UK Inheritance Tax Thresholds: How the £1m Limit Works
Discover how the standard £325,000 allowance and £175,000 residential property allowance work together, allowing married couples to pass on up to £1 million tax-free.
Under United Kingdom tax rules, you can pass on up to £325,000 as an individual, or up to £500,000 if you include your qualifying home, before any Inheritance Tax becomes due. Married couples and civil partners can combine these allowances to pass on up to £1,000,000 tax-free. Any estate value exceeding these combined limits is generally taxed at a rate of 40%.
Key Takeaways: Quick Guide to IHT Nil-Rate Bands
- The standard Nil-Rate Band remains at £325,000 per person.
- The Residence Nil-Rate Band provides an additional £175,000 allowance for qualifying homes.
- Both allowances are frozen until 5 April 2031 under the latest government budget legislation.
- Unused allowances are fully transferable to a surviving spouse or civil partner.
- The Residence Nil-Rate Band tapers by £1 for every £2 on estates valued over £2,000,000.
How much can I pass on before Inheritance Tax is due?
An individual can pass on a maximum of £500,000 tax-free, while a married couple can pass on up to £1,000,000.
This maximum tax-free threshold is reached by combining the standard allowance with the home-focused property allowance. If your estate value falls below these total thresholds, no Inheritance Tax is due to HM Revenue and Customs. Any assets that exceed your personal threshold limits will attract tax, which is typically charged at the standard rate.
What is the standard Nil-Rate Band (NRB)?
The standard Nil-Rate Band is the baseline amount of estate value that an individual can pass on to any beneficiary free of Inheritance Tax.
The standard Nil-Rate Band is set at £325,000 per person. According to official UK government budget measures, this standard threshold has been frozen at its current level and will remain frozen until 5 April 2031. This flat £325,000 allowance can be applied against any asset class, including cash, investments, personal belongings, and property.
What is the Residence Nil-Rate Band (RNRB)?
The Residence Nil-Rate Band is an additional tax-free allowance of £175,000 available when you leave your main home to direct descendants.
To successfully claim this additional allowance, the estate must meet specific statutory criteria. The rules stipulate that:
- The deceased must have owned and lived in a qualifying residential property as their main home.
- The qualifying home must be closely inherited by direct descendants, such as children or grandchildren.
- The allowance can apply to downsizing proceeds if the family home was sold after 8 July 2015.
- The sibling of the deceased, or nieces and nephews, do not qualify as direct descendants under this rule.
How do transferable allowances work for married couples?
Spouses and civil partners can transfer any unused portion of their allowances to the surviving partner when they pass away.
Under the rules of the Inheritance Tax Act 1984, transfers between spouses are entirely exempt from tax during life and on death. If the first spouse to die leaves their entire estate to the survivor, their allowances remain completely untouched. This unused percentage is added to the survivor's allowances when the survivor later passes away, effectively doubling the thresholds.
| Allowance Type | Per Person Limit | Combined Couple Limit |
|---|---|---|
| Standard Nil-Rate Band (NRB) | £325,000 | £650,000 |
| Residence Nil-Rate Band (RNRB) | £175,000 | £350,000 |
| Total Maximum Allowance | £500,000 | £1,000,000 |
How does the Residence Nil-Rate Band taper for larger estates?
The Residence Nil-Rate Band is reduced for estates worth over £2,000,000, tapering down to zero for high-net-worth individuals.
The taper system reduces the residential allowance slowly based on the total net value of the estate. The tapering mechanics operate as follows:
- The estate value is calculated, excluding liabilities but before deducting any relief or standard Nil-Rate Bands.
- The RNRB is reduced by £1 for every £2 that the total net estate exceeds the £2,000,000 threshold.
- For a single estate, the £175,000 residence allowance is tapered to zero once the estate value reaches £2,350,000.
- For a surviving spouse with double allowances, the residence allowance is tapered to zero when the estate value reaches £2,700,000.
What are the Inheritance Tax rates above the allowances?
Assets exceeding the available allowances face a standard tax rate of 40%, unless a discounted charity rate applies.
If you leave a meaningful portion of your estate to a registered charity, you can reduce your overall tax bill. The table below outlines how the tax rates apply based on your charitable giving choices.
| Tax Rate | Condition for Application |
|---|---|
| 40% | Applied to all taxable estate assets that exceed your personalised tax-free allowances. |
| 36% | Applied if you leave at least 10% of the net value of your estate to registered charities. |
How do lifetime gifts affect your available Nil-Rate Band?
Gifts made during your lifetime can reduce your available standard allowance if you pass away within seven years of giving them.
The standard Nil-Rate Band is applied chronologically to lifetime gifts made within seven years of your death before it can be applied to the assets in your remaining estate. This means large lifetime gifts can fully consume your £325,000 allowance, leaving your estate exposed to a higher tax bill. In contrast, the Residence Nil-Rate Band is strictly reserved for the estate at death and cannot be eroded by lifetime transfers.
Who counts as a direct descendant for the Residence Nil-Rate Band?
Direct descendants include your children, stepchildren, adopted children, foster children, and grandchildren. Siblings, nieces, nephews, and friends do not qualify for this property allowance.
When is the Inheritance Tax payment due to HMRC?
Inheritance Tax must be paid within six months after the end of the month in which the person died. Interest is charged by HM Revenue and Customs if payment is not made on time.
Can you transfer the Residence Nil-Rate Band if you downsized your home?
Yes, you can still claim the Residence Nil-Rate Band if you sold your home, downsized to a less valuable property, or moved into care after 8 July 2015, provided the remaining assets are inherited by direct descendants.
Does the Nil-Rate Band freeze affect the 7-year gift rule?
The freeze on the standard allowance does not alter the mechanics of the seven-year rule itself, but it means the amount of cash you can gift before tax remains limited to £325,000 until 2031.