What’s the Threshold for Inheritance Tax in the UK?

Understanding what’s the threshold for inheritance tax is vital if you want to protect your estate and ensure your loved ones receive the most from what you leave behind. In the UK, inheritance tax (IHT) can significantly reduce the value of your estate unless effective planning is in place. In this article, we’ll break down the threshold, who pays it, and what you can do to reduce or avoid it.

At MP Estate Planning, we’re here to help you navigate inheritance tax planning with clarity and confidence. You can also book a free consultation or browse our transparent pricing anytime.

What Is the Inheritance Tax Threshold?

The inheritance tax threshold, also known as the “nil-rate band,” is the amount of your estate that can be passed on without incurring inheritance tax. As of the 2024/25 tax year, the standard threshold remains at £325,000.

This means if your estate is valued under £325,000, no inheritance tax is due. If it exceeds that amount, 40% tax is applied to the value above the threshold. For example, an estate worth £500,000 would incur IHT on £175,000.

Residence Nil-Rate Band (RNRB)

On top of the standard threshold, you may qualify for the Residence Nil-Rate Band (RNRB), which gives an additional allowance of up to £175,000 if your home is passed to a direct descendant (such as children or grandchildren). This brings the total possible IHT-free threshold to £500,000 per person.

For couples, unused thresholds can be transferred upon death, meaning a married couple can pass on up to £1 million tax-free with appropriate planning.

What’s the Threshold for Inheritance Tax on Gifts?

Gifts made during your lifetime may also fall under inheritance tax rules. If you give assets away and die within seven years, they may still count towards your estate. The UK government gift rules apply a taper relief system depending on how long you survive after making the gift.

Some gifts are exempt, such as:

• Annual exemption of £3,000
• Wedding gifts (limits vary by relationship)
• Small gifts of up to £250 per person
• Regular gifts from surplus income

For large gifts, understanding what’s the threshold for inheritance tax becomes essential in calculating any potential future liability.

What Happens If You Go Over the Threshold?

If your estate exceeds the IHT threshold, 40% is typically charged on the amount above the limit. This can result in a significant tax bill for your heirs unless steps are taken in advance to reduce the liability.

Here are a few ways to mitigate the impact:

• Making use of allowances and reliefs
• Setting up trusts
• Gifting assets strategically
• Charitable donations (reduces the IHT rate to 36%)

Read more about IHT mitigation techniques on STEP.

Example Scenario

Let’s say your estate is worth £800,000, and you leave everything to your children. You qualify for both the nil-rate band (£325,000) and the residence nil-rate band (£175,000), making your IHT-free allowance £500,000. The remaining £300,000 would be taxed at 40%, resulting in a tax bill of £120,000.

Strategies to Stay Under the Inheritance Tax Threshold

While many estates exceed the limit, there are strategic ways to reduce your estate’s value to stay within what’s the threshold for inheritance tax. Here are some common approaches:

1. Lifetime Gifts

By giving gifts more than seven years before your death, you can completely remove them from your estate. However, be cautious of the rules if you continue to benefit from the gifted asset (e.g., still living in a gifted house).

2. Using Trusts

Trusts can help control how your wealth is distributed and potentially reduce IHT. For example, discretionary trusts or loan trusts can shelter assets from inheritance tax if set up properly.

3. Life Insurance Policies

Taking out a life insurance policy written into trust can cover any inheritance tax bill, ensuring your family doesn’t have to sell assets to pay the tax.

How Property Affects the Threshold

Property is often the largest part of an estate. If your home pushes your estate above the threshold, you may qualify for the residence nil-rate band—but only if you pass the property to direct descendants. Second homes, buy-to-let properties, or gifting property while living in it can have different implications.

Read more on the government’s RNRB guidance.

When Should You Start Planning?

The earlier, the better. Effective IHT planning is often a multi-year process. A well-timed gift or trust setup can mean the difference between paying thousands in tax or nothing at all.

Speak with a professional to assess your circumstances. You can book a free consultation today with our estate planning team and start protecting your family’s financial future.

Common Inheritance Tax Myths

Many assume inheritance tax only affects the wealthy. In reality, rising property values have pushed more average families above the IHT threshold. It’s a myth that if you have a will or simply own a home, IHT won’t apply.

It’s also incorrect to assume that all gifts are exempt. Without planning, gifts can still incur IHT depending on timing and value.

Conclusion: Knowing What’s the Threshold for Inheritance Tax

To recap, what’s the threshold for inheritance tax in the UK is £325,000, potentially rising to £500,000 with the residence nil-rate band. Anything above this may be taxed at 40%, making planning essential for families who want to protect their estate.

Start by assessing your assets, understanding your allowances, and taking professional advice where needed. Our team can help you minimise exposure to IHT through expert guidance tailored to your situation.

Book your free estate planning consultation or explore our clear and fair pricing today to begin your journey toward inheritance tax efficiency.