How Much Inheritance Tax Will You Pay?

How Inheritance Tax Works

Inheritance Tax is 40% charged on the portion of an estate above the threshold. Sounds simple — but the thresholds are surprisingly generous once you layer them up, and there are legitimate ways to reduce the bill considerably.

The basic nil rate band is £325,000. Anything below that passes free of IHT. Everything to a spouse or civil partner is completely exempt regardless of value, and any unused nil rate band from a deceased spouse transfers — potentially doubling the threshold to £650,000. The NRB has been frozen since 2009 and will remain so until at least 2030.

The Residence Nil Rate Band

If you leave your main home to direct descendants — children, grandchildren, step-children — an extra allowance applies: the Residence Nil Rate Band (RNRB) of £175,000. Combined with the NRB and both transferred from a deceased spouse, a couple can pass up to £1,000,000 to children with no IHT.

The RNRB does taper for larger estates: for every £2 above £2 million, the RNRB reduces by £1. If your estate exceeds £2.35 million, the RNRB disappears entirely (or £2.7 million for couples with transferred allowances). This is the point where specialist advice becomes genuinely worthwhile.

The 7-Year Rule

Gifts made during your lifetime — called Potentially Exempt Transfers — fall out of your estate entirely if you survive seven years after making them. If you die within that window, the gifts count against your nil rate band and may trigger IHT. Taper relief reduces the tax owed on gifts made between three and seven years before death:

• 3–4 years before death: 20% of IHT otherwise due
• 4–5 years: 40%
• 5–6 years: 60%
• 6–7 years: 80%

One point that surprises people: taper relief reduces the tax on the gift, not the value of the gift itself. If someone gave away £400,000 four years before dying with a £325,000 NRB left, the £75,000 above the NRB is taxable at the tapered rate — not the full £400,000.

What Changed in the 2024 Budget

The October 2024 Budget contained two significant IHT changes worth knowing about:

• Pension funds (from April 2027): Most inherited pension pots will be included in the estate for IHT purposes. This is a major change — pensions have been the most effective IHT planning tool for decades because they sit outside the estate.
• Agricultural and Business Property Relief (from April 2026): The 100% relief is capped at £1 million per person. Assets above that get 50% relief only. This affects farmers and business owners considerably.

Both changes are scheduled but political landscapes shift — it is worth monitoring. The NRB freeze to 2030 was also confirmed, meaning more estates will get pulled above the threshold as property values rise.

How to Reduce the Bill

The most accessible starting points:

• Annual gifting exemption: £3,000 per year, carry forward one year if unused — so a couple can gift £12,000 in a single year
• Small gifts: any number of gifts up to £250 per person per year, as long as that person hasn't received from your annual exemption
• Gifts from surplus income: regular gifts funded from income (not capital) can be fully exempt if you can demonstrate a pattern and that your standard of living wasn't affected
• Charity: leaving 10% or more of your net estate to charity reduces the IHT rate from 40% to 36%, which sometimes means the charity costs you nothing net
• Life insurance in trust: a policy written in trust pays out without forming part of the estate — useful to cover a known IHT liability

Larger strategies — trusts, deeds of variation, family investment companies — require specialist legal and financial advice. They can be highly effective but need to be set up correctly.

Frequently Asked Questions

Does a spouse pay inheritance tax?

No. Assets left to a spouse or civil partner who is UK-domiciled are entirely exempt from IHT, regardless of value. More usefully, any unused nil rate band from the first spouse to die transfers to the survivor — so even if the first spouse left everything to their partner and used none of their NRB, that £325,000 (and up to £175,000 RNRB) carries over.

When does inheritance tax have to be paid?

IHT must be paid within six months of the end of the month in which the person died. Interest accrues after that. In practice, executors often have to find the funds before probate is granted — which creates a problem because you can't access the estate until you have probate. Some banks will release funds directly to HMRC before probate; others won't. This is one reason why a life insurance policy in trust — which pays out quickly and outside the estate — can be so useful.

Is my pension included in my estate for IHT?

Currently no — pension pots generally sit outside the estate and pass IHT-free. However, from April 2027 most defined contribution pensions will be included in the estate under the changes announced in the 2024 Budget. If you have a significant pension pot, this is worth planning for now.

What is the difference between nil rate band and residence nil rate band?

The nil rate band (£325,000) applies to any estate and covers all assets. The residence nil rate band (£175,000) is an additional allowance that applies only when a main residence is left to direct descendants — children, grandchildren or step-children. If you don't own a home, or leave it to someone who isn't a direct descendant, you can't use the RNRB.

Can I give my house to my children to avoid inheritance tax?

If you give your house away but continue living in it, HMRC classifies it as a "gift with reservation of benefit" — it stays in your estate. To genuinely remove it, you'd need to move out and live there for free for seven years. Most solicitors warn against this approach without careful legal structuring, as the risks (losing your home, family disputes) usually outweigh the tax savings for most people.