Inheritance Tax Explained: The £325,000 Nil-Rate Band and How It Actually Works

Inheritance Tax (IHT) affects a growing share of UK estates every year, mostly because its core threshold hasn’t moved since 2009 while property and asset values have risen substantially. Here’s how the basic system actually works.

The nil-rate band

Every individual has a £325,000 nil-rate band (NRB) - the amount their estate can be worth before any Inheritance Tax is due at all. This figure has been frozen since April 2009, and is now confirmed frozen until at least April 2031. Above this threshold, the standard rate of Inheritance Tax is 40%, charged only on the value that exceeds the available allowances.

Who actually pays IHT, and how

Inheritance Tax is a tax on the estate - paid out of the estate’s assets by the executor, the person named in your will to administer it (or appointed under the intestacy rules if you die without one), before distribution to beneficiaries - not a tax paid directly by the people inheriting. It’s generally due within six months of the end of the month of death, and payment (or at least an initial instalment) is usually required before the Grant of Probate is issued, which is itself needed to access most of the estate’s assets (see our dedicated probate article).

What’s completely exempt regardless of value

• Anything left to a spouse or civil partner - fully exempt, regardless of the amount, as long as they’re UK-domiciled (special rules apply if they aren’t).
• Anything left to a UK-registered charity - fully exempt, and leaving at least 10% of your net estate to charity also reduces the IHT rate on the rest of the estate from 40% to 36% (see our dedicated article on this).

How the nil-rate band transfers between spouses

Any unused portion of one spouse’s nil-rate band transfers to their surviving spouse or civil partner on death - since assets left to a spouse are exempt anyway, this typically means the full £325,000 NRB passes across unused, giving the surviving spouse a combined £650,000 nil-rate band when they later die (see our dedicated article on how married couples can pass on up to £1 million combining this with the residence nil-rate band).

Why more estates are being pulled into IHT each year

With the threshold frozen since 2009 while UK house prices and other asset values have risen substantially, a growing number of estates that would never previously have been considered ‘wealthy’ now exceed the nil-rate band, particularly in higher-value property areas. This is a form of fiscal drag, similar in principle to the frozen income tax thresholds covered elsewhere in this content library.

What counts toward the estate’s value

The estate includes property, savings, investments, personal possessions, and (from April 2027) most unused pension funds (see our dedicated article on this major upcoming change), minus outstanding debts and funeral costs. Life insurance payouts are also included unless the policy is written in trust (see our dedicated article on why this matters).

Reducing an IHT bill: the main levers

• The residence nil-rate band, an additional allowance for leaving a home to direct descendants (see our dedicated article).
• Lifetime gifting, using annual exemptions and the seven-year rule (see our dedicated article).
• Trusts, in specific circumstances (see our dedicated article on when these genuinely help).
• Charitable giving, both directly reducing the taxable estate and potentially reducing the rate on the remainder.

The bottom line

The £325,000 nil-rate band is the foundation of the UK Inheritance Tax system, but it rarely operates in isolation - the residence nil-rate band, spousal transfers, and various reliefs and exemptions mean the real threshold for many families is considerably higher than £325,000 once properly planned for.