Inheritance tax (IHT) is charged at 40% on estates valued above the nil rate band of £325,000. If you leave your main home to direct descendants (children or grandchildren), you also get the residence nil rate band of £175,000, giving a combined threshold of £500,000.
For married couples and civil partners, the thresholds can be combined. If the first partner to die leaves everything to the surviving partner (which is tax-free), the unused thresholds transfer. This means a surviving spouse can potentially have a combined threshold of £1,000,000 before any IHT is due.
The nil rate band has been frozen at £325,000 since 2009 and will remain frozen until at least 2030. Had it risen with inflation, it would be approximately £475,000 today. This freeze means more estates are being caught by IHT each year.
The residence nil rate band (RNRB) of £175,000 only applies if you leave your main home to direct descendants. It does not apply if you leave your home to siblings, nieces, nephews or friends. It also tapers away for estates worth more than £2 million, reducing by £1 for every £2 above £2 million.
Strategies to reduce your IHT bill include making gifts during your lifetime (gifts become IHT-free after 7 years), using your annual gift exemption of £3,000 per year, leaving 10% or more of your estate to charity (which reduces the IHT rate from 40% to 36%), and setting up trusts.
Gifts made within 7 years of death are subject to taper relief. The tax rate reduces from 40% (0-3 years) to 32% (3-4 years), 24% (4-5 years), 16% (5-6 years), 8% (6-7 years), and 0% (7+ years).
Use our inheritance tax calculator to estimate the IHT on your estate.