Inheritance Tax UK: Thresholds, Rates & How to Reduce It
Inheritance Tax (IHT) is charged at 40% on the value of your estate above certain thresholds when you die. With rising property prices, more families are being caught by IHT than ever. Here is how it works and what you can do about it.
Current Thresholds (2025/26)
| Threshold | Amount | Notes |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Frozen until at least April 2028 |
| Residence Nil-Rate Band (RNRB) | £175,000 | Only applies if you leave your home to direct descendants |
| Combined (individual) | £500,000 | NRB + RNRB |
| Combined (married couple) | £1,000,000 | Unused allowance transfers to surviving spouse |
The RNRB tapers away for estates worth over £2 million — it reduces by £1 for every £2 over the threshold, disappearing entirely at £2.35 million.
How IHT is Calculated
IHT is charged at 40% on the portion of your estate above the available thresholds. If you leave at least 10% of your estate to charity, the rate drops to 36%.
Worked Example — £1,000,000 Estate (Single Person)
Estate value: £1,000,000
Less NRB: -£325,000
Less RNRB (home left to children): -£175,000
Taxable estate: £500,000
IHT at 40%: £200,000
Spouse & Civil Partner Exemption
Everything you leave to your spouse or civil partner is completely exempt from IHT, regardless of the amount. This is the single most powerful IHT exemption. When the surviving spouse dies, their estate can use both sets of NRB and RNRB — up to £1 million tax-free.
The 7-Year Rule for Gifts
Gifts you make during your lifetime become exempt from IHT if you survive for 7 years after making them. If you die within 7 years, the gift is subject to taper relief:
| Years before death | Tax rate on gift |
|---|---|
| 0 – 3 years | 40% |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| 7+ years | 0% (exempt) |
Tax-Free Gifts You Can Make Now
- £3,000 annual exemption — per tax year (unused amount carries forward one year)
- £250 small gifts — to any number of people (not someone who received the £3,000)
- Wedding gifts — £5,000 (child), £2,500 (grandchild), £1,000 (anyone else)
- Gifts from income — regular gifts that do not affect your standard of living
- Charity donations — fully exempt and can reduce the IHT rate to 36%
Using Trusts
Trusts can remove assets from your estate, but they come with their own tax rules. Discretionary trusts are subject to entry charges (20% above the NRB), periodic charges (up to 6% every 10 years) and exit charges. They are most useful for large estates and require specialist advice.
Life Insurance Written in Trust
A whole-of-life insurance policy can cover the expected IHT bill. The crucial step is writing the policy in trust — this ensures the payout goes directly to your beneficiaries without being added to your estate (which would itself attract IHT).
Key Takeaways
- IHT is 40% above £325,000 (or £500,000 if leaving your home to children).
- Married couples can pass up to £1,000,000 tax-free.
- Gifts become exempt after 7 years — start gifting early.
- Use your annual exemptions every year — they are use-it-or-lose-it.
- Life insurance in trust can cover the bill without adding to the estate.