Inheritance tax allowances determine how much of an estate can pass to beneficiaries before any tax is charged. In the UK, the main nil-rate band sits at £325,000 per person.…
Inheritance tax allowances determine how much of an estate can pass to beneficiaries before any tax is charged. In the UK, the main nil-rate band sits at £325,000 per person. On top of that, a residence nil-rate band of £175,000 can apply when a home is left to direct descendants, lifting the total to £500,000 for one individual. Married couples and civil partners can transfer any unused portion, so a surviving spouse may pass on up to £1 million tax-free.
Anything above these thresholds is generally taxed at 40%. To put that in plain figures: an estate of £700,000 left by a single person with the full £500,000 allowance would face tax on £200,000, producing a bill of £80,000.
Understanding these allowances matters because they shape what heirs actually receive. Small planning decisions — how a home is owned, when gifts are made — can change the final figure considerably.
What Is inheritance tax allowances?
Inheritance tax allowances are the thresholds that let a portion of your estate pass to your heirs free of inheritance tax (IHT). In the UK, IHT is charged at 40% on the value of an estate above these allowances when someone dies.
Two main allowances apply. The first is the nil-rate band, currently £325,000 per person. The second is the residence nil-rate band, worth up to £175,000, which applies when you leave your main home to direct descendants such as children or grandchildren. Together, one person can potentially pass on £500,000 before any tax is due.
Spouses and civil partners can transfer unused allowances between them. So if the first partner leaves everything to the survivor, both allowances carry over. The surviving partner's estate can then use up to £1 million before IHT applies: £325,000 + £325,000 + £175,000 + £175,000.
The arithmetic is straightforward. An estate worth £700,000 left to children, with the full £500,000 available, would face tax on £200,000. That produces a bill of £80,000 (£200,000 × 40%).
There are limits. The residence nil-rate band tapers away for estates above £2 million, reducing by £1 for every £2 over that threshold. Both allowances are frozen until April 2030, meaning more estates are drawn into IHT as property and asset values rise.
Other reliefs sit alongside these allowances, including exemptions for gifts to spouses, charities, and certain business or agricultural assets. The allowances form the starting point of any IHT calculation.
Key Benefits of inheritance tax allowances
Inheritance tax allowances reduce the portion of an estate exposed to the 40% charge. Used properly, they can remove a significant tax bill entirely.
The main allowance is the nil-rate band of £325,000 per person. On top of that sits the residence nil-rate band of £175,000, available when a qualifying home passes to direct descendants. A single person can therefore pass on up to £500,000 before any tax is due.
For married couples and civil partners, unused allowances transfer to the survivor. That means a couple can combine two nil-rate bands and two residence nil-rate bands, giving a joint threshold of £1 million. On an estate worth exactly £1 million, the tax saved compared with having no allowances at all is £400,000.
The arithmetic is straightforward. Consider an estate of £700,000 left by a widow who inherited her late husband's full allowances. Her available threshold is £325,000 + £325,000 + £175,000 + £175,000 = £1,000,000. The estate falls below that figure, so no inheritance tax is payable. Without the transferable element, the taxable portion would have been £200,000, producing a bill of £80,000.
Smaller annual allowances also matter. Each person can give away £3,000 a year free of inheritance tax, and any unused portion can be carried forward one year, allowing a £6,000 gift. Small gifts of £250 to any number of individuals are exempt, as are wedding gifts within set limits and regular gifts made from surplus income.
The practical value is threefold: more of the estate reaches the intended beneficiaries, executors face a simpler process where allowances cover the total, and lifetime planning becomes easier because the thresholds are known and stable. Allowances do not shelter every estate, but they remove tax from many that would otherwise pay it.
How inheritance tax allowances Works
Inheritance tax in the UK is charged at 40% on the value of an estate above certain thresholds. The allowances reduce the taxable portion before that rate is applied.
The main allowance is the nil-rate band, set at £325,000 per person. Anything below this figure passes free of inheritance tax. So an estate worth £300,000 pays nothing. An estate worth £500,000 pays 40% on the £175,000 above the threshold, which comes to £70,000.
A second allowance, the residence nil-rate band, adds a further £175,000 when a main home is left to direct descendants — children, grandchildren, stepchildren or adopted children. Combined, one person can pass on up to £500,000 before any tax is due.
Spouses and civil partners inherit from each other free of inheritance tax, regardless of the amount. They also inherit any unused allowances. If the first partner to die uses none of their nil-rate band, the survivor's estate can apply £650,000, plus up to £350,000 in residence allowance — a combined £1 million.
The residence nil-rate band tapers for larger estates. For every £2 the estate exceeds £2 million, £1 of the residence allowance is withdrawn. An estate of £2.35 million loses the full £175,000.
Gifts made during a lifetime can also affect the calculation. Anything given away in the seven years before death is added back to the estate. Gifts made between three and seven years before death may qualify for taper relief, reducing the tax on those specific gifts, not the estate as a whole.
The executor totals the estate, deducts debts and funeral costs, applies the available allowances, and pays 40% on what remains. Tax is generally due within six months of the end of the month of death.
Common Questions About inheritance tax allowances
What is the nil-rate band? Every individual has a nil-rate band of £325,000. Estates below this figure pay no inheritance tax. Anything above is taxed at 40%.
What is the residence nil-rate band? An additional £175,000 applies when you leave your main home to direct descendants — children, stepchildren, or grandchildren. So a homeowner passing property to their children can shield up to £500,000.
Can allowances transfer between spouses? Yes. Anything left to a spouse or civil partner passes free of inheritance tax, and any unused allowance transfers to the survivor. A widow or widower can therefore have up to £1 million available: £325,000 + £175,000, doubled.
Is the residence allowance reduced for larger estates? It tapers. For every £2 an estate exceeds £2 million, the residence nil-rate band drops by £1. An estate of £2.35 million loses the full £175,000.
Are the allowances rising with inflation? No. Both bands are frozen until April 2030. As property and asset values climb, more estates are pulled into the tax.
What about gifts made during my lifetime? You can give away £3,000 each tax year without it counting towards your estate. Larger gifts generally fall outside the estate if you survive seven years after making them; partial relief applies between three and seven years.
Do pensions count? Most pensions currently sit outside the estate, but rules are changing from April 2027, when unused pension funds are expected to be included.
Conclusion
Inheritance tax allowances are more generous than many people assume, but only if you know how they stack. Each individual has a £325,000 nil-rate band. Add the £175,000 residence nil-rate band when a home passes to direct descendants, and a couple can pass on up to £1 million before the 40% charge applies.
The rules taper, though. Estates above £2 million lose £1 of the residence allowance for every £2 over the threshold, so a £2.35 million estate loses the residence band entirely. Unused allowances transfer between spouses and civil partners, which is why timing and paperwork matter.
Three things to take away: check whether your estate qualifies for the residence nil-rate band, confirm any transferred allowance from a deceased spouse is documented, and review the figures whenever property values shift.
Next step: pull together a current valuation of your estate and compare it against the £325,000 and £175,000 thresholds. That single calculation tells you where you stand.
Learn more about Inheritance tax planning.