Inheritance Tax Explained
A 40% tax on the value of your estate above £325,000 when you die. With the residence nil-rate band, a couple can pass on up to £1 million tax-free if they leave their home to children or grandchildren.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has died. The estate includes property, savings, investments, possessions and certain gifts made in the 7 years before death. The nil-rate band (tax-free threshold) has been frozen at £325,000 since 2009 and is set to remain at this level until at least April 2028.
How it works
The first £325,000 of the estate is tax-free (the nil-rate band). Above that, IHT is charged at 40%. The residence nil-rate band (RNRB) adds an extra £175,000 if you pass your home to direct descendants (children, grandchildren). Married couples and civil partners can transfer unused allowances to the surviving spouse. This means a couple could potentially pass on £1 million tax-free (£325,000 + £175,000 each). Gifts made more than 7 years before death are exempt. Gifts within 7 years are subject to taper relief.
Real example
Margaret dies with an estate worth £800,000, including a house worth £400,000 left to her two children. Her IHT allowances: £325,000 nil-rate band plus £175,000 RNRB = £500,000 tax-free. Taxable estate: £300,000. IHT due: £120,000 (40% of £300,000). If Margaret's husband predeceased her and did not use his allowances, she could inherit his £500,000 combined allowance, making the entire £800,000 tax-free.
Who does this affect?
Anyone with an estate above £325,000, which increasingly includes ordinary homeowners due to rising property values. Around 27,000 estates per year currently pay IHT. From April 2027, unused pension funds will also be included in the estate for IHT purposes, significantly increasing the number of affected estates.
HMRC source
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