In the UK, you can pass on up to £325,000 of your estate tax-free, and in some cases, this goes up to £500,000 if you leave your home to children or grandchildren. 

Married couples and civil partners can also pull their allowances together, meaning they can leave up to £1 million tax-free.

That’s the short answer, but the full story is a little more complicated. 

Inheritance Tax (IHT) is full of rules, allowances and exceptions, which is why families are regularly caught off guard after a loved one’s death. 

This guide will walk you through exactly how Inheritance Tax works, what you can pass on tax-free and what options you have available if you need help covering the bill.

What is Inheritance Tax and when does it apply?

Inheritance Tax is a tax charged on a person’s estate (property, money, items and some gifts) after they have died. The standard rate of Inheritance Tax is 40% on anything above the tax-free threshold of £325,000.

The tax is normally paid by the estate, not the beneficiaries. What this means in practice is that it’s usually the executor (the person responsible for managing the will) who arranges payment to HMRC – not the people inheriting the money.

But whilst it’s important to know about, the truth is that most estates don’t actually pay Inheritance Tax. 

According to recent stats on Gov.uk, around 94% of estates do not pay IHT thanks to the mix of allowances and exemptions that are available. Still, as property values rise and thresholds stay frozen until 2030, more families are finding themselves pulled into the tax net.

The nil-rate band: £325,000 of your estate, tax-free

Every person in the UK has a nil-rate band of £325,000. This is the amount of your estate you can pass on before any Inheritance Tax is due.

For example, if your estate is worth £300,000, no tax is due.

However, if your estate is worth £500,000, tax is charged at 40% on the £175,000 above the threshold.

The main residence allowance: up to £175,000 extra

Introduced in 2017, the main residence nil-rate band gives you an extra £175,000 allowance if you leave your home to direct descendants. This includes children, step-children, adopted or foster children, or grandchildren.

This means that single people can pass on up to £500,000 tax-free (£325,000 + £175,000) whereas married couples and civil partners who combine their allowances can pass on up to £1 million tax-free.

However, there are some limits:

If your estate is worth more than £2 million, this residence allowance tapers off by £1 for every £2 over the threshold. This means that by £2.35 million, the allowance is lost completely.

What about tax-free exemptions for partners?

One of the most generous rules is that anything left to a spouse or civil partner is exempt from Inheritance Tax, regardless of the value.

Even better, any unused allowance from the first partner can be transferred to the surviving spouse. This is why many couples reach the £1 million tax-free threshold.

Importantly, however, this only applies to couples that are either married or civilly partnered – not those that live together, even if it’s long-term.

What about gifts?

One of the main ways that people avoid paying Inheritance Tax is through gifting. But if you do plan to give away your money when you’re alive, it’s important to know about the seven-year rule:

If you are still alive seven years after giving away an asset, it falls outside of your estate for IHT purposes.

If you die within seven years, the gift might be taxed, but the rate reduces after the first three years.

However, there are some limits when it comes to gifts.

• £3,000 per year can be gifted tax-free.
• Small gifts (up to £250 per person) are also not counted.
• Parents can make tax-free wedding gifts of up to £5,000 and grandparents up to £2,500.

Other tax-free inheritance reliefs

Aside from the main allowances, there are other reliefs that allow you to lower the amount of Inheritance Tax you pay on an estate.

Donations to charities and community sports clubs for example, do not pay any tax on their donations. If you leave 10% or more of your estate to charity, the IHT rate on the rest falls from 40% to 36%.

Pensions also currently fall outside of the estate for IHT purposes, but from April 2027, pensions will count towards IHT.

Are trusts exempt from Inheritance Tax?

Trusts are another way to manage inheritance and potentially lower the tax. By placing assets in a trust, you can:

• Control how and when beneficiaries receive money.
• Potentially move assets out of your estate (depending on the type of trust and timing).

However, trusts can be complicated, and in many cases, they come under different tax rules. If you aren’t sure if trusts are right for you, it’s important to seek out professional advice. 

What happens if you can’t afford the inheritance tax bill?

One of the biggest problems with Inheritance Tax is liquidity. Property and assets may be valuable on paper, but the estate needs to pay the IHT to HMRC in cash within 6 months after death.

For many, this can be an incredibly stressful situation, on top of a recent loss.

This is where Provira can help.

Provira’s Estate Advance Service

Provira provides an Estate Advance, allowing executors to access up to 50% of the estate value early, allowing them to pay Inheritance Tax on time. This can help avoid any penalties or interest building up.

But aside from being a great tool, an Estate Advance can help relieve financial stress, especially during an already difficult time.

If you’re coming up against a big Inheritance Tax bill and are waiting on probate, learn more about Provira’s Estate Advance and see how it can help free up funds when you need them most.

Tax-free estate planning

Most people will never pay Inheritance Tax, but for those who do, the bills can be high. 

Knowing the £325,000 nil-rate band, the £175,000 residence allowance, and the rules around gifts and exemptions can make a huge difference.

If your estate looks likely to go above these thresholds, then it’s important to start planning early.

And if you ever find yourself facing an Inheritance Tax deadline without the cash to pay, remember that options do exist. Provira’s Estate Advance can help you unlock money tied up in an estate, so you can settle with HMRC without added stress.

Ready to plan ahead or cover urgent costs? See how Provira can help with Estate Advances today.