The inheritance tax threshold: what it is, what it isn't, and why it keeps catching people out

Inheritance tax feels like a tax on the wealthy. In practice, it catches a growing number of ordinary families, mainly because of rising house prices and a threshold that has not kept up with them.

Understanding how the thresholds work, and where your estate stands against them, is the first step in any sensible estate plan.

The nil-rate band: the basic threshold

Every person has a nil-rate band of £325,000. This is the amount that can pass from your estate free of inheritance tax. Anything above it is taxed at 40%.

The nil-rate band includes everything in your estate: property, savings, investments, vehicles, jewellery, and anything else you own outright. It is not just cash.

The residence nil-rate band: an extra allowance for homeowners

If you own a home and leave it to your children or grandchildren (including stepchildren and adopted children), a further allowance of up to £175,000 may apply. This is the residence nil-rate band.

Combined with the standard nil-rate band, this gives a potential threshold of £500,000 per person, provided the conditions are met. The main conditions are that you own a home, or did until recently, and that it passes directly to qualifying descendants.

The residence nil-rate band is tapered for larger estates. If your total estate exceeds £2 million, the residence nil-rate band reduces by £1 for every £2 above that figure, and disappears entirely at £2.35 million.

How the thresholds work for couples

Married couples and civil partners can pass assets to each other free of inheritance tax on first death. They can also transfer any unused nil-rate band to the surviving spouse.

In practice, this means a couple can have a combined threshold of up to £650,000 in nil-rate band, and up to £350,000 in residence nil-rate band, giving a potential total of £1 million before inheritance tax applies.

But this is not automatic. The residence nil-rate band transfer, in particular, requires the estate to be structured properly and for HMRC to be given the right information. It is worth checking that your will and estate plan support this outcome rather than assuming it will happen.

The freeze: a silent tax rise

The nil-rate band has been frozen at £325,000 since 2009. It was set to remain frozen until at least 2030 under current government plans. The residence nil-rate band has also been frozen.

Over the same period, UK house prices have risen substantially. A home that was comfortably below the threshold in 2009 may now, combined with savings and investments, push an estate well into inheritance tax territory.

This is sometimes described as a stealth tax. You have not done anything differently. Your estate has just grown in value while the thresholds have stood still.

What actually counts towards your estate

• Your share of any property you own, including jointly held property
• Savings accounts and ISAs (ISAs lose their tax-free status on death)
• Shares, funds, and investment portfolios
• Business assets, unless Business Property Relief applies
• Life insurance proceeds that are not written in trust
• Gifts made in the last seven years, depending on their size
• From April 2027, most unused pension funds

What does not count

• Assets passing directly to a spouse or civil partner
• Gifts to registered UK charities
• Most business assets that qualify for Business Property Relief
• Currently, most pension funds (changing in April 2027)

Many families do not know their estate total until a solicitor or financial planner works through it with them. It is a useful exercise even if the answer turns out to be reassuring.

Devonshire Wealth can connect you with a qualified estate planning specialist who can map your estate against the current and future thresholds. Visit our inheritance tax page to get started.