UK Inheritance Tax: Thresholds, reliefs & transferability

Key takeaways

• The IHT net is widening: Frozen limits combined with rising house prices mean regular families now face tax bills once reserved only for the rich.
• The family first incentive: The system heavily rewards people for leaving the family home to kids or grandkids, but punishes you if you leave it to nieces, nephews, or friends.
• The marriage bonus: Being married or in a civil partnership is the ultimate tax shield.

Inheritance Tax (IHT) is a complex but crucial aspect of estate planning. While often associated with high-net-worth individuals, IHT increasingly affects a broader range of estates due to rising property values and relatively static tax thresholds. This article aims to demystify the core components of IHT, focusing on the £325,000 nil-rate band, the residence nil-rate band (RNRB), and rules concerning transfers between spouses or civil partners.

The Inheritance Tax Nil-Rate Band: £325,000

Every individual in the UK benefits from a standard nil-rate band (NRB) of £325,000. This means that the first £325,000 of an estate’s value is taxed at 0% for IHT purposes. Above this threshold, IHT is charged at 40%, unless reliefs or exemptions apply.

Importantly, this threshold has been frozen since 2009, and despite significant inflation and property growth, there are currently no confirmed plans to increase it.

The Residence Nil-Rate Band (RNRB)

Introduced in 2017, the residence nil-rate band (RNRB) is an additional threshold designed to ease the IHT burden on families passing on the family home to direct descendants (children or grandchildren).

As of the 2025/26 tax year, the RNRB remains at £175,000 per individual. When combined with the standard NRB, an individual can potentially pass on up to £500,000 tax-free, assuming they meet the qualifying criteria.

To qualify for the RNRB:

• The deceased must have owned a qualifying residential property.
• That property must be “closely inherited,” i.e., passed to direct descendants.

Estates valued above £2 million begin to lose the RNRB, which tapers by £1 for every £2 over the threshold.

IHT Exemptions: Spouse and civil partner

One of the most generous exemptions in the IHT regime is that transfers between spouses or civil partners are exempt from IHT, regardless of amount. This means that on death, an individual can pass their entire estate to their surviving spouse tax-free.

Additionally, if the first spouse does not use their full NRB and/or RNRB, the unused portion can be transferred to the surviving spouse’s estate. This effectively allows a married couple to pass on up to £1 million tax-free ((£325,000 + £175,000) × 2), assuming all conditions are met.

Limits to transferring IHT allowances

While the ability to transfer unused allowances between spouses is powerful, it comes with caveats:

• The couple must have been married or in a civil partnership at the time of the first death. Cohabiting couples do not benefit from this transfer.
• If the surviving spouse remarries, they do not get a “reset” of allowances. Only the unused allowances from one predeceased spouse can be claimed. You cannot accumulate multiple sets of transferable NRBs or RNRBs via successive marriages.
• Transfers are not automatic. The estate must claim the unused allowances at the time of the second death, usually within two years, by submitting the appropriate forms to HMRC.

How is Inheritance Tax paid? The process on death

Upon an individual’s death, their estate is valued, including property, savings, investments, and personal possessions. Debts and funeral costs are deducted to arrive at the net estate value. The executor or personal representative is responsible for:

1. Calculating any IHT due;
2. Submitting IHT400 or relevant simplified forms to HMRC;
3. Paying IHT

Assets cannot generally be distributed to beneficiaries until the IHT is settled, although instalment options are available for certain assets, like property.

If the estate is below the combined NRB and RNRB thresholds (or exempt due to a spouse transfer), no IHT is due, but the estate may still need to file documentation to confirm this.

Summary: Planning is essential to mitigate IHT

With proper planning, many estates can mitigate or eliminate IHT exposure. However, the static thresholds and rising asset values make it increasingly important for individuals and families to understand the rules and plan early.

Key takeaways:

• Every individual has a £325,000 NRB and potentially a £175,000 RNRB.
• Transfers between spouses or civil partners are IHT-free, and unused allowances are transferrable.
• Only one set of transferable allowances can be claimed – remarrying does not create multiple entitlements.

While IHT remains one of the more politically sensitive taxes, it is unlikely to disappear entirely. Engaging with professional advisors and reviewing wills, ownership structures, and lifetime gifts are all prudent steps for those seeking to safeguard wealth for future generations. Contact us to review your estate's IHT exposure and explore the planning options available to you.

FAQs

What is the inheritance tax nil-rate band and how does it work?
The nil-rate band (NRB) is the threshold below which no Inheritance Tax is charged on an estate. Currently, it is £325,000 per person, a figure frozen since 2009 and now extended until at least 2028.

Is IHT due on assets passed to a spouse?
No, transfers between spouses and civil partners are exempt from IHT, regardless of the amount. However, since April 2025, the spousal exemption for non-UK domiciled spouses has changed: if one spouse is a long-term UK resident and the other is not, the exempt transfer to the non-UK resident spouse is capped at the standard NRB. International families should take specialist advice.

When does IHT need to be paid and can it be paid in instalments?
IHT is generally due six months after the end of the month of death. Executors are responsible for calculating and paying the tax before assets are distributed to beneficiaries. For certain assets, primarily property, HMRC allows IHT to be paid in equal annual instalments over years. Assets such as cash, investments, and most personal possessions must have their IHT settled in a lump sum.

Glossary

Nil-Rate Band (NRB): The baseline financial threshold up to which an estate owes no inheritance tax.

Residence Nil-Rate Band (RNRB): A supplementary tax-free allowance tied specifically to the main family home.

Direct descendants: Linear family extensions including children, stepchildren, and grandchildren who qualify for specific property reliefs.

Tapering: The gradual, proportional reduction of a tax allowance once an estate's total value exceeds a set limit.

Spouse/civil partner exemption: A legal provision allowing assets to pass between married or civilly registered partners entirely tax-free.