When a loved one passes away, the last thing most families want to think about is tax. But understanding how much you can inherit without paying tax can make a real difference to how an estate is handled and what’s ultimately passed on to the people who matter.
This guide explains the Inheritance Tax rules in plain English, including the thresholds, exemptions, and allowances that determine how much tax is owed (if any at all).
At Beaumont Wealth, we help families plan ahead so that more of their wealth passes to the next generation and less to HMRC.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has died. The estate includes everything they owned, including property, savings, investments, and personal possessions, minus any debts.
The tax rate is 40%, but it only applies above certain thresholds. Below those thresholds, no IHT is due. This is why understanding the allowances matters so much.
The nil-rate band: the basic threshold
The nil-rate band (NRB) is the amount an estate can be worth before IHT kicks in. It currently stands at £325,000 and has been frozen at that level since 2009.
If you inherit from an estate worth less than £325,000 after debts, there is no Inheritance Tax to pay.
If the estate is worth more than £325,000, IHT is charged at 40% on the amount above the threshold. For example, an estate worth £500,000 would face a bill of £70,000 (40% of £175,000).
The residence nil-rate band: an extra allowance for property
In addition to the standard nil-rate band, there is an extra allowance called the residence nil-rate band (RNRB), sometimes called the “family home allowance”. It currently stands at £175,000.
This allowance is available when a person’s main home is left to direct descendants such as children, grandchildren, or stepchildren. It cannot be used for assets other than residential property.
Combined with the standard nil-rate band, this raises the effective threshold to £500,000 for individuals and up to £1 million for married couples or civil partners, as unused allowances can be transferred to the surviving spouse.
The taper on larger estates
For estates worth more than £2 million, the residence nil-rate band starts to reduce by £1 for every £2 over that threshold. At £2.35 million, the allowance disappears entirely for single individuals (£2.7 million for couples).
Spouse and civil partner exemption
Transfers between spouses and civil partners are completely exempt from Inheritance Tax, regardless of the amount. There is no limit on how much you can leave to a husband, wife, or civil partner, and it will not attract IHT.
This also has an important planning implication: if you leave your entire estate to your spouse, their estate later benefits from both their own nil-rate band and any unused portion of yours, effectively doubling the threshold available.
Gifts made during your lifetime
What you give away during your lifetime can also affect how much IHT is owed. The rules here are more complex.
Annual gift allowance: each tax year, you can give away up to £3,000 in gifts free of IHT. If you don’t use it in one tax year, you can carry it forward to the next, but only for one year, meaning the maximum you can give under this allowance in a single year is £6,000.
Small gifts: you can give up to £250 to as many different individuals as you like each tax year, entirely free of IHT. This cannot be combined with the annual exemption for the same recipient.
Wedding gifts: you can give £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else as a wedding gift, free of IHT.
Gifts from income: regular gifts made from surplus income, where the giver’s standard of living is not affected, can also be exempt. This is a powerful planning tool for those with a reliable income.
Potentially exempt transfers (PETs): larger gifts fall outside the estate entirely if you survive for seven years after making them. If you die within that period, the gift may still attract IHT, though the amount reduces on a sliding scale from year three onwards; this is known as taper relief.
What about charity donations?
Gifts made to UK-registered charities are completely exempt from Inheritance Tax. If you leave at least 10% of your net estate to charity, the IHT rate on the rest of the taxable estate reduces from 40% to 36%.
What doesn’t count towards the estate?
Some assets sit outside the estate for IHT purposes:
Pension funds – currently pension pots do not form part of your estate for IHT purposes, making pensions one of the most tax-efficient ways to pass wealth to the next generation, but this changes from April 2027. Our guide to pension advice explains this in more detail.
Life insurance written in trust – if a life insurance policy is held in trust, the payout goes directly to beneficiaries and does not form part of the estate. You can find out more in our article on life insurance written in trust.
Business assets — qualifying business interests may be eligible for Business Relief, reducing their value for IHT purposes. See our guide on Business Relief for business owners.
How to reduce an Inheritance Tax bill
There are several legitimate ways to reduce the IHT that will be owed on an estate:
- making use of the annual gift allowance each year
- gifting assets early so the seven-year clock can start
- placing life insurance in trust so payouts bypass the estate
- donating to charity via the will
- using trusts to move assets outside the estate
The right combination depends on the size and nature of the estate, family circumstances, and long-term goals.
How Beaumont Wealth can help
Our team works with families across Shrewsbury, Chester, and the wider area to build IHT plans that reflect their full situation, not just the tax figures. Whether your estate is straightforward or complex, we can help you understand what’s at stake and what can be done about it.
Talk to the team at Beaumont Wealth for a clear, honest conversation about your estate and your options.
