Inheritance tax

Five need-to-knows including who pays it and how to legally reduce it

Inheritance tax can cost loved ones £100,000s when you die, with it generating £7 billion for HM Revenue & Customs in one recent tax year alone. But in reality the vast majority of people (around 96%) don't have to pay a penny, while the few who do can legally avoid huge swathes of it. This guide runs through five inheritance tax need-to-knows.

Before reading the full detail below, first watch founder Martin Lewis's four-minute introductory video on inheritance tax and why most are unlikely to ever pay it.

Martin Lewis explains the basics of inheritance tax.
Embedded YouTube Video

Five inheritance tax need-to-knows

First, a word on the politics of inheritance tax, which are controversial. The idea is that without it you perpetuate inherited wealth, so the children of the rich stay rich. Inheritance tax redistributes income so some of the money goes to the state to be distributed for the benefit of all.

The argument against it is that when money's earned, tax is paid at the time, so to pay tax on it again isn't fair.

After years of rocketing property prices, more are being caught by the inheritance tax threshold (which has been frozen until April 2028), raising it higher up the political and social agenda. Yet even then, and we repeat, fewer than 5% of estates currently get charged inheritance tax, so most won't be affected at all.

But as it's a financial fact for some, we've five simple inheritance tax need-to-knows to help you figure out if you (or those inheriting your estate) will likely pay it, and if so, how to legally soften the blow.

1. Anything left to a spouse or civil partner is EXEMPT from inheritance tax

Inheritance tax is a tax on the 'estate' of someone who's passed away. But as we've said, only around one in 25 families (around 4%) have to pay it, as most estates fall below the inheritance tax threshold.

One key reason for this is that if the deceased was married or in a civil partnership, then anything they leave to their spouse or civil partner will be exempt from inheritance tax. This applies regardless of the estimated value of the deceased's estate.

So, even if the deceased has a million pounds to their name when they die, if they leave it all to their surviving spouse or civil partner, inheritance tax WON'T be charged (anything they don't leave to their spouse or civil partner might be liable for inheritance tax though – read on for the full details).

Do also note that this DOES NOT APPLY if you're simply cohabiting with your partner, even if you've lived together for years and have 20 children. In other words, if you live with your partner but are not married or in a civil partnership, any money you leave your partner when you die will count towards your individual inheritance tax-free allowance (more on this below).

In England and Wales, less than 50% of people over the age of 16 are married or in a civil partnership, according to the Office for National Statistics.

2. You do not pay inheritance tax on the first £325,000 you leave to other people

Even if you leave part of your estate to somebody other than your spouse or civil partner, it's still unlikely that you'll need to pay inheritance tax.

That's because everybody gets a £325,000 inheritance tax-free allowance. So, if the value of the estate (or anything that doesn't go to a spouse/civil partner) is below £325,000, there's no inheritance tax to pay. (This is also true if you leave everything over £325,000 to a charity or a community amateur sports club.)

 40% above the threshold.

To work out the value of an estate, you'll need to calculate what assets the person had when they died (cash in the bank, investments, property or business, vehicles, payouts from life insurance policies and so on), minus any debts.

If there's tax to pay, the estate will theoretically be taxed at 40% on anything above the £325,000 threshold when you die (or 36% if you leave at least 10% of the value after any deductions to a charity in your will).

We say 'theoretically' because, depending on your circumstances, there are ways to boost this £325,000 tax-free allowance to £500,000+. We explain how in the next two need-to-knows...

3. Passing on your home can BOOST your allowance to £500,000 (if you leave it to your children or grandchildren)

In the current tax year, 2024/25, no inheritance tax is due on the first £325,000 of any estate, with 40% normally being charged on any amount above that.


However, the amount that's taxable will be lowered for anyone who leaves their home to their 'direct descendants'. This includes your children (whether biological, adopted, foster or step) or grandchildren, but not, for example, nieces and nephews.

This is because you will then have two tax-free allowances:

  1. £325,000 – this is the basic inheritance tax allowance that everyone gets, which still applies.

  2. £175,000 – since 2017, everyone has also been able to take advantage of something called the 'residence nil-rate band', commonly known as the 'main residence' band. This is an additional allowance you'll receive ON TOP of the existing £325,000 inheritance tax allowance if you pass on your main residence to your children (including adopted, foster and stepchildren) or grandchildren. 

This means inheritance tax might not be due on the first £500,000 of your estate (£325,000 + £175,000), depending on who you leave your home to. However:

  • The £175,000 main residence allowance only applies if your estate is worth less than £2 million. (On estates worth £2 million or more, the main residence allowance will decrease by £1 for every £2 above £2 million that the deceased's estate is worth.)

  • Your home won't qualify for the £175,000 main residence allowance if it's in a 'discretionary will trust', even if the beneficiaries of the trust are your children or grandchildren. 

  • If your home's not worth £175,000 (or £350,000 if two spouses' allowances are combined – you can't combine allowances if you're not married or in a civil partnership), you can't use the main residence allowance to offset tax against other assets. So, technically it's an allowance of 'up to' £175,000.

An example may help...

Let's say you've got an estate worth £525,000, including a home worth £200,000. You've decided to leave your home to your children. This means no inheritance tax will be charged on the first £500,000 (£325,000 basic allowance + £175,000 main residence allowance). There'll be a 40% charge on the remaining £25,000 value of your home, giving a total of £10,000 in tax (presuming you're not leaving anything to charity).

If you weren't leaving your home to your direct descendants, there would be nothing to pay on the first £325,000 of your estate, and 40% on the £200,000 value of your home, meaning a total of £80,000 to pay in inheritance tax.

Quick question

  • What happens to the home I share with my partner if we're not married?

    While transfers of property and other assets between married couples or civil partners don’t usually attract inheritance tax, this isn't the case for unmarried couples. 

    If you're not married to your partner, but own assets together such as property, whether or not inheritance tax will be due on the property after one of you dies will depend on different factors. These include the basis on which you owned the property together, whether the deceased had a will and if their total assets exceeded the inheritance tax threshold:

    • If you're joint tenants (you both own all the property), and your partner's left you everything in the will, then if your partner's assets including the property exceed the inheritance tax threshold, then tax will be payable on any assets in the estate above that. After your partner's death, the property would then be owned by you in its entirety.

      Even if your partner didn't leave a will, thanks to something called the 'right of survivorship', the property would still go entirely to you although the inheritance tax rules above would still apply. However, your partner's family would still have a claim to his or her share of other assets, such as insurance policies and pension investments.
    • If you're tenants in common (you each own a specific percentage of the property), it's more complex. If your partner's made a will leaving their share to you, any inheritance tax would be paid out of the estate before the bequests are shared out. Inheritance tax may end up having to be paid on the property, but this would depend on the value of their total estate.

      If your partner's not made a will leaving their share to you, and you're tenants in common, their share will go to their relations. As an unmarried partner, you'd only be entitled to the share of the property you currently own.

    It's especially important that if you own a property with someone who isn't your husband/wife or child, you make a will describing exactly who benefits on your death.

4. Any unused inheritance tax allowance passes to your spouse


As explained, any assets left to your spouse or civil partner will be exempt from inheritance tax. Yet the inheritance-tax related perks for married couples don't end there...

On top of this, your spouse's inheritance tax allowance rises by the percentage of your allowance that you didn't use, meaning together a couple can currently leave £1 million tax-free (2 x £325,000 tax-free allowances + 2 x £175,000 main residence allowances).

This can sound complicated, so here's an example...

Mr and Mrs Youngatheart have assets worth £1 million between them. Mr Y dies first in January 2025 – leaving everything to Mrs Y – so his £325,000 tax-free allowance is passed on, as well as his £175,000 main residence allowance. In total, this means Mrs Y may have an up-to £1 million tax-free allowance: her allowance, plus her inherited allowance from her deceased husband.

You don't need to do anything to activate this – the executors of your will just need to send certain documents to HM Revenue & Customs (HMRC) within two years of your death – see HMRC's guidelines.

Quick questions

  • What if my partner died years ago?

    These rules are backdated – so will apply even if your partner died years ago. The key to how much extra allowance you get relies on the percentage (not the amount) of the allowance that your spouse used.

    For example, if your partner died in 2012 and used 50% of their nil-rate allowance at the time of their death, you will get an extra 50% of the current allowance (in other words, 50% of £325,000).

    In addition, you also get 100% of their main residence allowance, so another £175,000, which your partner wouldn't have used because it wasn't available in 2012. One hundred per cent of the main residence allowance will be available for transfer unless the estate was worth more than £2 million, in which case the main residence allowance starts to be reduced. 

    This extra allowance (your partner's nil-rate allowance and main residence allowance) is on top of your own £500,000 total allowance. 

    An example should help explain...

    Let's say Mr Youngatheart passed away some years before Mrs Youngatheart, back when the nil-rate allowance was only £250,000. He gave £50,000 to each of his three children, meaning £150,000 was used – 60% of his allowance. All the rest went to Mrs Y.

    When she dies, of course she can currently pass on £500,000 free of tax due to her own allowance (£325,000 + £175,000). But she can also pass on the unused amount of Mr Y's allowance free of tax. He didn't use 40% of his, so she gets another 40% of the current nil-rate amount, in other words, £130,000, plus 100% of Mr Y's main residence allowance, so another £175,000. This means her total tax-free allowance is currently £500,000 + £305,000, giving £805,000. 

  • Can I pass on any unused inheritance tax allowance to my partner if we're not married?

    Do note if you're not married or in a civil partnership then any unused inheritance tax allowance or residence nil rate band allowance can't be passed between you and your partner (this perk is strictly for married or civil-partnered couples).

    This means if you're co-habiting with your partner and you've got kids together, it can be more complicated to reduce any potential inheritance tax liability. In situations such as these – particularly if you've got a large estate, including property – it can be worth seeking financial advice.

5. Still likely to have to pay inheritance tax? There are ways to legally cut the bill


If you're one of the few who will see inheritance tax charged on their estate, there are ways of reducing the bill.

Specifically, money or gifts given away during your lifetime can affect how much inheritance tax your estate will need to pay. So, if you're planning on making gifts, it's worth getting familiar with the rules.

In simple terms, any gifts given more than seven years before your death WON'T be liable for inheritance tax (unless they form part of a trust).

But gifts given in the seven years prior to your death will count towards your £325,000 inheritance tax allowance. So even if the gift(s) you give in the seven years prior to your death amount to less than £325,000, they could have an impact on how much inheritance tax will be charged on the rest of your estate.

If your gift(s) amount to more than £325,000 in the seven years prior to your death, then inheritance tax on the amount above £325,000 (in addition to any inheritance tax due on the remaining estate) will be charged on a sliding scale (up to a maximum of 40%).

But before we delve deeper into how this sliding scale works, be aware that everyone is able to give away a certain amount in exempt gifts each year...

Tax-free gifts

Each tax year, you are able to give away a certain amount of money or possessions tax-free (in other words, gifts that are exempt from the seven-year inheritance tax rule).

This means you can:

  • Give away £3,000 (annual exemption). The first £3,000 given away each tax year does not form part of your estate so is not subject to inheritance tax. If you don't use your full annual exemption in any given year, the remainder can be carried forward to the next tax year (but no further).

  • Give to charities with no limit. Donations or gifts to charity are not subject to inheritance tax. And where a charity donation is equivalent to at least 10% of your estate, any inheritance tax payable elsewhere is reduced to 36% from 40%. See our Cheap and free wills guide for ways to remember a charity.
  • Give £250 to everybody you know. Gifts of up to £250 per person each year are not subject to inheritance tax. So somebody with 12 grandchildren could give each of them £250 each year as a birthday present. These gifts do not count towards the £3,000 annual gift exemption (described above) – though you can't combine gifts on the same person. So if you've already gifted someone your £3,000 annual exemption, you couldn't then give them £250.

  • Give money freely from your income (as long as it doesn't affect your lifestyle). Inheritance tax is a tax on your assets. And as a regular income (such as a pension or earnings) is not treated as an asset, you can regularly give money away from this income – tax-free – so long as it's not detrimental to your lifestyle.

  • Give wedding gifts (up to a limit). If a family member or friend is getting married, you're able to gift them money tax-free. You can only make such a gift once a year, and there's a limit on how much you can give: £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else. Wedding gifts can be combined with your £3,000 annual exemption (so they can be used on the same person) but not with the £250 small gift allowance.

  • Fund a loved one's living costs. For example, you can contribute to your child's living costs and tuition fees at university. There are no caps on how much you can contribute, and it can be given tax-free as long as the money comes from your own regular income and doesn't affect your own lifestyle. Such funding can be combined with your £3,000 annual exemption (so it can be used on the same person) but not with the £250 small gift allowance.

See the website for more information about tax-free gifting.

When might inheritance tax be due on a gift?

Inheritance tax will be due on gifts given away less than seven years before you die if the following apply:

  • The gifts are not considered tax-free gifts (in other words, they're not in the list above).
  • The gifts amount to more than £325,000 (the tax-free threshold).

(Remember that gifts given away in the seven years before your death which don't exceed the tax-free threshold will still eat into your estate's £325,000 tax-free allowance.)

The portion of any gifts above £325,000 will have inheritance tax charged on it on a sliding scale. It works as follows:

Inheritance tax on gifts above £325,000
Years between gift and death Rate of inheritance tax
Less than 3 years 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7+ years 0%

Here's an example of how this works in practice:

Sally Saver sadly passes away. She was not married or in a civil partnership when she died. In the nine years before her death, she gave away three significant sums of money:

  • £50,000 to her brother, nine years ago.
  • £325,000 to her sister, four years ago.
  • £100,000 to a friend, three years ago.

There's no inheritance tax to pay on the £50,000 gifted to her brother, as it was given more than seven years ago. Likewise, there isn't any to pay on the £325,000 she gave to her sister, as this is covered by the inheritance tax allowance.

But her friend (not the estate) must pay inheritance tax on the £100,000 given to them, at a rate of 32%, as this was given by Sally after she'd breached the inheritance tax threshold. The inheritance tax due on this gift is therefore £32,000.

At the time of her death, Sally's remaining estate was valued at £400,000. As there is no inheritance tax-free allowance left to use (it all went on the gifts), inheritance tax on the entire estate would be due (at 40%). This would be equivalent to £160,000.

What constitutes a gift?

A gift must be a genuine unconditional gift that you will not gain from; something given to someone without any reservation, no nods, winks or mutual backscratching. The biggest asset most people have is their home, yet trying to give this to your children won't work if you continue to live in it (unless you pay market rent to them for it).

Many gifts are valid ways of reducing your inheritance tax bill (as described above). Yet if any are given conditionally (barring a wedding gift), with the intention of receiving something in return, they could fail to work, so watch out.


See for more information on what exactly constitutes a gift.


If you do plan to make large lifetime gifts, the beneficiaries could take out life insurance against the potential inheritance tax bill. Most gifts into trust are now subject to inheritance tax even if made during your lifetime, but this is an area where you would need specialist advice.


Quick questions

  • Are there any exemptions from inheritance tax?

    People in certain 'risky' roles are exempt from paying inheritance tax if they die in active service. Included in this are armed forces personnel, police, firefighters and paramedics, plus humanitarian aid workers.

    The exemption also comes into play if a person who was injured on active service later dies as a result of the original injury, even if they're no longer on active service.

  • Should I get financial advice?

    This is a sensible step for anyone thinking about the perils of inheritance tax, and what happens to your money once you're gone.

    You should always try to do most things yourself as it's much cheaper. But if you have sizeable assets, then inheritance tax is one of the few occasions where paying for good professional legal or tax advice is well worth it – spend £100s to save £100,000s.

    But first of all, consider if you're even caught by inheritance tax at all. If you and your spouse's total assets are under £650,000 (so property value, savings, inheritance and what'd be left from your pension), you shouldn't pay the tax anyway, so there's little point.

    However, for those with bigger estates, an independent financial adviser may, depending on their qualification, be able to help (see our Financial advice guide), but a solicitor or tax accountant is a better bet for more specialised info. Preferably find one who is a member of the Society of Trust and Estate Practitioners (STEP) – take a look on the STEP and Chartered Institute of Taxation websites.

    You can also get free 30- to 60-minute inheritance-planning advice via VouchedFor*, a site allowing you to search for local independent financial advisers. Follow our link, enter your postcode, and contact your chosen adviser by phone or online to arrange your free session, which you can use to ask questions and identify what steps you should take with your inheritance planning.

    To make sure you get the most out of the session, it's a good idea to have a summary of your financial situation to hand – any savings, debt, incomings, outgoings – as well as details of existing wills, trusts and future plans.

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