Which Inheritance Tax Applies to You? Understanding the Rules, Bands, and Reliefs That Could Save Your Estate Thousands

Belgravia Capital
6 days ago
4 min read

Inheritance tax (IHT) in the UK is often viewed as one of the most complex and misunderstood aspects of estate planning.

That confusion is reflected in a question we hear regularly:

“Which inheritance tax applies to me?”

Are you covered by the standard nil-rate band?

Does the residence nil-rate band apply?

What about business relief, agricultural relief, or tax on gifts?

At Belgravia Capital Wealth Management, we help families demystify inheritance tax and make the most of the rules and exemptions available to them.

In this article, we break down the different types of inheritance tax thresholds, exemptions, and reliefs - and explain which apply to your estate.

The Core Inheritance Tax Framework (2025)

In the UK, inheritance tax is charged on an individual’s estate when they pass away, and potentially on some gifts made during their lifetime.

The standard rate is 40% on the portion of the estate that exceeds the available tax-free thresholds.

There are three primary tax-free allowances you should understand:

Nil-Rate Band (NRB) – £325,000

This is the standard inheritance tax allowance for everyone
The first £325,000 of your estate is tax-free
Anything above that is taxed at 40%, unless further allowances apply

Residence Nil-Rate Band (RNRB) – £175,000

Applies only if you leave your main home to direct descendants (children or grandchildren)
Adds an extra £175,000 of tax-free allowance
Tapered down for estates worth more than £2 million

Transferable Allowances

If you’re married or in a civil partnership, any unused NRB or RNRB can be transferred to your surviving spouse or civil partner
This means couples can pass on up to £1 million tax-free, assuming full eligibility

Which Inheritance Tax Threshold Applies to You?

That depends on your:

Marital status
Estate size
Relationship to your beneficiaries
Ownership of property
Business or farming assets
Gifting history

Let’s look at which thresholds apply in various scenarios:

Scenario 1: Married Couple With Family Home and Children

Applies:

Nil-rate band: £325,000 x 2 = £650,000
Residence nil-rate band: £175,000 x 2 = £350,000

Total tax-free allowance: £1 million

If the estate is worth £999,999 and the main home goes to children, no inheritance tax is due.

Scenario 2: Single Person With No Children

Applies:

Nil-rate band: £325,000
No residence nil-rate band (not passed to direct descendants)

Total tax-free allowance: £325,000

If the estate is £500,000, IHT is due on £175,000:

Tax: £175,000 x 40% = £70,000

Scenario 3: Estate Over £2 Million

The residence nil-rate band tapers for estates above £2 million:

For every £2 over the threshold, £1 of the RNRB is lost
At around £2.35 million (for individuals), the RNRB is fully lost

Planning implication: Wealthier estates may not benefit from the extra £175,000 unless assets are reduced below the taper threshold during lifetime.

Other Inheritance Tax Reliefs You Might Qualify For

Beyond the main thresholds, there are several powerful reliefs that can reduce or eliminate IHT:

Business Property Relief (BPR)

Up to 100% relief on qualifying business assets, including shares in trading companies
Reduced to 50% for AIM shares from April 2026
Lifetime transfers of qualifying business assets may also qualify

Agricultural Property Relief (APR)

Up to 100% relief on farmland and agricultural buildings
Subject to a £1 million lifetime cap from April 2026 (combined with BPR)

Spousal Exemption

Transfers between spouses and civil partners are completely free of inheritance tax, regardless of amount

Charitable Exemption

Gifts to charities are tax-free
If you leave 10% or more of your estate to charity, the overall IHT rate may reduce from 40% to 36%

Life Insurance in Trust

A whole-of-life insurance policy written in trust pays out outside your estate, providing tax-free funds to cover your IHT bill

Gifting and Lifetime Tax Considerations

Which Gifts Are Taxable?

Gifts made within 7 years of death may be subject to inheritance tax
Taper relief may reduce the tax if the gift was made 3–7 years before death
If you die within 7 years, gifts above the annual allowance are added back to your estate

Annual Gift Exemptions

£3,000 per tax year (can be carried forward for one year)
£250 small gift exemption per person
Wedding gifts: up to £5,000 for a child, £2,500 for a grandchild

Gifts from Surplus Income

Regular gifts made from excess income are exempt if they don’t affect your standard of living
Must be properly documented

What Happens If You Inherit Assets?

If you’re a beneficiary, you typically don’t pay tax directly. The estate pays the IHT before distribution.

However, you might be taxed if:

You inherit an untaxed gift made within 7 years and the estate can’t cover the tax
You receive income from a trust or assets with capital gains
You inherit overseas assets and are UK-domiciled (depending on tax treaties)

How to Work Out Which IHT Rules Apply to You

To determine which thresholds and reliefs apply to you or your estate, ask:

Are you married or in a civil partnership?
Are you passing property to direct descendants?
Do you own qualifying business or agricultural assets?
Has the estate value exceeded £2 million?
Have you made gifts in the last 7 years?
Have you structured your will to use both allowances?
Do you have unused reliefs or exemptions?

The more of these you can answer confidently, the more effectively you can plan and the less inheritance tax your family will pay.

How Belgravia Capital Wealth Management Can Help you Plan for IHT

At Belgravia Capital, we help clients:

Identify which inheritance tax allowances and reliefs apply
Structure their wills and trusts to make full use of them
Plan business succession with BPR and APR in mind
Utilise insurance and gifting strategies to reduce liabilities
Rebalance ownership between spouses to optimise thresholds

We provide full IHT exposure reports and step-by-step strategies tailored to your specific family structure and estate profile.

Conclusion: Which Inheritance Tax Applies to You?

It depends and the right answer could save your family hundreds of thousands.

Understanding the combination of bands, reliefs, and exemptions available to you is essential.

With thresholds frozen and rules tightening, there’s never been a more important time to review your estate and ensure you’re not paying more tax than necessary.