Understanding UK Inheritance Tax
Inheritance tax (IHT) is charged at 40% on the value of your estate above the available tax-free thresholds when you die. It is one of the most widely misunderstood taxes in the UK, but with proper planning, many estates can significantly reduce or eliminate the IHT liability entirely.
The Nil-Rate Band (NRB)
Every individual has a nil-rate band of £325,000. This has been frozen at this level since 2009 and is currently expected to remain frozen until at least 2028. Estates worth less than this amount pay no IHT. When someone dies and does not use their full NRB (for example, because they leave everything to a spouse), the unused proportion can be transferred to the surviving spouse's estate, potentially doubling it to £650,000.
The Residence Nil-Rate Band (RNRB)
An additional £175,000 allowance is available when a main residence is passed to direct descendants (children, grandchildren, step-children). Like the NRB, any unused RNRB can transfer to a surviving spouse. This means a married couple could potentially have a combined tax-free threshold of £1,000,000. However, the RNRB tapers away for estates worth over £2,000,000, reducing by £1 for every £2 above the threshold.
Gifts and the Seven-Year Rule
Gifts made more than seven years before death are fully exempt from IHT. Gifts within seven years may be subject to taper relief, reducing the tax rate from 40% on a sliding scale. You can also give away up to £3,000 per year as your annual exemption, small gifts of up to £250 per person, and unlimited normal expenditure out of income.
Frequently Asked Questions
Do I pay IHT if I leave everything to my spouse?â–¾
No. Transfers between spouses and civil partners are completely exempt from IHT, regardless of value. Additionally, any unused nil-rate band and residence nil-rate band can be transferred to the surviving spouse's estate when they die.
Can I reduce IHT by giving to charity?â–¾
Yes. Charitable gifts in your will are exempt from IHT. If you leave at least 10% of your net estate to charity, the IHT rate on the remaining taxable estate drops from 40% to 36%. This can actually mean your beneficiaries receive more by giving more to charity.
Is life insurance subject to IHT?â–¾
Life insurance payouts form part of your estate unless the policy is written in trust. A policy written in trust bypasses IHT entirely and pays out directly to your beneficiaries. This is one of the simplest and most effective IHT planning tools available.
Calclypso Editorial Team
IHT thresholds verified against HMRC 2025-26 rates. Last updated: April 2026. This calculator provides estimates only. Seek professional advice for estate planning.