What are the Inheritance Tax thresholds?

Understanding the Inheritance Tax (IHT) threshold is essential for estate planning. The threshold determines how much of an estate can be passed on tax‑free. This article explains the key thresholds, how they work together, and how tapering can affect estates.

The Nil Rate Band (NRB)

The Nil Rate Band, also known as the basic Inheritance Tax threshold, is set at £325,000 per individual. Estates under this value are not charged IHT. Amounts above this threshold are typically taxed at 40 %, subject to reliefs or exemptions. You can also combine unused NRB allowances from a deceased spouse or civil partner, potentially allowing a couple to pass on £650,000 tax‑free.  

Residence Nil Rate Band (RNRB)

The Residence Nil Rate Band is an additional allowance for those leaving a main residence to direct descendants, such as children or grandchildren. For tax year 2025/26, it is £175,000 per individual, bringing the maximum tax‑free allowance to £500,000. A married couple could collectively leave up to £1 million tax‑free. 

However, the RNRB only applies if: 

• The residence is part of the estate at death;
• It passes to direct descendants;
• The estate value does not exceed the taper threshold (£2 million). 

Unused RNRB from a spouse or civil partner can be transferred, just like the NRB, potentially doubling the benefit.  

How tapering works 

Tapering reduces the RNRB for large estates. If the estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over that threshold. This reduction can eliminate the allowance for estates worth £2.35 million or more. The NRB remains unaffected by tapering and stays at £325,000, even for large estates.  

Example calculations 

These examples illustrate: 

• How combining NRB and RNRB increases the threshold;
• How tapering reduces RNRB in higher value estates;
• That a single person can minimise tax liability by leaving a home to direct descendants. 

Planning tips 

To protect and maximise your Inheritance Tax threshold: 

• Make full use of lifetime gifting allowances and the seven‑year rule;
• Consider Trusts, Business Property Relief (BPR), or Agricultural Property Relief (APR), where applicable;
• Leave your main residence to direct descendants if possible;
• Keep records of unused thresholds to pass on to a surviving spouse or civil partner. 

If unpaid IHT arises due to payout differences between estate valuation at death and sale value, Executors may claim refunds using forms IHT38 (for property) or IHT35 (for shares), up to four years after death.   

Final thoughts 

The Inheritance Tax threshold comprises two key allowances: the Nil Rate Band of £325,000 and the Residence Nil Rate Band of £175,000. Together, they make it possible for many estates to remain entirely exempt from IHT. However, tapering rules and strict qualifying conditions apply, especially for larger estates. Planning ahead, knowing how thresholds work, and taking advantage of reliefs can significantly reduce tax liabilities.