Inheritance Tax (IHT) is a 40% tax on the value of an estate above the tax-free thresholds. UK homeowners benefit from a standard £325,000 nil-rate band plus an additional £175,000 residence nil-rate band when leaving the family home to direct descendants.
Your IHT Allowances Explained
Every individual gets two allowances:
- Nil-Rate Band (NRB) — £325,000 tax-free, regardless of who inherits
- Residence Nil-Rate Band (RNRB) — an additional £175,000 when leaving your main home to direct descendants (children, stepchildren, grandchildren)
Couples can combine these. Anything above is taxed at 40%.
A married couple leaving the family home to their children can therefore pass on up to £1,000,000 tax-free. Both bands are frozen until at least April 2030.
The Spousal Exemption
Anything left to a UK-domiciled spouse or civil partner is 100% exempt from IHT — no matter how large.
Better still, any unused NRB and RNRB passes to the surviving spouse — so the second-to-die gets up to £1m of allowances combined.
Important: this only works for married couples / civil partners. Cohabiting partners get none of this — see our unmarried couples guide.
The £2m Taper Trap
If your estate is worth more than £2m at death, the £175,000 residence nil-rate band starts to taper away — by £1 for every £2 above £2m. Estates above £2.35m (single) or £2.7m (couple) lose the RNRB entirely.
For larger estates, planning is essential — typically using lifetime gifts, trusts, or pension structures. Specialist legal advice is critical here.
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Practical Planning Steps
For most homeowners, the priorities are:
- Make a will that uses both NRBs efficiently — see our wills guide
- Write life insurance in trust — payout sits outside the estate. Read our mortgage life insurance guide
- Consider gifting — gifts are IHT-free if you survive 7 years (the "7-year rule"). Annual £3,000 exemption available.
- Use pensions efficiently — most pensions sit outside your estate for IHT purposes (as of 2026)
- Review charitable giving — leaving 10%+ to charity drops the IHT rate to 36% on the rest
Blended Families and Trusts
If your estate planning involves blended families or property trusts, the IHT calculation gets more complex. The trust structure must qualify for the RNRB by allowing the home to pass to descendants — speak to a specialist.
Through our partnership with Castle Family Legal, we can introduce you to a regulated specialist for IHT and trust planning. We'll arrange the protection side ourselves. Get in touch.
Frequently Asked Questions
- Do I have to pay IHT on a property I inherit?
- IHT is paid by the estate before assets are distributed — beneficiaries usually receive their inheritance net of any tax due.
- What if my house is worth more than the allowance?
- Only the value above your combined allowances is taxed. Mortgages outstanding on the property are deducted before IHT is calculated.
- Does life insurance count towards my estate?
- Yes — unless it's written in trust. Writing in trust is free, simple and keeps the payout outside the estate.
- Are pensions counted for IHT?
- Most defined contribution pensions are outside the estate for IHT in 2026, though rules are scheduled to change from April 2027 — keep advice current.
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