How Inheritance Tax works
Inheritance Tax is usually charged at 40% on the part of an estate above the tax-free allowances. Everyone has a nil-rate band of £325,000. If you leave your home to children or grandchildren, an extra residence nil-rate band of £175,000 can apply, taking a single person's allowance up to £500,000.
Married couples and civil partners can pass their unused allowances to each other, so the survivor's estate can use up to £1,000,000 tax-free. The residence band is tapered away for estates over £2,000,000. Leaving at least 10% of the estate to charity reduces the rate on the rest to 36%.
Worked example
A £600,000 estate, with the home left to children (single person, £500,000 of allowances) has £100,000 taxable — Inheritance Tax of £40,000.
The allowances in more detail
Everyone has a nil-rate band of £325,000 that passes free of Inheritance Tax. On top, the residence nil-rate band of £175,000 applies when you leave your main home to children, grandchildren or other direct descendants — but it's gradually withdrawn for estates worth more than £2 million. Both bands are frozen, so as house prices and asset values rise, more estates are drawn into paying.
Gifts and the seven-year rule
You can give money away to reduce your estate, but timing matters. Most sizeable gifts become fully exempt only if you live for seven years after making them; die within that window and they may count towards your estate, with "taper relief" reducing the tax on larger gifts made three to seven years before death. Some gifts are always exempt, including up to £3,000 a year in total, small gifts of up to £250 per person, and regular gifts made out of surplus income.
The spouse exemption
Anything you leave to a husband, wife or civil partner is normally free of Inheritance Tax, and they also inherit your unused allowances. That's why a surviving partner's estate can use up to two nil-rate bands and two residence bands — up to £1 million in total — before any tax is due.
Common ways people reduce Inheritance Tax
Beyond using the allowances and making gifts early, people reduce Inheritance Tax by leaving at least 10% of their estate to charity (which cuts the rate on the rest from 40% to 36%), and sometimes through trusts or the way pensions are passed on. This is a complex area where the right approach depends heavily on your circumstances — it's one where professional advice usually pays for itself.
Frequently asked questions
How much is Inheritance Tax?
The standard rate is 40% on the value of an estate above the available tax-free allowances. A reduced 36% rate applies if at least 10% is left to charity.
What is the nil-rate band for 2026/27?
£325,000 per person. Leaving your home to direct descendants can add a £175,000 residence nil-rate band on top.
Can a couple pass on £1 million tax-free?
Yes, potentially. Because spouses and civil partners can inherit each other's unused allowances, a surviving partner's estate can use up to two nil-rate bands and two residence bands — £1,000,000.
What is the residence nil-rate band?
An extra £175,000 allowance that applies when you leave your main home to children, grandchildren or other direct descendants. It's tapered for estates over £2,000,000.
Is there a lower rate for leaving money to charity?
Yes. If you leave at least 10% of your net estate to charity, the Inheritance Tax rate on the rest drops from 40% to 36%.