Where Does Inheritance Tax Start? Everything UK Families Need to Know in 2025
- Belgravia Capital
- May 31
- 5 min read
When planning how to pass on wealth to the next generation, one question comes up time and again:
Where does inheritance tax start?
It’s a simple question, but the answer is layered.
Understanding where inheritance tax (IHT) starts in the UK means knowing which thresholds apply, what assets are included, and how allowances like the nil-rate band and residence nil-rate band work together.
It also means planning carefully to avoid falling into the 40% tax trap that can cost families hundreds of thousands of pounds.
In this comprehensive guide, we’ll walk you through:
The current inheritance tax thresholds in 2025
When your estate becomes liable for IHT
How the tax-free allowances work
What assets are counted in your estate
Smart strategies to keep your estate below the IHT line
At Belgravia Capital Wealth Management, we specialise in helping families preserve their wealth through proactive inheritance tax planning.
Let’s explore where IHT really starts - and how to keep your estate on the right side of the line.
What Is Inheritance Tax?
Inheritance tax is a tax levied on the estate (money, property, and possessions) of someone who has passed away. It is paid by the estate itself before assets are distributed to beneficiaries.
In the UK, inheritance tax is usually charged at 40% on the value of an estate that exceeds the tax-free allowances set by the government. These allowances are where IHT “starts” and they’re critical to understand.
Where Does Inheritance Tax Start in the UK?
In simple terms, inheritance tax starts when the total value of your estate exceeds £325,000, known as the nil-rate band.
This is the baseline. Anything below £325,000 is taxed at 0%. Anything above it - unless exempt or relieved - is potentially taxed at 40%.
But that’s not the full picture.
You may also benefit from additional allowances that raise this threshold significantly, especially if you own a home and are passing it to direct descendants.
Let’s look at the two main tax-free allowances:
The Nil-Rate Band (NRB): £325,000
Every individual in the UK has a personal inheritance tax allowance of £325,000. This is the nil-rate band, so named because it’s taxed at a “nil” (0%) rate.
If your estate is worth less than £325,000, no inheritance tax is due.
If your estate is worth more than £325,000, only the amount above that is potentially subject to the 40% tax rate.
The Residence Nil-Rate Band (RNRB): £175,000
Introduced to help families pass on the family home tax-free, the residence nil-rate band gives an additional £175,000 allowance if:
You own a residential property, and
You leave it to a direct descendant (child, stepchild, adopted child, or grandchild)
So if you’re passing on your main home to your children, your total tax-free threshold becomes:
£325,000 + £175,000 = £500,000
This means inheritance tax doesn’t “start” until your estate exceeds £500,000, if the RNRB applies.
How Much Can a Married Couple Pass On Tax-Free?
If you’re married or in a civil partnership, you can transfer unused allowances to your spouse when you die. This means that together, a couple can pass on:
£325,000 x 2 = £650,000 (nil-rate band)
£175,000 x 2 = £350,000 (residence nil-rate band)
Total: £1 million tax-free
Inheritance tax only starts after this threshold if you’re leaving your estate to your children or grandchildren. This is why many estates don’t face any IHT, but many more do when planning isn’t done properly.
What Counts Towards the Value of the Estate?
To determine whether you exceed the inheritance tax threshold, you need to calculate the total value of your estate, which includes:
Your home (including any second or rental properties)
Bank accounts and savings
ISAs and other investments
Pensions not written in trust
Business assets
Cars, jewellery, artwork, and valuables
Life insurance policies (unless in trust)
Outstanding loans due to the estate
Also included are gifts made in the 7 years before death - more on that below.
When Does Inheritance Tax Start for Larger Estates?
If your estate is worth more than £2 million, your residence nil-rate band is gradually withdrawn. This is known as tapering.
For every £2 over £2 million, £1 of RNRB is lost
At £2.35 million, the entire £175,000 RNRB is lost
For a couple, the full RNRB disappears at £2.7 million
So for high-net-worth individuals, inheritance tax starts closer to £650,000, not £1 million, due to the loss of the RNRB.
This makes gifting and trust strategies vital for estates in this range.
What About Gifts? When Do They Trigger IHT?
Gifts made during your lifetime can be added back into your estate if they were made within seven years of death.
If you give away more than £325,000 within that time, inheritance tax can apply, and the recipient of the gift may become liable.
Taper relief may reduce the tax due on gifts made more than three years before death, but it doesn’t eliminate the liability.
Annual gift exemptions include:
£3,000 per year, tax-free
£250 small gifts to unlimited recipients
£5,000 for children’s weddings, £2,500 for grandchildren
Who Pays the Tax?
Inheritance tax is paid by the estate, typically through the executor. The beneficiaries receive their share after tax has been deducted, except in the case of certain gifts or trusts where they may be liable.
Ways to Keep Your Estate Below the IHT Threshold
Make Use of Both Tax-Free Allowances
Structure your estate to make full use of the nil-rate and residence nil-rate bands for both you and your spouse.
Gift Strategically
Start gifting assets early so they fall outside the 7-year window. Use annual exemptions.
Use Trusts Effectively
Placing assets into trust may reduce your estate’s value, but the rules are complex, and trusts must be correctly structured.
Take Out Life Insurance in Trust
Use life insurance to cover your IHT bill and ensure the policy is held in trust so the payout doesn’t increase your estate.
Qualify for Business or Agricultural Relief
If you own qualifying business assets or farmland, these may benefit from 50% or 100% relief - but these rules are changing from April 2026, so time is critical.
Spend or Gift Excess Wealth
For estates over £2 million, consider reducing the value of your estate to preserve the RNRB.
Upcoming Changes That May Move the IHT Goalposts
As of 2025 under the Labour government, several significant changes are either planned or already legislated:
Residence nil-rate band and NRB frozen until 2030, meaning more estates will become taxable as inflation pushes up asset values.
Business Property and Agricultural Relief capped at £1 million from April 2026.
AIM shares now receive 50% relief instead of 100% under the 2024 Autumn Budget.
Pension pots will be included in your estate for IHT purposes from 2027.
These changes effectively mean that inheritance tax could start earlier for many families and that smart planning is more crucial than ever.
Conclusion: Where Inheritance Tax Starts - And How to Stay Below It
Inheritance tax starts when your estate exceeds the combined value of the nil-rate and residence nil-rate bands. For a single person, that’s usually £325,000 or £500,000 if the RNRB applies. For a couple, it can be up to £1 million, unless tapering kicks in.
Knowing these thresholds is essential. But more importantly, acting on them is what protects your family’s financial future.
The earlier you plan, the more you can do - whether that’s gifting assets, setting up trusts, or protecting your estate with insurance and professional structuring.
Need help planning your estate to avoid IHT?
Contact Belgravia Capital Wealth Management for a personalised inheritance tax consultation:
Let’s make sure your wealth goes where you want it - not to the taxman.
