How Much Is Inheritance Tax in the UK?

The headline rate of inheritance tax (IHT) is 40%, but that figure only ever applies to the slice of an estate above your tax-free allowances, and for most families a large part of the estate escapes tax entirely. Understanding how the bands stack up is the foundation of everything else, and the starting point of our complete guide to inheritance tax planning.

Two allowances do the heavy lifting. The nil-rate band gives every individual £325,000 that passes tax-free. On top of that, the residence nil-rate band adds up to £175,000 when you leave your main home to children, grandchildren or other direct descendants. Both are frozen until April 2030, so as house prices and savings grow in cash terms, more estates are quietly drawn into the net each year, a phenomenon sometimes called fiscal drag.

How the 40% is actually worked out

IHT is charged only on the value above your combined threshold. Suppose an unmarried person leaves an estate of £700,000, including a home passing to their children. They have a £325,000 nil-rate band plus the £175,000 residence band, £500,000 tax-free in total. The remaining £200,000 is taxed at 40%, producing a bill of £80,000. The effective rate across the whole estate is therefore about 11%, not 40%. That distinction matters enormously when people panic at the headline number.

Married couples and civil partners enjoy a further advantage. Anything left to a surviving spouse is completely exempt, and any unused allowance transfers to them on the second death. That is how a couple can combine two nil-rate bands and two residence bands to shelter up to £1 million. If your estate is likely to exceed that ceiling, our guide on how to reduce inheritance tax legally sets out the main levers, from gifting to trusts.

Who actually ends up paying

Most estates never trouble HMRC. The people who do pay tend to own a home in an expensive area, hold sizeable investments or savings, or have not used the spousal exemption and allowance transfers effectively. Because the thresholds are frozen while asset values climb, families who would once have been comfortably under the line increasingly find themselves just over it, often unexpectedly. Reviewing your position early is far more powerful than reacting after a death.

It is worth adding up everything, because the taxable estate is broader than people assume. It includes your home and any other property, savings and current accounts, ISAs, investments, cars, jewellery and other valuables, business interests and life policies that are not written in trust, less any mortgages, loans and reasonable funeral costs. Certain gifts made in the seven years before death are added back in too. Only once that full picture is drawn together can you see whether the 40% charge will bite, and by how much.

The charity discount and a big change ahead

Leave at least 10% of your net estate, the value above the nil-rate band, to charity and the rate on the remainder drops from 40% to 36%. For many estates the reduction to the tax bill and the gift to charity broadly offset one another, making it an efficient way to give. You can read more about how the bands are set in our answer on the inheritance tax threshold, or see the wider service through our inheritance tax planning hub.

One major reform is on the horizon. From April 2027, most unused pension funds will count as part of your estate for inheritance tax, reversing years of pensions sitting outside the net. If a pension makes up a large share of your wealth, that single change could reshape your planning, and it is worth modelling now rather than in 2027.

So how do you find out where you stand? Start by totting up your assets, subtracting debts, and comparing the result with your available allowances, remembering to include any allowance inherited from a late spouse. If you are comfortably below the threshold, the priority is simply an up-to-date will. If you are above it, the earlier you plan the more options you have, because the most powerful tools, gifting and the seven-year rule, trusts, and pension strategy, all reward time. Vetted Wealth is not an adviser and this is information rather than personal advice, but the free matching service can connect you with an independently vetted, FCA-regulated specialist to run your own numbers.

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