How much can you inherit tax-free in the UK?

Inheritance Tax (IHT) can be complex, and working out how much you can inherit tax-free will depend on you and your family’s circumstances.

In the UK, everyone has a tax-free threshold for Inheritance Tax. What your spouse or family will inherit in the event of your death will depend on how much IHT planning you have done to minimise the Inheritance Tax bill for your family, what your overall estate is worth and many other factors.

In this blog, we’ll teach you what you need to know about IHT and how to minimise your inheritance tax bill.

How does Inheritance Tax work?

Inheritance Tax (IHT) is a tax paid on the value of your estate (property, money and possessions) in the event of your death. IHT may need to be paid on your estate if its value exceeds the tax-free threshold.

Your family may not have to pay Inheritance Tax if the value of your estate is below the Inheritance Tax threshold of £325,000. IHT will also not be payable if you leave everything above the £325,000 threshold to your spouse, civil partner or a charity or amateur community sports club.

The first £325,000 of your estate value is Inheritance Tax-free. The standard rate of Inheritance Tax for estates over the Inheritance Tax threshold of £325,000 is 40%. The 40% tax only applies to any assets over this threshold.

If you give your home before dying to your children or grandchildren, the threshold will increase to £500,000.

Any unused threshold can be passed to your partner if you are married or in a civil partnership.

if you leave 10% or more of the ‘net value’ of your estate to charity in your will. (The net value is the estate’s total value minus any debts), A reduced rate of IHT at 36% could apply to some assets.

What’s included in my estate for IHT?

Your estate for IHT purposes will include:

• savings
• personal possessions
• property you owned
• any money or property you gave away during the seven years prior to death, subject to some exemptions.

What is exempt from Inheritance Tax?

• Anything passed on to your spouse or civil partner will be exempt from IHT (this is referred to as the spousal exemption).
• Donations to charity and community amateur sports clubs.
• Donations made to political parties.
• Gifts made before death of up to £3,000 in each tax year.
• Small or annual gifts (up to the value of £250).
• Wedding or civil partnership gifts.
• Pensions (see below for details of changes to this due in 2027).
• Other reliefs, such as Business Relief and Agricultural Property Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced tax bill.

Note: gifts made before you die could be liable for IHT, depending on their value and when they were given.

What is the Inheritance Tax threshold?

The Inheritance Tax thresholds remain frozen until 2030 at the following rates:

• NIL Band Rate (NRB): £325,000
• Residence NIL Rate Band (RNRB): £175,000

The Nil-Rate Band (NRB)

The Inheritance Tax £325,000 nil-rate band is available to everyone and is set against their assets upon their death. Individuals can make chargeable lifetime transfers up to £325,000 within a 7-year period without any IHT liability.

Anything above the £325,000 nil-rate band may be charged to Inheritance Tax at 40%.

Residence Nil-Rate Band (RNRB)

The Residence NIL-Rate Band is £175,000 and is available to people passing on a qualifying residence to their descendants after death.

A taper reduces the nil-rate band if your estate is worth over £2 million. It will reduce by £1 for every £2 that the net value of the estate is worth more than £2 million.

Following death, any unused nil-rate and residence nil-rate band can be transferred to a surviving spouse or civil partner. Qualifying estates can pass up to £500,000 on and if both nil-rate bands are unused, up to £1 million can be passed on without IHT.

Civil partner and spousal exemption

When your spouse or civil partner dies, they can leave everything to you tax-free of Inheritance Tax, whatever the value. The only exception is when the recipient spouse is non-UK domiciled and not a long-term resident in the UK.

This protects wealth on the first death, and IHT may only be incurred once both spouses have passed away.

Annual gift allowance & annual exemption

While alive, you are entitled to a tax-free annual exemption, known as a ’gift allowance’, each year. This allows you to gift assets or cash up to a value of £3,000 each tax year without incurring IHT on the asset or money.

This tax-free allowance can be carried forward to the next tax year if not used. It cannot be carried forward for more than one tax year.

Small-gift exemption

You can give gifts up to £250 to as many individuals as you wish tax-free. If someone has already received a £3,000 annual exempt gift, you cannot give them a £250 gift in the same year.

Wedding gifts

You can give people wedding gifts (as long as they are made before the wedding). You can gift the following:

• £5,000 or less to children.
• £2,5000 or less to grandchildren or great-grandchildren.
• £1,000 or less to another relative or friend.

Gifts out of surplus income

If you have enough money to maintain your usual standard of living, you can gift money from surplus income. The rules surrounding gifts from surplus income are complex. These gifts need to be regular and you must keep accurate records. These gifts could be used to pay for things such as children’s or grandchildren’s school fees.

Potentially Exempt Transfers (PET)

A Potentially Exempt Transfer (PET) gives you the ability to make larger, unlimited-value gifts exempt from Inheritance Tax if you survive seven years or more.

If you die before the seven-year period has expired, then the PET becomes a chargeable consideration, meaning it will be added back into the value of your estate for IHT purposes.

However, if you gift an asset but keep an interest in it (for example, you give your house away but continue to live in it rent-free), this gift will NOT be a potentially exempt transfer.

If the total value of gifts that you made is over the threshold and you die between three and seven years after making a gift, Inheritance Tax will be due on the gift, at a reduced rate on a sliding scale. This is known as ‘Taper Relief’.

Below is the sliding scale of IHT rates on gifts made:

Business Property Relief (BPR)

If you own a business or a share of a company, it is included in the estate for Inheritance Tax purposes.

Business Property Relief (BPR) reduces the value of a business or its assets for IHT purposes.

Agricultural property relief (APR)

Agricultural Property Relief (APR) reduces the Inheritance Tax bill on transfers of agricultural land, buildings, and farmhouses. The relief applies to the agricultural value of the property, rather than its market value.

From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will have a combined limit of £1 million. Thereafter, 50% relief applies, resulting in an effective 20% tax rate.

The rate of BPR available will reduce for shares designated as “not listed” on the recognised stock exchanges, such as AIM, meaning AIM shares will only receive 50% relief.

Pensions

Currently, pensions do not form part of an individual’s estate for IHT. However, in the Autumn Budget 2024, it was announced that any unused pensions will form part of the estate and fall into the scope of IHT from 6th April 2027.

It’s important to note that this is not yet finalised legislation, so there may be changes to this announcement before 2027.

Tax planning strategies to minimise and protect against IHT

Seek advice from dns accountants on ways to minimise and protect against IHT. Having a trusted adviser, such as dns accountants, means that you can plan in advance and minimise your family’s IHT bill, meaning your direct descendants will inherit more of your hard-earned cash and assets.

Here are some areas where a well-thought-out IHT strategy could benefit you and your family:

1. Review your succession plans.

2. Consider taking out life insurance to meet your family’s IHT obligations.

3. Make lifetime gifts during your lifetime to family and friends.

4. Consider using trusts to protect and pass on assets.

5. If you own a business, consider using a family investment company (FIC) or growth shares to limit future IHT liabilities.

Contact dns accountants today for help and advice on minimising your Inheritance Tax bill

For help and advice on IHT and how to minimise your Inheritance Tax bill, contact dns today on 03330600706 or email us at enquiry@dnsaccountants.co.uk.

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