Inheritance Tax Threshold: A Complete Guide to Property & IHT

The Inheritance Tax threshold is £325,000 per person for the 2026/27 tax year. On top of that, a residence nil-rate band of up to £175,000 applies when you leave your main home to children or grandchildren. So a single homeowner can pass on up to £500,000 before any IHT is due, and a married couple or civil partners up to £1 million by combining both allowances. Anything above the threshold is taxed at 40%. Both bands are frozen until 5 April 2031, which — with house prices where they are — is quietly pulling thousands more ordinary homeowners into the net every year.

What the Inheritance Tax threshold actually means

Inheritance Tax is charged on the value of what you leave behind when you die — your house, savings, investments, cars, and anything else of value, minus debts and funeral costs. The "threshold" is simply the slice you can pass on before HMRC takes a cut. Below it, nothing is due. Above it, the excess is taxed at 40%.

That headline £325,000 figure is the nil-rate band. It is per person, and it has been stuck at £325,000 since April 2009. To put that in perspective: the average UK house was worth roughly £160,000 back then. Today, according to HM Land Registry, it is around £270,000, and far more in the South East. The band hasn't moved. Prices have. That gap is the whole story of why IHT keeps catching families who never thought of themselves as wealthy.

Then there is the residence nil-rate band, introduced in 2017 and worth up to £175,000. It only applies when you leave your home — or the proceeds if you have downsized — to a direct descendant. Get both bands and you are shielding £500,000 as a single person, or £1 million as a couple. Miss the conditions on the residence band and you are back to £325,000.

How the two allowances stack up

The best way to see this is with real numbers rather than theory. Here is how the thresholds combine for the 2026/27 tax year.

Who is passing on the estate	Nil-rate band	Residence nil-rate band	Total tax-free (home to descendants)
Single person, no children inheriting the home	£325,000	£0	£325,000
Single person, home left to children	£325,000	£175,000	£500,000
Married couple / civil partners, home left to children	£650,000	£350,000	£1,000,000
Widow(er) inheriting a late spouse's unused bands	Up to £650,000	Up to £350,000	Up to £1,000,000

The transfer of unused allowances between spouses is the part people forget. When the first partner dies and leaves everything to the survivor, no IHT is due (spouse transfers are exempt) and — crucially — the deceased's unused nil-rate bands do not vanish. They pass to the survivor's estate. That is why a couple gets to £1 million even though each band on its own is smaller.

A worked example — the semi that owes nothing, and the one that owes plenty

Take Margaret, a widow in the Midlands. Her husband died years ago and left everything to her, so she inherited both his unused bands. Her estate is a £420,000 house, £90,000 in savings and a £15,000 car — £525,000 in total. She leaves the lot to her two children.

Margaret's estate has two nil-rate bands (£650,000) plus two residence bands (£350,000), a combined £1 million of allowance. Her £525,000 estate sits comfortably underneath. IHT due: £0. Her children inherit the full amount.

Now take her neighbour, Alan — same street, but a single man who never married, with a £600,000 house and £250,000 in investments. He leaves his home to his nephew, who is not a direct descendant, so the residence band does not apply.

• Estate value: £850,000
• Allowance: £325,000 (nil-rate band only — no residence band for a nephew)
• Taxable amount: £850,000 − £325,000 = £525,000
• IHT at 40%: £210,000

Same postcode, wildly different bills. The difference is almost entirely about who inherits the home and whether a spouse's allowances were ever banked. That is the practical heart of IHT planning, and it is why "just leave it to the kids" is genuinely better tax advice than it sounds.

Do you pay Inheritance Tax on a house you inherit?

This trips up nearly everyone, so let us be plain. If you inherit a property, you do not personally pay Inheritance Tax on it. IHT is settled by the estate — the executors pay it out of the estate's assets before anything is distributed. By the time the house reaches you, the tax question has already been dealt with.

What can catch you later is Capital Gains Tax. You inherit the property at its value on the date of death (the "probate value"). If you then hold it and sell for more, the gain above that probate value may be taxable when you sell — currently at 18% or 24% on residential property depending on your income band, above the annual CGT exemption. Sell promptly at or near probate value and there is usually little or no gain. Sit on it for five years in a rising market and you could face a bill.

This is one reason so many people who inherit a property they do not want to keep choose to sell it fairly quickly. A fast, clean sale close to probate value keeps the CGT position simple. If you are weighing that up, our guide to selling an inherited property walks through the timings, and if speed matters more than squeezing out the last few thousand, cash house buyers can complete in weeks rather than months.

The residence nil-rate band: the conditions that trip people up

The £175,000 residence band is generous, but it comes with strings. You only get it if:

• You owned a home, or your share of one, that was your residence at some point.
• It passes to a direct descendant — children (including adopted, foster and stepchildren) and grandchildren. Nephews, nieces, siblings and friends do not count.
• Your estate is under £2 million — above that the band starts tapering.

The taper is aggressive. For every £2 your estate exceeds £2 million, you lose £1 of residence band. So a £2.1 million estate loses £50,000 of it; by around £2.35 million (or £2.7 million for a couple with two bands) the residence allowance is gone completely. For higher-value estates, this taper is often the single biggest planning target, because reducing the estate below £2 million can restore the whole band.

There is also a "downsizing addition" for people who sold a larger home before death and moved somewhere smaller, or into care. It is designed so you do not lose the band just because you released equity late in life. The rules are fiddly and worth proper advice, but the principle is that you should not be penalised for downsizing.

The 40% rate — and the discount most people ignore

Everything above your combined threshold is taxed at 40%. That is a flat rate; there is no sliding scale on the estate itself. But there is a lever worth knowing about: if you leave at least 10% of your net estate to charity, the rate on the rest drops from 40% to 36%.

It sounds small. It is not, once you run it. On a taxable estate of £500,000, the charitable route can mean the charity receives a meaningful gift while the reduction in IHT offsets much of what leaves the family. It rarely leaves beneficiaries better off than giving nothing to charity — that is a myth — but it dramatically lowers the net cost of a charitable legacy. If giving is something you would do anyway, structuring it to clear the 10% bar is close to a free upgrade.

The 7-year rule: giving it away while you are alive

Gifts are where a lot of real-world planning happens, and also where a lot of confusion lives. The basic rule: if you give money or assets away and survive seven years, the gift falls completely outside your estate. Die within seven years and it may be pulled back in — this is a "potentially exempt transfer".

Taper relief softens the blow if you die between three and seven years after a large gift, reducing the tax on that gift on a sliding scale. But — and this is the bit that surprises people — taper relief only reduces tax on gifts above the nil-rate band. If your gifts sit within the £325,000 band, there is no tax to taper in the first place. The headline "taper relief" is far less useful than the marketing suggests for ordinary estates.

The genuinely useful exemptions are the smaller, reliable ones:

Exemption	What you can give	The catch
Annual exemption	£3,000 a year, free of IHT immediately	Unused allowance can roll forward one year only
Small gifts	£250 per person, to any number of people	Cannot combine with the £3,000 to the same person
Wedding gifts	£5,000 to a child, £2,500 to a grandchild, £1,000 to others	Must be given before the wedding
Gifts from surplus income	Regular gifts out of income, unlimited	Must be genuinely from income and not affect your standard of living — keep records
Spouse / civil partner	Anything, any amount	Must be legally married or in a civil partnership

My honest view: the "gifts from surplus income" exemption is the most underused tool in the box. If you have a comfortable pension and spend less than you receive, regular gifts from that surplus leave your estate immediately — no seven-year wait — provided you keep clean records showing they came from income. Set up a simple spreadsheet and a standing order and you are doing more than most expensive schemes achieve.

The big change coming: pensions in the IHT net from April 2027

Here is the shift no one should ignore. Until now, unused pension pots have sat outside your estate for IHT — one reason financial advisers have long suggested spending other assets first and leaving the pension untouched. From 6 April 2027, most unused pension funds and death benefits will be brought into the estate for Inheritance Tax.

For anyone with a sizeable defined-contribution pension they were planning to pass on, this is material. A pot that would have transferred tax-free could now form part of a taxable estate. Pensions left to a spouse or civil partner will still be exempt, but the days of the pension as an IHT-free wealth-transfer vehicle are ending. If your estate planning was built around that assumption, it needs revisiting before April 2027 — not after.

How IHT interacts with selling an inherited home

If you are the one dealing with an estate, the practical sequence usually looks like this. First, the value of the estate is established — including the property at its date-of-death value. Second, any IHT due is calculated and, where there is a bill, at least some of it typically has to be paid before probate is granted. That is a real cashflow problem: you may owe tax on a house you cannot yet sell because you do not yet have probate.

HMRC lets you pay the IHT attributable to property in annual instalments over ten years, which helps. And once the grant of probate comes through — usually 8 to 16 weeks after application, sometimes longer when HMRC is involved — you are free to sell. Many executors sell at that point to release funds, settle the tax and distribute to beneficiaries.

Where the estate is asset-rich but cash-poor, a quick sale can be the cleanest way to break the deadlock. Selling on the open market takes 16 to 24 weeks on average from listing to completion, and around one in four sales falls through along the way. A genuine cash buyer completes in 7 to 28 days with far less fall-through risk — useful when there is a tax bill ticking. The trade-off is price: reputable cash buyers pay roughly 75–85% of market value. Anyone claiming to pay materially above 82% while still completing in days deserves a hard, sceptical look. If you want to understand that market properly, read what percentage of market value cash buyers actually pay and check any firm against the best house-buying companies before you commit.

When to worry — and when not to

Let us be honest about who this actually affects. The majority of estates in the UK pay no Inheritance Tax at all — roughly one in twenty estates ends up with a bill. If you are a couple with a home worth under £700,000 and modest savings, and you are leaving it to your children, you are very likely covered by the £1 million combined allowance and can stop losing sleep.

You should pay attention if any of these apply: your estate is heading towards or past £2 million (the taper); you are not married but living with a partner (no spouse exemption — this catches long-term couples badly); you have a large pension you planned to pass on (the 2027 change); you own a business, farm or AIM shares (the 2026 relief cap); or your home will not pass to direct descendants (no residence band). Those are the situations where good advice pays for itself many times over.

And a plain warning about the schemes advertised online: be wary of anything promising to make your home "disappear" from your estate while you carry on living in it rent-free. HMRC's "gift with reservation of benefit" rules exist precisely to stop that, and most such schemes fail. If it sounds too clever, it usually is.

How to work out if your estate is likely to owe anything

You do not need an accountant to get a first-pass answer. Sit down with a sheet of paper and run four quick steps. First, add up everything you own: property at a realistic current value, savings, investments, ISAs, the value of any life insurance not written in trust, cars, and valuables. Second, subtract your debts — the outstanding mortgage, loans, credit cards, and an allowance for funeral costs. That gives your net estate. Third, set your allowances: £325,000, plus £175,000 if your home goes to children or grandchildren, and double both if you are married and inheriting a late spouse's unused bands. Fourth, take the difference and multiply by 40%.

If your net estate lands below the allowance, you are done — nothing to pay. If it lands above, you now know roughly what the bill would be, and you can decide whether it is worth acting. The commonest mistake here is undervaluing the house. Use a genuine current figure, not what you paid or a cautious guess from a decade ago, because it is the property that pushes most estates over the line. A quick reality-check against recent sold prices in your street will get you far closer than a hunch, and it is the single number that most changes the answer.

Frequently asked questions

What is the Inheritance Tax threshold for 2026/27?

£325,000 per person (the nil-rate band), plus up to £175,000 more (the residence nil-rate band) if your home passes to children or grandchildren. That is £500,000 for a single homeowner and up to £1 million for a couple. Both figures are frozen until April 2031. Always confirm current figures on GOV.UK before acting.

Do I pay Inheritance Tax on a house I inherit?

No — IHT is paid by the estate before you receive anything, not by you personally. You may later owe Capital Gains Tax if you sell the inherited property for more than its probate (date-of-death) value.

Can a couple really pass on £1 million tax-free?

Often, yes. Two nil-rate bands (£325,000 each) plus two residence bands (£175,000 each) total £1 million, provided the home passes to direct descendants and the estate is under £2 million. Unused allowances transfer from the first spouse to die to the survivor, but the executors must claim them.

Is property left to a spouse subject to IHT?

No. Anything left to a legal spouse or civil partner is exempt from Inheritance Tax, whatever the amount, and their unused allowances can pass to the survivor. This exemption does not extend to unmarried partners, however long you have lived together.

When does the residence nil-rate band start to disappear?

Once your estate exceeds £2 million, the residence band tapers by £1 for every £2 above that figure. It is lost entirely at around £2.35 million for a single estate, or £2.7 million where a couple's two bands apply.

How are pensions changing in 2027?

From 6 April 2027, most unused pension funds and death benefits will be counted as part of your estate for IHT — reversing the long-standing position that pensions sit outside it. Pensions passing to a spouse or civil partner remain exempt. If your plan relied on passing a pension on tax-free, review it before then.

The bottom line

Inheritance Tax rewards the organised and punishes the passive. The thresholds themselves are simple enough — £325,000, plus £175,000 for the home, doubled for couples. What determines whether your family keeps the money is the boring admin: making a will that leaves the home to descendants, being married rather than merely together, claiming a late spouse's transferable bands, keeping records of gifts from income, and revisiting the plan before the 2027 pension change lands. None of that requires an offshore trust. It requires attention.

If part of your situation involves an inherited property you would rather turn into cash — to settle a tax bill, split between siblings, or simply move on — understanding the value first matters. Start with a realistic figure using our guide to how much your house is worth, get to grips with the vocabulary in our property jargon explained guide, and if speed is the priority, learn how a fast house sale works before you decide. And for the tax itself, treat this guide as a map, not a substitute for a conversation with a qualified adviser or solicitor — IHT is one area where a couple of hundred pounds of advice routinely saves tens of thousands.

Ready Steady Sell is run by founder Lisa Hayes and exists to give UK homeowners straight, jargon-free guidance on selling — including the awkward situations like probate, tax and inherited property that other sites skate over. This guide is general information, not personal tax or legal advice; figures are for the 2026/27 tax year and should be confirmed on GOV.UK.