Your tax-free inheritance tax allowances — what they are, how they work, and when they are reduced.
The nil-rate band and the residence nil-rate band are the two tax-free allowances that determine how much you can leave to your family without paying inheritance tax. Understanding how they work — and when they are reduced — is the starting point for any inheritance tax planning.
Every person has a tax-free allowance called the nil-rate band. For the 2025/26 tax year, it is £325,000. Anything your estate is worth above this amount is taxed at 40%.
The nil-rate band has been frozen at £325,000 since April 2009 — over 17 years. It will remain frozen until at least April 2031. If it had kept pace with inflation, it would now be roughly £500,000. This freeze is the single biggest reason more families are paying inheritance tax than ever before.
Worth knowing. Many people believe the nil-rate band has been going up over the years. It has not. Every year it stays frozen, rising property values and growing pension pots pull more families above the threshold — even those who would not consider themselves wealthy.
Since April 2017, there has been an additional allowance called the residence nil-rate band. For 2025/26, it is £175,000 per person.
This extra allowance is available when your main home passes to direct descendants — your children, stepchildren, adopted children, foster children, or grandchildren. It does not apply if the home passes to a sibling, niece, nephew, or friend.
Combined with the standard nil-rate band, this gives a single person up to £500,000 of tax-free allowances.
When the first spouse or civil partner dies, any unused nil-rate band and residence nil-rate band can be transferred to the survivor. Because most couples leave everything to each other (which is tax-free under the spouse exemption), none of the first person's allowances are typically used — meaning the full amount transfers.
This effectively doubles the surviving spouse's allowances:
The transfer is based on the percentage that was unused, not a fixed amount. If the first spouse used 20% of their nil-rate band (perhaps through gifts to others), the surviving spouse inherits the remaining 80% of whatever the nil-rate band is at the time of the second death.
The transfer is not automatic. The people dealing with the estate must claim it when the second spouse dies. Both wills need to be structured correctly, and the home must pass to direct descendants for the residence nil-rate band to apply.
There is an important catch that many families do not expect. If the total estate is worth more than £2 million, the residence nil-rate band is tapered away. You lose £1 of the allowance for every £2 the estate exceeds £2 million.
For a single person, the residence nil-rate band disappears entirely at £2.35 million. For a couple claiming both allowances, it is gone at £2.7 million.
The hidden 60% tax rate. In the range where the residence nil-rate band is being tapered away, the real tax rate is 60%, not 40%. For every extra £1 your estate is worth, you lose 50p of allowance (which would have saved you 20p in tax) and you also pay 40p on that extra £1. That adds up to 60p on every extra pound. This catches a lot of families by surprise.
This is one of the most important things to get right. If your estate is anywhere near the £2 million mark, reducing it below that threshold — through gifting, spending down pensions, or other planning — can save tens of thousands of pounds by preserving the full residence nil-rate band.
To receive the full residence nil-rate band, three conditions must be met:
You must own a home (or have owned one that you later sold or downsized from — there are special rules for this).
The home must pass to direct descendants. This includes children, stepchildren, adopted children, foster children, and grandchildren. It does not include brothers, sisters, nieces, nephews, or friends.
The estate must be below £2 million to receive the full amount. Above £2 million, the taper reduces it. Above £2.35 million (single) or £2.7 million (couple), it disappears completely.
If you sold your home before you died — perhaps to move into a smaller property or into care — you may still qualify for the residence nil-rate band. There are "downsizing" rules that allow the allowance to apply as long as you left the equivalent value to direct descendants in your will. This is a technical area and usually needs a solicitor to set up correctly.
Our free calculator works out which allowances apply to your situation — including the transferred nil-rate band from a deceased spouse and the residence nil-rate band. It also shows you whether the £2 million taper is reducing your allowances and by how much.