Introduction to inheritance tax rates, allowances and mitigation plans
Inheritance tax (IHT) remains one of the most significant taxes affecting the transfer of wealth in the UK. Despite only 3.73% of estates paying inheritance tax in the 2020-21 tax year, HM Revenue & Customs (HMRC) collected £5.76 billion from IHT alone, according to official data from HMRC and the Office for National Statistics (ONS). As property prices and asset values continue to rise—and with the inheritance tax thresholds frozen until 2030—more families face potential tax liabilities. Effective legacy and succession inheritance tax planning has never been more essential.
This article explains inheritance tax rates, the inheritance tax nil rate band, the residential nil rate band, and relevant allowances. We include expert commentary and recent legislative updates, providing a trusted and practical resource for those seeking to minimise tax exposure and protect their legacy.
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Understanding Inheritance Tax Rates in the UK
Inheritance tax is charged at a standard rate of 40% on the taxable estate—that is, the value above all available allowances and exemptions. For the 2025/26 tax year, the inheritance tax nil rate band (NRB) remains at £325,000 per person, as legislated under the Inheritance Tax Act 1984. Estates exceeding this threshold are subject to the 40% tax on the excess.
HMRC’s Inheritance Tax Manual (IHTM45000) clarifies that this rate drops to 36% if at least 10% of the net estate is left to qualifying charities, incentivising philanthropic giving as part of estate planning.
According to HMRC’s Inheritance Tax Statistics 2023, the average tax paid per estate was approximately £141,000, with the median estate value liable to IHT around £870,000. This illustrates the impact on higher-value estates and the need for careful planning.
Dying intestate severely limits inheritance tax (IHT) planning opportunities. Without a valid will, your estate cannot take advantage of strategic tax-saving tools such as discretionary trusts, planned gifting, or optimal use of the residence nil-rate band. Assets may be distributed inefficiently, potentially increasing the taxable estate and resulting in a higher IHT bill. Additionally, unmarried partners or non-blood relatives may receive nothing, preventing the use of spousal exemptions or planned lifetime transfers that could have reduced tax exposure. Ultimately, intestacy often leads to both financial loss and family disputes.
Inheritance Tax Allowances and the Nil Rate Bands
Each individual in the UK has a £325,000 inheritance tax nil rate band (NRB), which means this portion of their estate can pass on free of IHT. For married couples and civil partners, the transferable nil rate band allows the unused portion of the first deceased’s NRB to be claimed by the survivor, potentially doubling the allowance to £650,000.
This concept is enshrined in the Inheritance Tax Act 1984 (Sections 7 and 8), providing flexibility in utilising allowances effectively over two generations.
The Residential Nil Rate Band (RNRB)
Introduced in April 2017 and outlined in the Finance Act 2015 (Schedule 15), the residential nil rate band offers an additional allowance of £175,000 per person (or £350,000 per couple) when a qualifying family home (Residential nil rate band) is passed to direct descendants, such as children or grandchildren.
This allowance can bring the total tax-free inheritance for couples to £1 million, a significant relief given rising property values.
However, the RNRB tapers down by £1 for every £2 the estate exceeds £2 million, with no allowance available for estates over £2.35 million (HMRC IHTM46023). This tapering mechanism has important implications for large estates and underscores the importance of lifetime gifting or other planning measures.
Rebecca Probert, in her authoritative text Family and Succession Law (Oxford University Press, 2023), stresses:
“The residential nil rate band is a welcome development but requires precise estate structuring to fully realise its benefits, particularly given the £2 million tapering threshold.”
How Much Inheritance Is Tax Free?
Combining the nil rate band and residential nil rate band allowances, an individual can pass on up to £500,000 free of IHT. For couples, this effectively doubles to £1 million, provided both allowances are fully available and the family home qualifies.
Spousal transfers further increase flexibility, as assets passing between spouses or civil partners are exempt from IHT regardless of value, a principle affirmed by Daniel Edwards in Tax Planning for Family Wealth (CCH Publications, 2021).
Real-World Scenario: Using the Allowances Effectively
Consider Sarah, a widow with a £1.5 million family home and £500,000 in other assets. If Sarah leaves her home to her children, her executors can utilise both her and her late husband’s nil rate bands (£325,000 each) and residential nil rate bands (£175,000 each), creating a combined allowance of £1 million.
The remaining £1 million of her estate would be taxed at 40%, resulting in a £400,000 IHT liability.
Sarah could mitigate this by making lifetime gifts, a method Carl Bayley endorses in How to Save Inheritance Tax (Taxcafe, 2023):
“By gifting assets more than seven years before death, individuals can reduce their estate’s value and preserve key allowances.”
Lifetime Gifts and Potentially Exempt Transfers (PETs)
Gifts made more than seven years prior to death are classified as Potentially Exempt Transfers (PETs) and fall outside the estate for IHT purposes, assuming the donor survives the seven-year period. HMRC’s IHT Manual (IHTM14131) details which gifts qualify, including the annual exemption of £3,000 per person, small gifts up to £250, and wedding gifts under specific limits.
Karen Speight highlights in Practical Inheritance Tax Planning (LexisNexis, 2024):
“Gifting is a powerful tool but must be part of a structured plan. Taper relief applies if death occurs within seven years, reducing the exemption progressively.”
Making gifts is a great way to minimise your future inheritance tax liability. Start planning today.
Trusts and Their Role
Trusts can be used to transfer assets outside of the estate, but they come with complex tax implications. Chargeable Lifetime Transfers (CLTs) to trusts above the nil rate band trigger immediate IHT charges.
Christopher Whitehouse, in Inheritance Tax Planning (Bloomsbury Professional, 2022), advises:
“Trusts offer flexibility and control but require expert navigation due to shifting legislation and periodic charges.”
Charitable Giving and IHT Reduction
Donating at least 10% of your net estate to qualifying charities reduces the inheritance tax rate from 40% to 36% (HMRC IHTM45000). Karl Hartey notes in Wealth Preservation (Sweet & Maxwell, 2023:
“Charitable legacies not only reflect generosity but serve as an effective IHT mitigation strategy.”
Upcoming Legislative Changes and Compliance Updates
From 6 April 2027, unused pension funds will be included in the taxable estate, closing a previously popular planning route. HMRC estimates this will increase IHT liabilities for approximately 10,500 estates annually (GOV.UK Consultation Summary).
Karen Speight advises:
“Review pension strategies urgently to mitigate this upcoming tax charge.”
The 2024 Autumn Budget announced that Agricultural Property Relief (APR) and Business Property Relief (BPR) will be capped at £1 million from April 2026, with any excess receiving only 50% relief, affecting high-value farms and businesses.
The inheritance tax nil rate band and residential nil rate band are frozen until 2030, meaning inflation and rising property prices will gradually expose more estates to IHT.
FAQ
Frequently Asked Questions
1. What is the inheritance tax nil rate band and how does it work?
The nil rate band is £325,000 per person, tax-free. Transfers between spouses can increase this to £650,000.
2. Who qualifies for the residential nil rate band?
Homeowners passing their main residence to direct descendants qualify, receiving up to £175,000 extra per person (Residential Nil Rate Band).
3. What percentage is the inheritance tax?
40%, or 36% if 10% of the estate goes to charity.
4. How much inheritance is tax free for a married couple?
Up to £1 million combining nil rate bands and residential nil rate bands.
5. Are unused pension funds included in inheritance tax?
Yes, from April 2027, most unused pensions will be subject to IHT.
