What Is the Inheritance Tax Threshold?

“The threshold” is really two allowances working together, plus some rules that decide how much of each you actually get. Getting to grips with both, and with how they pass between spouses, is what turns a headline figure into a number that means something for your own estate.

The two allowances

Everyone has a nil-rate band of £325,000, the amount of your estate that passes free of inheritance tax. On top of that sits the residence nil-rate band of up to £175,000, which applies specifically when your main home, or its value, passes to direct descendants: children, stepchildren, adopted or foster children, and grandchildren. Combine the two and one person can pass on up to £500,000 tax-free, provided a qualifying home goes to the right people.

Anything above the available threshold is taxed at 40%. The residence band is also tapered away for larger estates: it reduces by £1 for every £2 by which the estate exceeds £2 million, so very large estates lose it altogether. That taper is one of the easiest things to overlook when totting up your position.

How couples combine allowances

Transfers between spouses and civil partners are free of inheritance tax, and just as importantly, any unused nil-rate band and residence band passes to the survivor. This is the mechanism that lets a couple reach up to £1 million: two £325,000 nil-rate bands plus two £175,000 residence bands. The unused allowances are claimed by the executors when the second person dies, and the entitlement carries forward even from deaths many years ago. Unmarried couples do not benefit from this, which is one reason planning matters more for them.

Why the frozen threshold matters

Both bands are frozen until 2030. Because the thresholds stand still while house prices and investments generally rise, more estates are pulled over the line each year, a slow, quiet increase in the tax often described as fiscal drag. An estate that sat comfortably under the threshold a few years ago may not today. A further change is on the horizon: from April 2027, unused pension funds, which have largely sat outside inheritance tax, come into scope, materially increasing many future liabilities.

The practical upshot is that inheritance tax is no longer a concern only for the very wealthy, particularly for homeowners in higher-value areas. It is worth totting up your assets and comparing the figure with the allowances available to you. If you are over the threshold, or heading that way, our complete guide to inheritance tax planning and the question of how much inheritance tax planning costs are useful next steps, alongside the wider inheritance tax planning service. Tax depends on your circumstances and the rules can change; this is information, not personal advice.

A worked example

Take a married couple with a home worth £550,000 and other assets, pensions, savings and investments, of £600,000, a £1.15 million estate. Between them they have two £325,000 nil-rate bands and two £175,000 residence bands, provided the home passes to their children: £1 million of allowances in total. On the first death everything passes to the survivor free of tax, and the unused allowances transfer across. On the second death the estate uses the combined £1 million, leaving £150,000 taxed at 40%, a bill of £60,000.

Change the facts and the number moves sharply. If the couple were unmarried, the allowances could not be pooled in the same way. If the estate exceeded £2 million, the residence bands would begin to taper away. And from April 2027, unused pension funds count towards the total, potentially pulling more into charge. The lesson is that the threshold is not a single fixed figure: it depends on marital status, what your home is worth, who inherits it and the size of the estate. If the sums suggest you are over the line, the worst thing to do is nothing: making sure both spouses’ allowances are set up correctly in your wills, using the £3,000 annual gift exemption, and starting the seven-year gifting clock early all help, and a vetted adviser can calculate your own position for free.

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