For the 2021/22 tax year, running from 6 April 2021 to 5 April 2022, the UK inheritance tax threshold was £325,000 per person. An additional £175,000 was available when a home passed to direct descendants, so a single person could leave up to £500,000 tax-free in the right circumstances. Anything above the applicable threshold was taxed at 40 percent.1GOV.UK. Inheritance Tax Thresholds and Interest Rates Both figures remain frozen at these levels through to April 2030, so the same numbers still apply today.
The £325,000 Nil Rate Band
Every individual has a tax-free allowance called the nil rate band. For 2021/22 it was set at £325,000, the same figure it has been since April 2009. The Finance Act 2021 legislated to keep it there until April 2030.2GOV.UK. Inheritance Tax Thresholds
The nil rate band applies to the total worldwide assets a person owned at death: property, savings, investments, pensions with death benefits, life insurance policies not written in trust, and personal belongings. Estate value up to £325,000 is taxed at zero. Only the portion above that figure attracts the 40 percent rate.
The £175,000 Residence Nil Rate Band
On top of the standard £325,000, an extra £175,000 threshold called the residence nil rate band was available in 2021/22. It applies when the deceased leaves a home they lived in to direct descendants, meaning children, grandchildren, stepchildren, adopted children, or foster children.1GOV.UK. Inheritance Tax Thresholds and Interest Rates Combined with the nil rate band, that brings the personal tax-free total to £500,000.
Larger estates lose the benefit. Once the total estate value exceeds £2 million, the £175,000 allowance drops by £1 for every £2 above that mark, so the residence nil rate band disappears entirely at £2,350,000.3GOV.UK. Inheritance Tax Nil Rate Band and Residence Nil Rate Band Thresholds From 6 April 2021
Someone who sold their home or moved to a smaller property on or after 8 July 2015 can still benefit through downsizing provisions, provided assets of equivalent value pass to direct descendants.4GOV.UK. Work Out and Apply the Residence Nil Rate Band for Inheritance Tax
How Married Couples Reach £1 Million
Anything left to a spouse or civil partner is completely exempt from inheritance tax, with no upper limit. It does not matter how large the estate is: if everything passes to the surviving partner, no tax is due on the first death.5GOV.UK. Inheritance Tax Manual – Spouse or Civil Partner Exemption The couple must be legally married or in a civil partnership. Cohabiting partners, regardless of how long they have lived together, do not qualify.
Because the first partner’s £325,000 nil rate band goes unused when everything passes to the survivor, that unused portion carries forward. It works as a percentage, not a fixed sum. If none of the first partner’s nil rate band was used, the survivor’s estate gets a 100 percent uplift, producing a combined nil rate band of £650,000.6GOV.UK. Transferring Unused Basic Threshold for Inheritance Tax
The residence nil rate band transfers the same way. A couple who both qualify for the full nil rate band and full residence nil rate band transfers can pass on up to £1 million tax-free. The claim to transfer the unused threshold must be submitted to HMRC within two years of the second partner’s death.
Gifts That Sit Outside the Threshold
Several exemptions let people give away assets during the 2021/22 tax year without those gifts eating into the £325,000 threshold at all:
- Annual exemption of £3,000 per tax year. If the previous year’s allowance was unused, it can be carried forward one year only, giving a maximum of £6,000 in a single year.7GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
- Small gifts of up to £250 per recipient per tax year, given to as many different people as you like. If gifts to any one person exceed £250 in total, the entire small-gifts exemption for that person is lost, and it cannot be combined with the annual exemption for the same recipient.8GOV.UK. IHTM14180 – Lifetime Transfers: Small Gifts Exemption: Summary
- Wedding and civil partnership gifts of up to £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else, given on or shortly before the ceremony.
- Gifts from regular income that do not reduce the donor’s standard of living, with no upper limit.
- Gifts to qualifying charities or registered political parties, which are fully exempt. Leaving at least 10 percent of the taxable estate to charity also reduces the inheritance tax rate on the rest of the estate from 40 percent to 36 percent.
The Seven-Year Rule on Larger Gifts
Gifts above those exemptions are called potentially exempt transfers. They escape inheritance tax entirely if the person who made the gift survives seven years afterward.9GOV.UK. Work Out Inheritance Tax Due on Gifts If the donor dies within seven years, the gift is added back to the estate for the tax calculation. Gifts use up the £325,000 nil rate band first, and any remaining threshold passes to the rest of the estate.
When the donor dies between three and seven years after making the gift, taper relief reduces the tax on that gift:
- Less than 3 years before death: 40 percent, no reduction
- 3 to 4 years: 32 percent
- 4 to 5 years: 24 percent
- 5 to 6 years: 16 percent
- 6 to 7 years: 8 percent
Taper relief only bites when the total gifts in the seven years before death exceed the nil rate band. Someone who gave away £300,000 five years before dying in 2021/22 owes no tax on that gift, because it falls within the £325,000 threshold. Where tax is due, the recipient of the gift is responsible for paying it.
Reliefs That Can Sit on Top of the Threshold
Business property relief and agricultural property relief work separately from the nil rate band and can reduce the taxable value of qualifying assets even in estates well above the thresholds. Business property relief gives 100 percent relief on a business, an interest in a business, or shares in an unlisted company, and 50 percent relief on controlling shareholdings in listed companies and on land, buildings, or machinery used in a business the deceased controlled. The deceased must have owned the asset for at least two years before death.10GOV.UK. What Qualifies for Business Relief
Agricultural relief covers farmland, farm buildings, and farmhouses of a size appropriate to the farming activity, on a working UK farm. The rate is 100 percent where the owner farmed the land themselves or let it on a tenancy starting on or after 1 September 1995, and 50 percent in other cases. The ownership requirement is two years if the owner occupied the land, seven years if someone else did. Farm equipment, machinery, livestock, and harvested crops do not qualify.11GOV.UK. Agricultural Relief for Inheritance Tax
When the Tax Is Due
Any inheritance tax owed must be paid by the end of the sixth month after the person died. A death in January, for example, produces a 31 July deadline. Tax on assets that take time to sell, particularly property, can be spread over 10 equal annual instalments.12GOV.UK. Pay Your Inheritance Tax Bill Late payments attract interest, currently charged at 7.75 percent.13GOV.UK. HMRC Interest Rates for Late and Early Payments