The Inheritance Tax threshold is the value your estate can reach before tax becomes payable. It is a simple idea with several moving parts, and the difference between understanding them and assuming them is often measured in tens of thousands of pounds.
The Nil Rate Band: £325,000
Every individual has a Nil Rate Band of £325,000. Anything above it is taxed at 40% on death. The figure has been frozen since 2009, which means that as property and investment values have risen, more ordinary estates have been drawn into the charge.
The Residence Nil Rate Band: £175,000
If you leave your main residence to direct descendants, children, stepchildren, adopted children or grandchildren, a further £175,000 may be available. It applies to the home only, and it is not automatic: the property has to pass to the right people in the right way.
Transferring allowances between spouses
Anything passing to a spouse or civil partner is exempt, and any unused Nil Rate Band and Residence Nil Rate Band transfer to the survivor. This is where the widely quoted £1m figure comes from: £325,000 plus £175,000 each, for a married couple leaving a family home to their children.
The taper most people miss
The Residence Nil Rate Band is reduced by £1 for every £2 by which the estate exceeds £2m. On a large estate it disappears entirely, and because the taper is measured before reliefs and exemptions, estates that look comfortably planned can still lose the allowance.
A worked example
A married couple own a home worth £700,000, hold £450,000 in ISAs and investments and have a £60,000 life policy written into their estate rather than in Trust. On second death the estate is £1,210,000 against combined allowances of £1m, leaving £210,000 taxed at 40%: an £84,000 bill, most of which could have been designed out.
Where the threshold is quietly lost
Unmarried couples cannot transfer allowances. Leaving a home to a sibling, a niece or a nephew forfeits the residence allowance. Selling the family home in later life without advice can put it at risk, and gifts made within seven years of death are added back into the calculation.
What actually changes the outcome
Regular gifts from surplus income leave the estate immediately. Larger gifts fall outside it after seven years. Life policies written in Trust pay out free of Inheritance Tax rather than inflating the estate. Business Property Relief removes qualifying trading shares after two years. None of these are exotic; they are simply decisions taken deliberately rather than by default.
Thresholds are a starting point, not a plan
Allowances tell you where tax begins. How your Will is drafted, how assets are owned and whether Inheritance Tax planning has been coordinated with your investments decide what is actually paid. If you would like your position reviewed, we can set out the numbers for your own estate and what we would recommend.
