Inheritance Tax (IHT) is a levy on the value of a person's estate when they die. It's a topic that many find complex and sometimes daunting. Understanding how much you can inherit without facing this tax is crucial for both those planning their estate and those who stand to inherit. In the UK, there are several allowances and reliefs that can significantly reduce or even eliminate the amount of IHT payable. Let's delve into the details for the 2025/2026 tax year.
The Standard Nil-Rate Band: Your First Line of Defence
The primary threshold for Inheritance Tax is known as the nil-rate band (NRB). For the 2025/2026 tax year, this stands at £325,000. This means that the first £325,000 of an individual's estate is generally free from Inheritance Tax.
How it Works:
When someone passes away, the total value of their estate is calculated. This includes all their assets, such as property, savings, investments, vehicles, and personal possessions, minus any outstanding debts and funeral expenses. If the net value of the estate is £325,000 or less, no Inheritance Tax is typically due.
Example:
- Jason passes away with an estate valued at £275,000.
- Since £275,000 is below the £325,000 nil-rate band, no Inheritance Tax will be payable on her estate.
The Transferable Nil-Rate Band: Boosting the Tax-Free Allowance for Couples
One of the key aspects of UK Inheritance Tax is the transferable nil-rate band. This allows any unused portion of the nil-rate band from a deceased spouse or civil partner to be transferred to the surviving spouse or civil partner's estate upon their death.
How it Works:
- If the first spouse or civil partner leaves their entire estate to the surviving spouse or civil partner, they would have used none of their nil-rate band. In this scenario, the surviving spouse or civil partner's estate would be entitled to a double nil-rate band: £325,000 (their own) + £325,000 (transferred) = £650,000.
- If the first spouse or civil partner used some of their nil-rate band (e.g., by leaving assets to other beneficiaries), the remaining percentage of the band can be transferred.
Example:
- Jolly passed away in 2020 and left his entire £200,000 estate to his wife, Rose. He used £200,000 / £325,000 = 61.54% of his nil-rate band. This means 38.46% of his nil-rate band (£125,000 approximately) can be transferred to Mary's estate.
- When Rose passes away in 2026, her estate will have her own £325,000 nil-rate band plus the transferred £125,000, giving a total tax-free allowance of £450,000.
Important Note: To claim the transferable nil-rate band, the executors of the surviving spouse or civil partner's estate will need to provide details of the first spouse or civil partner's estate and how their nil-rate band was used.
The Residence Nil-Rate Band (RNRB): An Additional Allowance for Homeowners
For individuals who directly pass on their main residence to their direct descendants, there's an additional allowance called the residence nil-rate band (RNRB). For the 2025/2026 tax year, the RNRB stands at £175,000.
Who Qualifies as a Direct Descendant?
Direct descendants include children (including adopted, step, and foster children), grandchildren, and other lineal descendants) Nieces, nephews, siblings, and other relatives do not qualify.
How it Works:
- If an individual leaves their home to a direct descendant, their estate can benefit from the £175,000 RNRB in addition to the standard £325,000 nil-rate band, potentially increasing the tax-free threshold to £500,000.
- Similar to the standard nil-rate band, any unused RNRB from a deceased spouse or civil partner can also be transferred. This means a surviving spouse or civil partner could potentially have a total tax-free allowance of £1,000,000 if they leave their home to direct descendants and their first spouse/civil partner did not use their RNRB.
Tapering of the RNRB:
It's important to note that the RNRB is gradually withdrawn (tapered) for estates with a net value of more than £2 million. The RNRB is reduced by £1 for every £2 that the net value of the estate exceeds £2 million. This means that for estates worth £2.35 million or more, the RNRB is completely eliminated.
Example:
- Jim passes away in 2026 with an estate valued at £450,000, including his house worth £300,000, which he leaves to his daughter. His estate can benefit from both the £325,000 NRB and the £175,000 RNRB, meaning no Inheritance Tax will be payable.
- If Jim's wife, Pam, had passed away previously and left her entire estate to him, his estate could potentially have a total tax-free allowance of £325,000 (his NRB) + £325,000 (transferred NRB) + £175,000 (his RNRB) + £175,000 (transferred RNRB) = £1,000,000.
Other Exemptions and Reliefs That Can Reduce Inheritance Tax
Beyond the nil-rate band and the RNRB, several other exemptions and reliefs can further reduce the amount of Inheritance Tax payable:
- Gifts to Spouse or Civil Partner: Any assets left to a surviving spouse or civil partner are generally exempt from Inheritance Tax, provided the recipient is domiciled in the UK.
- Gifts to Charities: Gifts made to registered charities are entirely exempt from Inheritance Tax. Furthermore, if at least 10% of the net estate is left to charity, the rate of Inheritance Tax on the remaining taxable portion is reduced from 40% to 36%.
- Small Gifts Allowance: You can make small gifts of up to £250 per person per tax year without them being subject to IHT.
- Annual Exemption: You can give away a total of £3,000 worth of gifts each tax year, which are immediately exempt from IHT. Any unused portion of the previous year's annual exemption can also be carried forward for one year, allowing a potential £6,000 exemption.
- Normal Expenditure Out of Income: Regular gifts made out of your surplus income (that don't affect your standard of living) are also exempt from IHT. This can be a powerful tool for long-term IHT planning.
- Business Property Relief (BPR) and Agricultural Property Relief (APR): These reliefs can provide significant reductions (up to 100%) in IHT on qualifying business or agricultural assets. It's crucial to note that there are upcoming changes to BPR from April 2026, which will cap the relief at £1 million for certain assets.
- Potentially Exempt Transfers (PETs): Gifts made more than seven years before death are generally exempt from IHT. If a gift is made between three and seven years before death, taper relief may apply, reducing the amount of tax payable.
Key Takeaways for Inheriting Tax-Free in the UK (2025/2026):
- The standard nil-rate band is £325,000.
- This can be doubled to £650,000 if the first spouse or civil partner did not use their nil-rate band.
- The residence nil-rate band is £175,000 and is available when a main residence is passed to direct descendants.
- The RNRB can also be doubled to £350,000 if the first spouse or civil partner did not use their RNRB, potentially leading to a total tax-free allowance of £1,000,000 for couples leaving their home to direct descendants.
- Various other exemptions and reliefs can further reduce or eliminate IHT liabilities.
- Careful estate planning is essential to maximize these allowances and reliefs.
Do you need help with Inheritance Tax planning?
Breaking the Mould Accounting Limited offers expert advice and support to help you navigate the complexities of Inheritance Tax. We can help you understand your potential liabilities, explore available reliefs and exemptions, and develop a comprehensive estate plan tailored to your specific needs.