How Much Inheritance Tax Will I Pay on £1 Million?
If you’re asking yourself, “how much inheritance tax will I pay on £1 million?”—you’re not alone. With property prices and asset values steadily rising across the UK, more families are finding themselves above the standard inheritance tax (IHT) threshold. This article explores how IHT applies to estates worth £1 million, what you can do to reduce your liability, and when planning ahead can save your loved ones thousands.
For tailored advice, book a free consultation or explore our transparent pricing today.
Understanding the Inheritance Tax Threshold
The UK’s inheritance tax threshold, known as the nil-rate band, is currently £325,000. This means that the first £325,000 of your estate is not subject to tax. If your estate is worth £1 million, then only the portion above that threshold is potentially taxable.
There is also a residence nil-rate band (RNRB), which provides an extra £175,000 tax-free allowance if you leave your home to direct descendants, such as children or grandchildren. In combination, a married couple can potentially pass on £1 million tax-free if all allowances apply.
Keyphrase Application: How Much Inheritance Tax Will I Pay on £1 Million?
If you’re single and leave an estate worth £1 million, the calculation is as follows:
- Nil-rate band: £325,000
- Taxable estate: £675,000
- Inheritance Tax at 40%: £270,000
If you qualify for the full residence nil-rate band, your total tax-free allowance could rise to £500,000, lowering your taxable estate to £500,000 and resulting in a £200,000 tax bill.
Inheritance Tax on £1 Million for Married Couples
When one spouse passes away, any unused nil-rate and residence nil-rate bands can be transferred to the surviving spouse. This means that a couple can pass on up to £1 million tax-free, provided their estate includes a property passed to direct descendants.
If both partners leave their estate to their children and own a qualifying home, no tax may be due on a combined estate of £1 million. This is a crucial consideration when asking, “how much inheritance tax will I pay on £1 million?”
Inheritance Tax Example: Married Couple
Consider the following breakdown:
- Husband passes first, leaving everything to wife – no tax due
- Upon wife’s death, estate is valued at £1 million
- Combined nil-rate band: £325,000 x 2 = £650,000
- Combined residence nil-rate band: £175,000 x 2 = £350,000
- Total tax-free: £1 million
- IHT due: £0
This demonstrates how strategic planning between spouses can eliminate inheritance tax liability entirely.
How to Reduce Inheritance Tax on £1 Million
There are several strategies that can help reduce or eliminate the IHT burden:
1. Use of Trusts
Placing assets in a trust may remove them from your estate, depending on the type of trust and how it’s managed. Learn more on our inheritance tax planning page.
2. Lifetime Gifts
Gifts made more than seven years before your death are generally exempt from inheritance tax. Consider gifting surplus income or assets during your lifetime.
3. Charitable Donations
Leaving 10% or more of your estate to charity reduces the IHT rate from 40% to 36%. Not only is this philanthropic, but it can also significantly reduce your tax bill.
4. Life Insurance Policies
Policies written in trust can help cover inheritance tax liabilities and ensure beneficiaries receive the full value of your estate.
5. Professional Estate Planning
Getting advice from professionals ensures you’re taking advantage of all allowances and reliefs. Book a consultation to understand your personalised tax exposure and planning options.
Inheritance Tax and Property
Much of the average £1 million estate is tied up in property. The main residence nil-rate band is specifically designed to reduce IHT on homes passed to children or grandchildren. However, properties not passed to direct descendants may not qualify for this extra allowance.
Sell or Downsize? What You Need to Know
If you downsize or sell your home, the RNRB can still apply if assets of equivalent value are passed to your children. Known as the “downsizing addition,” this rule ensures families who’ve moved or sold don’t lose their tax benefit.
Common Mistakes to Avoid
- Failing to update your will
- Not using life insurance to offset IHT
- Gifting without documentation
- Misunderstanding the 7-year rule for gifts
- Overlooking business and agricultural reliefs
Many of these errors stem from a lack of guidance. A professional estate planner can ensure you’re not leaving your heirs with unnecessary tax bills.
When Should You Start Planning?
The earlier, the better. Inheritance tax is one of the few taxes that can be legally minimised through forward planning. Whether you’re updating your will, making gifts, or looking at trust options, it’s best to start now.
Don’t leave it too late—book a free consultation to review your estate with our experts.
FAQs: How Much Inheritance Tax Will I Pay on £1 Million?
Is inheritance tax charged on the full £1 million?
No. Tax is only charged on the value above the tax-free thresholds—£325,000 standard and up to £500,000 with residence allowance.
How can I avoid inheritance tax on my £1 million estate?
By using lifetime gifts, trusts, and spousal allowances, you may be able to reduce or eliminate the tax burden.
Do pensions count toward inheritance tax?
Usually not. Most defined contribution pensions can be passed on tax-free if you die before age 75, but speak with an adviser to confirm.
Can I insure against inheritance tax?
Yes, whole-of-life insurance policies written in trust can be used to cover the IHT bill upon death.
Conclusion: Plan Ahead and Save Thousands
When asking, how much inheritance tax will I pay on £1 million, the answer depends on your circumstances, assets, and preparation. Without planning, your estate could face a hefty tax bill. But with the right strategies—such as gifting, using allowances, and working with a professional—you can pass on more of your wealth to your loved ones.
Book your free estate planning consultation or explore our pricing options to get started today.