Inheritance Tax Threshold: How Much Is Tax-Free in 2026

Inheritance tax is a tax on the estate of someone who has died: their property, money and possessions, less any debts. The threshold is the line below which nothing is due. Cross it, and tax is charged only on the excess, not on the first pound. That point causes more confusion than any other part of the system, because people hear a large bill quoted and assume it applies to everything they leave behind. It does not.

There are two thresholds: one for everyone, and one only where a home passes to the next generation.

The standard threshold: £325,000 for everyone

Every individual has a nil-rate band of £325,000, set against any asset: a house, savings, investments or possessions. If the net estate — everything owned minus debts — is £325,000 or less, no inheritance tax is normally due.

That figure has been frozen since the 2009 to 2010 tax year, and is now fixed until the end of the 2030 to 2031 tax year, under the extension announced at Budget 2025. While the threshold stands still, house prices tend to rise, so more estates drift over the line each year. The government forecasts that more than 90% of estates will still have no liability in each of the next five years.

The home allowance: up to £175,000 more

The residence nil-rate band adds up to £175,000, but only when a qualifying home passes on death to direct descendants: children, including adopted, foster and stepchildren, and grandchildren. Leave it to a niece, friend or sibling, and this band does not apply.

Combined with the standard band, that gives a single person a threshold of up to £500,000 where the home condition is met. The band cannot exceed the value of the home itself.

The £2 million taper: where the home allowance shrinks

The residence band starts to disappear once an estate passes £2 million. For every £2 of estate value above £2 million, the band falls by £1. An estate worth £2,100,000 loses £50,000 of the band, leaving £125,000. An estate worth £2,350,000 loses the full £175,000, and the residence band is gone entirely. The standard £325,000 band is not tapered, so even the largest estates keep that part.

Couples: how the threshold reaches £1 million

Anything left to a spouse or civil partner is exempt from inheritance tax, with no upper limit. That exemption is what makes transferring allowances possible. When the first partner dies and leaves everything to the survivor, none of their nil-rate band is used, because the transfer was exempt. The unused band transfers to the survivor, doubling their standard allowance to £650,000, and the residence band can reach £350,000 combined. Together, a surviving spouse or civil partner can pass on up to £1 million tax-free, provided a qualifying home passes to direct descendants on the second death. The transfer is a proportion: if the first partner used a quarter of their band, three quarters transfers.

The 40% rate, and a worked example

The standard inheritance tax rate is 40%, charged only on the part of the estate above the available threshold. The estate pays it, from its own funds, before beneficiaries receive anything. If at least 10% of the net value is left to charity, the rate can fall to 36%.

Illustrative worked example. Suppose a single person dies leaving an estate worth £650,000, including a home worth £300,000 that passes to their daughter. Their threshold is £325,000 plus the £175,000 residence band, a total of £500,000. The taxable amount is £150,000, and at 40% the bill is £60,000, leaving £590,000 to distribute. Left to a friend instead, the residence band would not apply and the bill would be £130,000 — a £70,000 difference from one decision.

What counts towards the estate

Almost everything counts: property, savings, investments, vehicles, jewellery and other possessions, plus the deceased person's share of anything owned jointly. Debts, including a mortgage, are deducted to reach the net value. Gifts made in the seven years before death can also be pulled back in, and a gift you keep benefiting from — such as a home you carry on living in rent-free — can still count.

Note also that a second home counts in full towards the estate value; our guide to second-home stamp duty in the UK covers that purchase cost. Assets held in a trust do not always sit inside the estate the same way, so read what a trust is and who needs a trust instead of a will before assuming a trust removes the problem; trusts carry their own charges.

Why the freeze matters more than the rate

The 40% rate grabs the headlines, but the frozen threshold does the quiet damage: a threshold fixed since 2009, while house prices have risen, means an ordinary family home can now use up most of the allowance on its own. So value the estate at today's prices, check which bands genuinely apply, and remember the residence band depends on who inherits the home. If the numbers show a likely bill, take professional advice before rushing into gifts or trusts.

This article is general information only, not financial advice.