UK Inheritance Tax Explained: Thresholds, Rates and How to Reduce Your Bill

Inheritance Tax has a reputation for catching families off guard, usually because nobody worked out in advance whether an estate would actually owe anything. The truth is most estates pay nothing at all, but for those that do, the bill can run into tens of thousands of pounds. Our Inheritance Tax Calculator gives you a quick estimate, and this guide walks through exactly how the thresholds, rates and reliefs fit together.

Who actually pays Inheritance Tax

Inheritance Tax is charged on the value of your estate, everything you own minus what you owe, when you die. It's usually paid from the estate itself before anything is distributed to beneficiaries, rather than being a personal bill for whoever inherits. Because of the allowances covered below, most estates fall entirely under the tax-free threshold and pay nothing. It tends to become a real issue for estates that include a family home worth several hundred thousand pounds, on top of savings, investments and other assets.

The nil-rate band

Every estate gets a standard tax-free allowance called the nil-rate band, which has been frozen at £325,000 for a number of years. Any part of your estate up to this figure passes on free of Inheritance Tax. If you're married or in a civil partnership and leave everything to your spouse, their estate can usually inherit your unused nil-rate band too, potentially giving them £650,000 of combined allowance when they later pass assets on to the next generation.

The residence nil-rate band

On top of the standard nil-rate band, there's a further £175,000 residence nil-rate band that applies when your main home is left to direct descendants, meaning children, grandchildren, step-children, or their spouses and civil partners. It doesn't apply if the home is left to, say, a niece, nephew, or friend, and it starts tapering away by £1 for every £2 an estate is worth above £2,000,000, disappearing completely for very large estates. For a typical family estate under that threshold, it means a combined £500,000 can pass on tax-free, or £1,000,000 for a couple.

Inheritance Tax rates

Anything in your estate above your available tax-free threshold is taxed at a flat 40%. That drops to a reduced 36% on the whole taxable estate if you leave 10% or more of your net estate to charity, which is one of the more significant reliefs available and worth factoring into estate planning if charitable giving is already something you'd consider.

Worked example: a £950,000 estate

Say a single, widowed parent leaves an estate worth £950,000 in total, including a home worth £400,000, left entirely to their two children. They're entitled to the standard £325,000 nil-rate band plus the £175,000 residence nil-rate band, since the home goes to direct descendants, giving a combined £500,000 tax-free threshold.

If this parent had instead been part of a married couple who'd both used their full allowances, the combined £1,000,000 threshold would have covered the whole estate, and no Inheritance Tax would be due at all. This is exactly why checking your own numbers matters more than going on a rule of thumb, our Inheritance Tax Calculator lets you plug in your own estate value and see where you stand.

Gifts and the 7-year rule

Giving money or assets away during your lifetime can reduce the eventual size of your estate, but HMRC applies a 7-year rule to stop this being used to dodge Inheritance Tax at the last minute. Gifts made more than 7 years before death are entirely exempt. Gifts made within 7 years are treated as potentially exempt transfers: if you survive the full 7 years, no tax is due on them; if you don't, the gift can be pulled back into your estate, with taper relief reducing the rate the longer you survived after making it. Worth noting too, gifting an asset that's grown in value, such as shares or a second property, can also trigger Capital Gains Tax at the point of the gift, a separate tax entirely from Inheritance Tax, so it's worth checking our Capital Gains Tax Calculator before making a significant lifetime gift.

Ways to reduce an Inheritance Tax bill

• Use the spouse exemption. Anything left to a spouse or civil partner is exempt, and their unused allowances usually carry over to their own estate.
• Make use of annual gift exemptions. You can give away £3,000 a year, plus smaller regular gifts, entirely free of the 7-year rule, which adds up meaningfully over a decade or more.
• Consider pensions as part of the wider picture. Most defined contribution pensions currently sit outside your estate for Inheritance Tax purposes, which is why many people prioritise drawing down other savings first. Our Pension Calculator can help you see how your pension pot and State Pension fit into your wider retirement and estate planning.
• Leave a share to charity. Beyond being exempt itself, a gift of 10% or more of your net estate to charity brings the rate on the rest of the estate down from 40% to 36%.

Bear in mind that money held in an ISA does still count as part of your taxable estate, unlike a pension, even though it grows free of Income Tax and Capital Gains Tax during your lifetime. Check your current ISA position with our ISA Calculator if that's part of your estate planning.

Common mistakes

• Assuming the residence nil-rate band always applies. It only counts if the home goes to direct descendants, not to a sibling, friend, or a trust that isn't set up for children or grandchildren.
• Not keeping records of gifts. Executors need a clear record of what was given away and when, to work out whether the 7-year rule applies, and gaps in this record can slow down or complicate probate.
• Forgetting the taper on large estates. Above £2,000,000, the residence nil-rate band starts shrinking, which can catch out estates that are just over the line once a home's value is included.
• Leaving it too late to plan. Gifting, trusts, and other estate planning tools generally work best when set up well in advance, rather than as a last-minute response to a diagnosis or ill health.

For more on how pensions fit into your retirement income alongside the State Pension, see our UK State Pension guide, and for the tax rules on selling property or shares during your lifetime, read our guide to Capital Gains Tax in 2026/27.

Frequently asked questions