transfer to the surviving spouse. That means a couple can potentially pass on up to £1,000,000 before IHT kicks in — but only if the home goes to direct descendants. Leave everything to a friend or a nephew? The RNRB doesn’t apply.
One more catch: the RNRB tapers for estates over £2 million, reducing by £1 for every £2 above that threshold. Above £2.35 million, it disappears completely.
What Counts as Your Estate?
More than most people think:
- Your home (or share of a jointly-owned property)
- Savings, investments, and pensions not in a discretionary scheme
- Personal possessions worth over £6,000
- Life insurance payouts (unless written in trust — more on that below)
- Gifts made within the last 7 years
- Business assets (though these may qualify for Business Relief)
Gifts and the 7-Year Rule
You can give away assets during your lifetime to reduce your estate. Survive 7 years after making a gift, and it drops out of your estate completely. Die within 7 years, and it’s subject to taper relief:
- 0–3 years: 40% (no reduction)
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
You also get annual gift exemptions:
- £3,000 per tax year (can carry forward one unused year)
- £250 per recipient per year (unlimited recipients, but can’t combine with the £3,000 for the same person)
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Gifts from surplus income — regular gifts that don’t affect your standard of living. This one’s hugely valuable but massively under-used.
Exemptions and Reliefs
- Spouse exemption: Everything you leave to your spouse or civil partner is completely exempt, regardless of value. This is unlimited.
- Charity exemption: Gifts to registered charities are exempt. Leave at least 10% of your estate to charity and the IHT rate on everything else drops to 36%.
- Business Relief: Qualifying business assets can be 50% or 100% exempt
- Agricultural Relief: Qualifying farm property can get 50% or 100% relief
Planning Ahead
Start early. The 7-year rule means gifting is most effective when you’re in good health and well before you might need care. Write life insurance policies in trust so the payout falls outside your estate — this is one of the simplest and most overlooked things you can do. Review your will regularly and make sure it’s structured to use every available relief.
Use our free inheritance tax calculator to estimate your estate’s IHT bill and see how different planning strategies could reduce it.