The Nil Rate Band and IHT Threshold
Every individual has a nil rate band (NRB) of £325,000. Assets up to this value pass free of inheritance tax, regardless of who inherits them. The NRB has been frozen at £325,000 since 2009 and is set to remain frozen until at least April 2030, meaning fiscal drag is progressively pulling more estates into the IHT net as property values rise.
Married couples and civil partners can combine their nil rate bands. If the first partner to die leaves everything to the surviving spouse, their unused NRB transfers to the survivor, giving a combined NRB of up to £650,000 when the survivor dies. This transfer is automatic — it does not require a specific election.
The Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) is an additional allowance of up to £175,000 per person, available when a main residence is passed on death to direct descendants (children, grandchildren, stepchildren, adopted children). Combined with the standard NRB, a married couple can pass up to £1 million free of IHT: £325,000 + £175,000 per person, doubled for couples.
The RNRB tapers away for estates above £2 million — it is reduced by £1 for every £2 the estate exceeds this threshold. An estate of £2.35 million would see the RNRB entirely withdrawn. The RNRB cannot exceed the value of the property being passed to direct descendants.
When Property in Excess of Threshold Is Taxable
IHT is charged at 40% on the net estate above the available nil rate bands. For a surviving spouse who has inherited the first partner's unused allowances, the calculation is: (total estate value) minus (£650,000 NRB + £350,000 RNRB if applicable). The remainder is taxed at 40%.
Property is valued at open market value at the date of death. HMRC values the estate as a whole — including bank accounts, investments, pension death benefits (where applicable), and all property. A rough rule for planning purposes: if your estate (including property) is likely to exceed £500,000 as an individual or £1 million as a couple leaving property to children, IHT planning is worth considering.
Gifting Rules and the Seven-Year Rule
Gifts of property made more than 7 years before death are normally outside the estate and free of IHT. Gifts made within 7 years are potentially exempt transfers (PETs) — if you survive the full 7 years, the gift is exempt. If you die within 7 years, IHT may apply on a tapered sliding scale (taper relief): full tax for deaths within 3 years, tapering to zero over 7 years.
There is a critical caveat: you cannot give away your home and continue to live in it rent-free. This is a 'gift with reservation of benefit' and the property remains in your estate regardless of when the gift was made. To remove the property from your estate you must either move out entirely or pay a market rent to the new owner.
Legitimate Planning Strategies
- ▸Make use of annual gifting exemptions: Each person can give away £3,000 per year free of IHT (£6,000 for couples). Unused allowance from the previous year can be carried forward once
- ▸Potentially exempt transfers: Larger gifts start the 7-year clock. If you are in good health, gifts to beneficiaries now can save significant IHT over time
- ▸Life insurance written in trust: A whole-of-life policy written in trust pays out to beneficiaries outside the estate, providing liquidity to pay an IHT bill without selling property
- ▸Discretionary trusts: Property placed in trust is generally outside the estate after 7 years but involves legal costs and ongoing trust administration
- ▸Spouse exemption: All transfers between UK-domiciled spouses and civil partners are IHT-exempt. Ensuring assets are structured to use both partners' allowances on first death can be valuable
Frequently Asked Questions
Does everyone pay inheritance tax on property? No — only estates whose total value exceeds the available nil rate bands pay IHT. Most estates in the UK do not pay IHT. For an individual with a main residence passing to children, the threshold is typically £500,000 before any IHT is due.
When must inheritance tax be paid? IHT must usually be paid within 6 months of the end of the month in which the person died. For property specifically, payment can be spread over 10 annual instalments — though interest accrues on the outstanding amount.
Can I avoid inheritance tax on my property? Full avoidance is generally not achievable for estates that are significantly above the threshold without significant lifetime planning. Legitimate reduction strategies include gifts, trusts, life insurance, and ensuring the RNRB is fully utilised. Schemes promising full IHT avoidance should be treated with extreme scepticism.
What is the reduced rate of IHT for charitable legacies? If you leave at least 10% of the net estate to charity, IHT on the remainder is reduced from 40% to 36%. This can make a charitable legacy cost-neutral after the tax saving.
Do pension funds count as part of the estate for IHT? Most pension funds are currently outside the estate for IHT purposes because they are held in trust. The government has announced plans to bring unspent pension pots into the estate from April 2027 — this will affect planning for those with large pension balances.
Does IHT apply to property outside England and Wales? UK domiciled individuals pay IHT on worldwide assets regardless of where property is located. Non-UK domiciled individuals pay IHT only on UK assets, including UK property.
Key Takeaways
- ✓The nil rate band (£325,000) and residence nil rate band (£175,000) can give married couples a combined threshold of up to £1 million
- ✓The RNRB only applies when a main residence passes to direct descendants
- ✓The 7-year rule applies to gifts — but gifts with reservation of benefit remain in the estate regardless
- ✓You cannot give away your home and continue living in it rent-free without it remaining in your estate
- ✓Life insurance written in trust provides liquidity to pay IHT without forcing a property sale