Inheritance Tax Planning Guide: NRB, RNRB, the 7-Year Rule, and Taper Relief
Inheritance Tax (IHT) is a 40% charge on the value of a deceased person's estate above the nil-rate band. For 2025-26, the nil-rate band remains frozen at £325,000, where it has been since 2009. With UK property prices having risen substantially over the past 16 years, IHT now catches many ordinary homeowners who would not consider themselves wealthy. Around 4% of UK deaths result in an IHT charge, but that proportion is growing.
This guide explains the allowances, exemptions, and planning strategies that can legitimately reduce the amount of IHT your estate will owe.
The Nil-Rate Band (NRB): £325,000
Every individual has a nil-rate band of £325,000. The first £325,000 of your estate is taxed at 0%. Anything above that level is taxed at 40%. The NRB has been frozen at £325,000 since April 2009 and is confirmed to remain frozen until at least April 2030.
When someone dies, their estate includes everything they own: property, savings, investments, personal possessions, and the value of any gifts made within seven years of death (more on this below). Debts, funeral expenses, and certain reliefs are deducted before the NRB is applied.
The Residence Nil-Rate Band (RNRB): £175,000
Introduced in April 2017, the RNRB provides an additional allowance of £175,000 when a home (or the proceeds from selling a home) is left to direct descendants: children, grandchildren, stepchildren, adopted children, or foster children. It does not apply if the property is left to a sibling, niece, nephew, or friend.
Combined with the standard NRB, this gives an individual an effective IHT-free threshold of £500,000 when their home passes to their children.
The RNRB tapers for estates valued above £2 million. For every £2 of estate value above £2 million, the RNRB is reduced by £1. It reaches zero at £2,350,000 (for estates where the full £175,000 would otherwise apply).
Transferable allowances between spouses
When the first spouse or civil partner dies, any unused NRB and RNRB can be transferred to the surviving spouse. Since most couples leave everything to each other (which is exempt from IHT anyway), the full NRB and RNRB are typically unused on the first death.
On the second death, the estate can claim the transferred allowances, giving a combined threshold of:
- Two NRBs: £325,000 x 2 = £650,000
- Two RNRBs: £175,000 x 2 = £350,000
- Total: £1,000,000 tax-free (if the home passes to direct descendants)
For a married couple whose estate is worth under £1 million and whose home goes to their children, no IHT is payable. Use our inheritance tax calculator to model your estate.
The 7-year rule for gifts
Gifts made during your lifetime are potentially exempt transfers (PETs). If you survive for seven years after making the gift, it falls outside your estate completely and no IHT is due. If you die within seven years, the gift is added back to your estate for IHT purposes.
This rule creates a strong incentive to give assets away early. A parent who gives £200,000 to their child at age 65 and survives to 72 removes the entire amount from their estate. Had they kept it until death, it could attract IHT at 40% (£80,000 tax on £200,000 above the NRB).
Taper relief on gifts within 7 years
If you die within seven years of making a gift, taper relief reduces the IHT rate on that gift based on how many years have passed:
| Years Between Gift and Death | IHT Rate on Gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| Over 7 years | 0% (fully exempt) |
Taper relief reduces the tax rate, not the value of the gift. And it only applies to the extent that the total of gifts in the seven years before death exceeds the NRB (£325,000). If your total gifts are below £325,000, no IHT is due on them regardless of when you die.
Annual exemptions and small gifts
Several gift exemptions are available every year without using your NRB or starting the 7-year clock:
- Annual exemption: £3,000 per tax year. Unused allowance can be carried forward one year only (maximum £6,000 using two years).
- Small gifts: Up to £250 per person per year to any number of recipients. Cannot be combined with the annual exemption for the same person.
- Wedding/civil partnership gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
- Regular gifts from income: Gifts made from surplus income (not capital) that form part of a regular pattern and do not reduce your standard of living. There is no upper limit on this exemption, making it extremely valuable for people with high incomes relative to their spending.
The "gifts from surplus income" exemption
This is one of the most underused IHT planning tools. If you have income that exceeds your normal expenditure, you can give away the surplus regularly (monthly, quarterly, annually) and these gifts are immediately exempt from IHT. There is no 7-year waiting period and no upper limit.
Example: a retiree receives pension income of £50,000 per year and spends £35,000 on living costs. The surplus of £15,000 can be given away each year, entirely IHT-free, provided it forms a regular pattern. Over 10 years, this removes £150,000 from the estate with no IHT implications.
To use this exemption, you need to demonstrate three things: (1) the gifts are made from income, not capital; (2) they follow a regular pattern; (3) they do not reduce your standard of living. Keep records of your income, expenditure, and gifts. HMRC will scrutinise this exemption closely if the amounts are large.
Spousal exemption and other key reliefs
Transfers between spouses and civil partners are completely exempt from IHT, with no limit. You can leave your entire estate to your spouse tax-free. This is why most married couples defer IHT planning until the second death.
Other reliefs include:
- Business Property Relief (BPR): 100% relief on qualifying business assets (unlisted shares, partnership interests, sole trader businesses). Reduces the value of these assets to zero for IHT. Must be held for two years before death.
- Agricultural Property Relief (APR): 100% relief on agricultural land and buildings. Similar to BPR but for farming assets.
- Charity exemption: Gifts to registered UK charities are exempt from IHT. If 10% or more of the net estate is left to charity, the IHT rate on the rest drops from 40% to 36%.
Practical planning steps
- Calculate your estate value: property, savings, investments, pensions (check whether your pension is included; most defined contribution pensions pass outside the estate, but this may change). Our IHT calculator helps with this.
- Use your annual exemptions (£3,000 per year) every year. Do not let them go to waste.
- Start making larger gifts early to take advantage of the 7-year rule. The sooner you begin, the more likely the gifts will be fully exempt.
- If you have surplus income, set up regular gifts and keep meticulous records for the income exemption.
- Review your will to ensure your home passes to direct descendants (to claim the RNRB).
- Consider leaving at least 10% of your net estate to charity to reduce the IHT rate to 36%.
Frequently asked questions
Is my pension subject to Inheritance Tax?
Most defined contribution pensions (workplace pensions, SIPPs) currently pass outside the estate and are not subject to IHT. If you die before 75, nominated beneficiaries can inherit the pension tax-free. After 75, beneficiaries pay Income Tax at their marginal rate on withdrawals. The government has announced plans to bring unused pension funds within the scope of IHT from April 2027, but the detail is still subject to consultation.
Does jointly owned property count toward my estate?
Yes. For joint tenants, your share of the property passes automatically to the surviving owner and is valued for IHT purposes. For tenants in common, your share passes according to your will. In both cases, the value of your share is included in your estate. Property passing to a spouse is exempt from IHT through the spousal exemption.
Can I give my house to my children and continue living in it?
Not without triggering a "gift with reservation" rule. If you give away your home but continue to live in it rent-free, HMRC treats the property as still part of your estate for IHT. To make the gift effective, you must either move out completely or pay a full market rent to the new owners. The rent must be at a commercial rate and actually paid. Few people find this arrangement practical.
How is IHT paid?
The executor of the estate must pay IHT before obtaining probate (the legal authority to distribute the estate). The deadline is six months from the end of the month of death. IHT on property can be paid in 10 annual instalments if the property is not sold immediately. Banks may release funds from the deceased's accounts directly to HMRC before probate through the Direct Payment Scheme, avoiding the catch-22 of needing to access the estate to pay the tax on the estate.
Will the NRB ever be increased from £325,000?
The NRB has been frozen since 2009 and is confirmed frozen until at least 2030. In real terms, accounting for inflation, the effective value of the NRB has fallen by over 40% since it was set. There is ongoing political debate about IHT reform, but no government has committed to raising the threshold. Given the revenue IHT generates (approximately £7.5 billion per year), an increase seems unlikely in the near term.