Inheritance Tax Limit in the UK: What You Need to Know
When planning your estate, understanding the inheritance tax limit is essential. In the UK, this limit determines how much of your estate can pass to your beneficiaries tax-free. Get it wrong, and your loved ones could face a large bill. Get it right, and you can protect your wealth for the next generation.
This guide covers everything you need to know about the inheritance tax threshold, including how it works, what the current limits are, how it affects your estate, and—most importantly—how to plan smartly to avoid unnecessary tax. If you’re serious about securing your family’s future, read on.
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What Is the Inheritance Tax Limit?
The inheritance tax limit, often called the “nil-rate band”, is the amount of your estate that you can pass on to beneficiaries without paying inheritance tax (IHT). Anything above this limit is generally taxed at 40%.
As of 2024, the standard inheritance tax limit in the UK is £325,000. This amount has been frozen since 2009, despite rising house prices and inflation.
Additional Allowances: The Residence Nil-Rate Band
If you’re passing on your home to direct descendants (e.g. children or grandchildren), you may qualify for the Residence Nil-Rate Band (RNRB), which gives an additional allowance of £175,000.
That means, in some cases, your tax-free allowance can be up to £500,000 per individual, or £1 million for a married couple.
How Inheritance Tax Is Calculated
Once you pass away, your estate is valued. This includes all property, savings, investments, and possessions. If the total exceeds the available tax-free threshold, inheritance tax is charged at 40% on the excess.
Let’s look at an example:
Example: Sarah’s estate is worth £600,000. She qualifies for the standard £325,000 nil-rate band, but not the residence allowance. She would pay IHT on £275,000 (i.e. £600,000 – £325,000), resulting in a £110,000 tax bill.
Smart estate planning can reduce or eliminate this tax—and that’s where our expertise comes in. Learn more about our inheritance tax services.
Who Pays Inheritance Tax?
Inheritance tax is typically paid by the executor of the will or the administrator of the estate, using funds from the estate itself. Beneficiaries do not usually pay IHT directly unless the estate’s assets have already been distributed before payment.
However, gifts made during your lifetime may also be subject to inheritance tax if you pass away within seven years. This is known as the seven-year rule.
The Seven-Year Rule Explained
Gifts made more than seven years before your death are generally exempt from IHT. But if you die within seven years of making a gift, some or all of it may be taxed—depending on when it was given.
The closer to your death, the higher the tax. This is known as “taper relief”.
Taper Relief Rates
- 0–3 years: 40%
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
Planning to gift assets? Make sure it’s done correctly. Speak with our estate planners.
Inheritance Tax Limit for Married Couples
Married couples and civil partners benefit from a combined inheritance tax limit of up to £1 million, assuming they leave their entire estate to each other and then to children or grandchildren.
This is because any unused allowance from the first partner to die can be transferred to the surviving partner’s estate.
Transferable Allowance Example
John dies in 2010 and leaves his estate to his wife, Rachel. No IHT is due. When Rachel passes away in 2024, her estate can use both her own and John’s unused nil-rate bands, totalling up to £1 million if the residence band applies.
What Is Included in the Inheritance Tax Limit?
Here’s what HMRC counts towards your estate when calculating inheritance tax:
- Your home and other properties
- Cash savings and bank accounts
- Stocks and investments
- Life insurance (if not written in trust)
- Vehicles, jewellery, art, and personal possessions
- Business assets (with possible reliefs)
Exemptions and Reliefs That Reduce IHT
You may be able to reduce or eliminate inheritance tax through the following:
- Spouse exemption: Anything left to a spouse or civil partner is exempt from IHT
- Annual gift allowance: You can give away up to £3,000 each year tax-free
- Business Property Relief: May reduce tax on business assets by up to 100%
- Charitable donations: Gifts to registered charities are IHT-exempt
Strategies to Stay Within the Inheritance Tax Limit
1. Use Trusts
Placing assets in a trust can remove them from your estate—if done correctly and for the right reasons. Options include Discretionary Trusts and Life Interest Trusts.
2. Make Lifetime Gifts
Gifting early and within your means is a great way to reduce the value of your estate and stay below the inheritance tax limit. Just be aware of the seven-year rule.
3. Set Up a Life Insurance Policy in Trust
This ensures the payout won’t form part of your taxable estate and can even be used to cover any IHT bill.
4. Leave Money to Charity
If you leave 10% or more of your estate to charity, your IHT rate on the rest drops from 40% to 36%.
5. Change Property Ownership
Switching ownership to tenants in common and placing your share in trust through your will can protect your home from tax or care fees. See how care fee protection strategies work.
Frequently Asked Questions About the Inheritance Tax Limit
What is the current inheritance tax limit in the UK?
As of 2024, it’s £325,000 per person. With the residence nil-rate band, it can rise to £500,000 for individuals or £1 million for married couples.
Does everyone pay inheritance tax?
No. Only around 4% of estates in the UK actually pay inheritance tax—but without planning, your estate could be among them.
Is the inheritance tax limit likely to change?
It has been frozen since 2009, and there are no current plans to raise it. In fact, more estates are being caught due to rising property values.
Can I give away my home to avoid inheritance tax?
You can, but if you continue living in the property rent-free, HMRC may still include it in your estate. It’s best to get legal advice before gifting a home.
Conclusion: Take Control of Your Inheritance Tax Planning
The inheritance tax limit is a key figure in UK estate planning. Knowing the thresholds, how the tax is calculated, and what steps you can take to reduce liability is vital for protecting your legacy.
Don’t leave it to chance. With expert help, you can reduce or eliminate inheritance tax and pass on more of what you’ve built to your loved ones.
Get the right advice for your situation: