The Short Answer
Inheritance Tax is a tax on your estate (everything you own) when you die. It is charged at 40% on anything above the nil rate band of £325,000. With the residence nil rate band, couples can pass on up to £1 million tax-free — but many estates still get caught.
The Nil Rate Band
- Everyone gets a £325,000 nil rate band (frozen since 2009).
- If you leave your main home to direct descendants, you also get a £175,000 residence nil rate band.
- Married couples and civil partners can transfer unused allowances — meaning up to £1 million can pass tax-free.
What Is Included in Your Estate
Included
- Property
- Savings and investments
- Pensions (from April 2027)
- Life insurance (unless held in trust)
- Business assets
- Personal possessions of value
Deducted
- Outstanding debts
- Mortgage balances
- Funeral costs
Common Exemptions
- Spouse or civil partner: gifts between spouses are unlimited and tax-free.
- Charities: gifts to registered charities are exempt.
- Annual gift exemption: £3,000 per year.
- Small gifts: £250 per person per year.
- Gifts from surplus income: regular gifts you can afford from income (no limit).
- The seven-year rule: gifts to individuals become tax-free if you survive seven years.
The April 2027 Change
Currently, unused pension pots sit outside your estate. From April 2027, they will be included. This is a major change that could push many estates above the tax-free threshold for the first time.
How to Reduce Your Inheritance Tax Bill
- Use your annual gift exemptions every year.
- Gift from surplus income — there is no limit if you can afford it from regular income.
- Put life insurance in trust so the payout falls outside your estate.
- Consider pension drawdown strategies to reduce your estate before April 2027.
- Get professional advice for complex estates.