What Are the Inheritance Tax Thresholds and Allowances?

When someone dies, their estate may be subject to Inheritance Tax if its value exceeds certain thresholds. The main threshold is £325,000, but additional allowances can increase this to £500,000 or more in certain circumstances. Understanding these thresholds and allowances is...

Introduction

The nil-rate band: £325,000 threshold

The standard Inheritance Tax threshold is called the "nil-rate band" and is currently set at £325,000. This means no Inheritance Tax is due on the first £325,000 of your estate.

If your estate is valued below £325,000, there is normally no Inheritance Tax to pay. You may still need to report the estate's value to HMRC depending on what assets it contains, even if no tax is due.

When your estate exceeds £325,000, Inheritance Tax is charged at 40% on the amount above the threshold. For example, if your estate is worth £500,000, tax would be charged on £175,000 (the amount above the £325,000 threshold), resulting in a tax bill of £70,000.

The residence nil-rate band: additional £175,000

You can receive an additional allowance called the "residence nil-rate band" if you own your home and leave it to your direct descendants. This can increase your total tax-free threshold to £500,000.

To qualify for this additional allowance, you must:

Own your home or a share in it
Leave it to your children (including adopted, foster or stepchildren) or grandchildren in your will
Have an estate worth less than £2 million

When you leave your home to your spouse or civil partner, there is no Inheritance Tax to pay regardless of its value, but this would not use the residence nil-rate band.

Transferring unused allowances between spouses

If you are married or in a civil partnership, any unused threshold can be transferred to your partner when you die. This means couples can potentially pass on up to £1 million tax-free (£650,000 in standard nil-rate bands plus up to £350,000 in residence nil-rate bands) if they meet the qualifying conditions.

For the unused threshold to transfer, your estate must be worth less than your available threshold when you die. The unused portion is then added to your surviving partner's threshold when they pass away.

Reduced rate for charitable gifts

The standard Inheritance Tax rate is 40%, but your estate can pay a reduced rate of 36% on some assets if you leave 10% or more of the net value of your estate to charity in your will. The net value means the total value of the estate minus any debts.

Tax-free gifts and allowances during your lifetime

You can give away money and possessions during your lifetime using various allowances, which will not count towards your estate for Inheritance Tax purposes.

Annual exemption: £3,000

Each tax year (running from 6 April to 5 April), you can give away up to £3,000 worth of gifts without them being added to the value of your estate. This is your "annual exemption."

You can give the full £3,000 to one person or split it between several people. If you do not use your full annual exemption in a tax year, you can carry the unused amount forward to the next tax year only.

For example, if you gave away £2,000 in the 2023/24 tax year, you could give away £4,000 in 2024/25 (the current year's £3,000 plus the £1,000 carried forward).

Small gift allowance: £250

You can give as many gifts of up to £250 per person as you want each tax year. However, you cannot use this allowance for someone who has already received a gift from you using another allowance in the same tax year.

Birthday and Christmas gifts given from your regular income are also exempt from Inheritance Tax.

Wedding and civil partnership gifts

You can give tax-free gifts to someone getting married or entering a civil partnership. The amount you can give depends on your relationship to the recipient, though the source material provided does not include the specific amounts for this allowance.

Gifts to spouses, civil partners and charities

There is no Inheritance Tax to pay on gifts between spouses or civil partners, and you can give them as much as you like during your lifetime. This exemption applies as long as your spouse or civil partner lives in the UK permanently and you are legally married or in a civil partnership.

Similarly, there is no Inheritance Tax to pay on gifts to charities or political parties.

The seven-year rule for gifts

Gifts you make during your lifetime may be subject to Inheritance Tax if you die within seven years of making the gift. The tax treatment depends on:

Who you give the gift to and their relationship to you
The value of the gift
When the gift was given

Gifts made more than seven years before your death are generally exempt from Inheritance Tax. Taper relief may reduce the tax rate on gifts made between three and seven years before death.

If you give away your home but continue to live in it without paying market-rate rent to the new owner, this counts as a "gift with reservation." It will be added back to the value of your estate when you die, and the seven-year rule does not apply.

To avoid this, if you give away your home but want to continue living there, you must pay rent to the new owner at the going rate for similar local properties and pay your share of bills.

What counts as a gift

For Inheritance Tax purposes, gifts include:

Money
Household and personal items such as furniture, jewellery or antiques
Property, land or buildings
Stocks and shares listed on the London Stock Exchange
Unlisted shares held for less than two years before death

A gift can also include money you lose when you sell something for less than it is worth. For instance, if you sell your house to your child for below market value, the difference counts as a gift.

Anything you leave in your will is not considered a gift but forms part of your estate.

Estate valuation and who pays the tax

Your estate includes all your money, property and possessions when you die. The person dealing with your estate (the executor, if there is a will) is responsible for valuing the estate, reporting it to HMRC, and paying any Inheritance Tax due from the estate's funds.

Beneficiaries who inherit from your estate do not normally pay tax on what they inherit, though they may have other taxes to pay. For example, if they inherit a rental property, they would pay Income Tax on any rental income received.

Business and agricultural relief

Some assets can be passed on free of Inheritance Tax or with a reduced bill through reliefs such as Business Relief. If your estate includes a farm or woodland, Agricultural Relief may apply—contact the Inheritance Tax helpline for guidance on this.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.