Inheritance Tax Allowances in 2025: What Families Should Know
Last updated: January 16, 2025. This guide is based on current UK regulations and may change. Consult with qualified accountants for specific advice.
Inheritance Tax affects estates over £325,000 in 2025, but additional allowances can increase this to £1 million for married couples. Understanding these rules is crucial for effective estate planning and protecting family wealth.
Inheritance Tax Basics
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the nil-rate band. The tax applies to:
- Property, money, and possessions left when someone dies
- Gifts made within 7 years of death
- Certain trusts and lifetime transfers
Key Rates for 2025
- Nil-rate band: £325,000 (frozen until 2028)
- Standard rate: 40% on excess over threshold
- Reduced rate: 36% if 10%+ left to charity
- Residence nil-rate band: £175,000 (conditions apply)
Nil-Rate Band (NRB)
Current Threshold
The nil-rate band remains at £325,000 for 2025, unchanged since 2009 and frozen until April 2028. This means:
- First £325,000 of estate is tax-free
- 40% tax applies to value above this threshold
- Band applies per person, not per estate
- Unused allowance can transfer between spouses
Transferable Nil-Rate Band
When the first spouse dies without using their full allowance, the unused portion transfers to the surviving spouse:
Example Calculation:
- First spouse dies leaving £200,000 estate to surviving spouse
- Unused NRB: £325,000 - £0 (spouse exemption) = £325,000
- Surviving spouse's total allowance: £325,000 + £325,000 = £650,000
Residence Nil-Rate Band (RNRB)
Additional allowance when passing family home to direct descendants:
2025 RNRB Rules
- Maximum allowance: £175,000 per person
- Qualifying property: Main residence where deceased lived
- Beneficiaries: Must be children, grandchildren, or step-children
- Transferable: Unused RNRB passes to surviving spouse
Taper Thresholds
RNRB reduces for larger estates:
| Estate Value | RNRB Available | Reduction |
|---|---|---|
| Up to £2 million | £175,000 | No reduction |
| £2.1 million | £125,000 | £50,000 reduction |
| £2.35 million+ | £0 | Complete loss |
Maximum Family Allowances
Married Couples and Civil Partners
Combined allowances for couples passing property to children:
Maximum Combined Allowances (2025):
- Two nil-rate bands: £325,000 × 2 = £650,000
- Two residence bands: £175,000 × 2 = £350,000
- Total potential allowance: £1,000,000
Practical Example
Married couple with £900,000 family home passed to children:
- Estate value: £900,000
- Combined NRB: £650,000
- Combined RNRB: £350,000
- Total allowances: £1,000,000
- Inheritance Tax due: £0
Key Exemptions and Reliefs
Spouse/Civil Partner Exemption
- Unlimited exemption: No IHT on transfers between UK-domiciled spouses
- Non-domiciled spouses: Limited to £325,000 exemption
- Timing: Applies to lifetime gifts and death transfers
Annual Exemptions
| Exemption Type | 2025 Limit | Conditions |
|---|---|---|
| Annual exemption | £3,000 | Can carry forward one year if unused |
| Small gifts | £250 per person | Unlimited recipients, cannot combine with annual |
| Wedding gifts | £5,000 (child) £2,500 (grandchild) £1,000 (other) |
Must be within 12 months of wedding |
| Charity gifts | Unlimited | Registered UK charities only |
Business and Agricultural Relief
- Business property relief: Up to 100% relief on qualifying business assets
- Agricultural property relief: Up to 100% relief on agricultural land
- Minimum ownership: 2 years for most qualifying property
- Active business test: Must be trading business, not investment
Lifetime Giving Strategies
Potentially Exempt Transfers (PETs)
Gifts to individuals that become exempt if you survive 7 years:
- Taper relief: Reduced tax if death occurs 3-7 years after gift
- No limit: Can give unlimited amounts as PETs
- Record keeping: Must track all PETs for 7 years
Taper Relief Rates
| Years between gift and death | Tax rate |
|---|---|
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% |
Regular Gifts from Income
Gifts that qualify for immediate exemption:
- Must be from surplus income (not capital)
- Must be part of regular pattern
- Must not affect donor's standard of living
- Unlimited amount if conditions met
Trust Planning Opportunities
Discretionary Trusts
- Immediate charge: 20% on gifts above nil-rate band
- 10-year charges: Periodic charges on trust property
- Exit charges: When property leaves the trust
- Flexibility: Trustees can distribute to beneficiaries
Bare Trusts for Children
- No ongoing charges: Treated as child's property
- Age restrictions: Child gets control at 18
- Income tax: May be treated as parent's income
- Simple structure: Lower costs and complexity
Estate Planning Strategies
Early Planning Considerations
- Start early: 7-year rule favors younger donors
- Use exemptions: Maximize annual and other exemptions
- Consider insurance: Life insurance to cover potential tax
- Review regularly: Update wills and strategies as circumstances change
Family Home Strategies
- Downsizing provisions: Maintain RNRB when selling home
- Joint ownership: Ensure both spouses benefit from allowances
- Deed of variation: Redirect inheritance within 2 years
- Gifting with reservation: Avoid continuing to benefit from gifted property
Common Pitfalls to Avoid
Residence Nil-Rate Band Mistakes
- Wrong beneficiaries: RNRB only applies to direct descendants
- Property disposal: Must still own qualifying property at death
- Taper calculations: Estate value includes all assets, not just UK property
Lifetime Giving Errors
- Reservation of benefit: Continuing to use gifted property
- Associated operations: Connected transactions treated as one gift
- Pre-owned assets tax: Income tax charges on former property
Professional Estate Planning
We help families maximize inheritance tax allowances and implement effective estate planning strategies.