Inheritance tax explained in plain English
Most estates pay no inheritance tax at all. Here is exactly how the allowances stack up, what pushes an estate over the line, and the legitimate ways to bring it back under.
The short answer
- Everyone gets a nil-rate band of £325,000. Leave your home to children or grandchildren and you may get another £175,000 on top.
- Anything above the available allowances is normally taxed at 40%.
- Married couples and civil partners pass unused allowances to each other, so a couple leaving a home to direct descendants can reach £1,000,000 tax-free.
- Anything you leave to a spouse, civil partner or UK charity is exempt without limit.
- Gifts normally fall out of your estate after 7 years years, and you can give £3,000 a year with no wait at all.
What's on this page
Who actually pays inheritance tax?#
A minority of estates. The tax only bites on the value above your available allowances, and for a couple who own their home those allowances can reach £1,000,000. Most families fall under. The ones caught are usually homeowners in expensive areas whose house has quietly outgrown the frozen thresholds.
Inheritance tax is charged on your estate: everything you own at death — property, savings, investments, possessions, and your share of anything jointly owned — less debts and funeral expenses. Most pensions sit outside the estate, which is why they matter in planning.
The two allowances, in order#
1. The nil-rate band — £325,000 per person#
The first £325,000 of every estate is taxed at 0%. It applies to everyone regardless of what you own or who you leave it to, and it has been frozen at this level for years — which is why more estates drift into the tax each year even though nothing about the rules has changed. More on the nil-rate band.
2. The residence nil-rate band — up to £175,000 per person#
An extra allowance, but only if you leave your home (or the proceeds of one you sold to downsize) to direct descendants: children, grandchildren, stepchildren, adopted and foster children. Nieces, nephews, siblings and friends do not count.
Two conditions catch people out. It is capped at the value of the home actually passing to descendants — a £175,000 allowance is no use against a £120,000 flat. And it tapers away by £1 for every £2 your estate exceeds £2,000,000, so a large estate can lose it entirely. Full guide to the residence nil-rate band.
How a couple reaches £1,000,000#
Anything left to a spouse or civil partner is exempt, and any allowance the first partner did not use transfers to the survivor. On the second death the estate can therefore claim:
2 × £325,000 nil-rate band = £650,000
2 × £175,000 residence nil-rate band = £350,000
Total: £1,000,000
This is not automatic. The transfer has to be claimed by the executors on the second death, and the residence element depends on the home passing to direct descendants — which depends on how the wills are written.
Unmarried couples get none of this. Two people who lived together for forty years each have their own single allowance and nothing transfers. It is the strongest financial argument for marriage in British law.
What is exempt#
- Everything left to a spouse or civil partner — unlimited, provided they are UK-domiciled.
- Gifts to UK charities — unlimited. Leave 10% or more of your net estate to charity and the rate on the rest drops from 40% to 36%.
- Gifts to political parties meeting certain conditions.
- Business and agricultural property relief — significant reliefs for qualifying trading businesses and farmland. The rules changed materially in recent Budgets; take current advice.
The gifting rules#
Giving things away during your lifetime is the most straightforward way to reduce an estate — provided you genuinely give them away and live long enough.
Gifts that are exempt immediately#
- Annual exemption: £3,000 each tax year. If you did not use last year's, you can carry it forward one year — so up to £3,000 × 2 in one go.
- Small gifts: £250 per person per tax year, to as many people as you like (but not on top of the annual exemption to the same person).
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
- Normal expenditure out of income: regular gifts from surplus income that do not affect your standard of living. Underused, potentially unlimited, and requires good records.
The seven-year rule#
Larger gifts are "potentially exempt transfers". Survive 7 years years and they leave your estate entirely. Die within that period and they count back in, though taper relief reduces the tax on gifts made more than three years before death.
You cannot give something away and keep using it. Sign the house over to the children and carry on living there rent-free and it stays in your estate for inheritance tax, no matter how many years pass. It may also create a capital gains tax problem for your children and expose the property to their divorces and creditors. This is one of the most commonly attempted and least effective bits of DIY planning there is.
How to work out what an estate would pay#
- Add up everything owned: property, savings, investments, possessions, share of joint assets.
- Subtract debts, the mortgage and funeral costs. That is the net estate.
- Subtract anything left to a spouse, civil partner or charity.
- Subtract the nil-rate band (£325,000, doubled if a partner's is transferred).
- Subtract the residence nil-rate band if a home passes to direct descendants, after any taper.
- Whatever remains is taxed at 40%.
Our trust savings calculator runs those steps on your own figures and shows what claiming every allowance is worth.
Legitimate ways to reduce the bill#
In rough order of how many people they suit:
- Write the wills properly so the residence nil-rate band is available and the transferable allowance can be claimed. Free-ish, and the most commonly missed.
- Use the annual gifting allowances every year rather than in one late lump.
- Give regularly out of surplus income and document it.
- Leave 10% to charity if you were going to give anything at all — it cuts the rate on everything else to 36%.
- Review pensions and life cover. Life policies written in trust pay out outside the estate.
- Take advice on larger gifts and trusts if the estate is well over the threshold, especially near the £2,000,000 taper.
The full list, with the traps.
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Frequently asked questions
When does inheritance tax have to be paid?
By the end of the sixth month after death, and interest runs from that date. Awkwardly, tax on the estate generally has to be paid before probate is granted, which is what releases the money — banks will often pay HMRC directly from the deceased's accounts under the Direct Payment Scheme. Tax on land and buildings can be paid in ten annual instalments.
Do I pay inheritance tax on money I inherit?
No. In the UK the tax is paid by the estate before anything is distributed, not by beneficiaries on what they receive. You may pay income tax on income the inherited assets later produce, or capital gains tax if you sell an asset for more than its value at the date of death.
Are pensions subject to inheritance tax?
Historically most defined contribution pensions sat outside the estate, which made them an efficient thing to leave untouched. This area has been changing — announced reforms bring unused pension funds within the scope of inheritance tax. Because the treatment is in flux, check the current position on GOV.UK and take advice before planning around a pension.
Is the nil-rate band going to change?
The nil-rate band has been frozen at £325,000 for years and is currently set to stay frozen until April 2030. Freezing an allowance while house prices rise is a tax increase that never has to be announced — which is precisely why more families are affected each year. All figures on this page were last checked 6 April 2026.
What if the estate is mostly the house and there is no cash to pay the tax?
This is common. Options include paying the tax on land and buildings in ten annual instalments (with interest), the executors taking a short-term bridging loan, or selling the property. It is one reason people take out life cover written in trust — it pays out outside the estate and gives executors the cash to settle the bill without a forced sale.
This is general information, not legal advice. Everyone's situation is different — speak to a qualified adviser before acting. KeepTheLot is an independent information service covering England & Wales. We are not a law firm.