Inheritance tax thresholds, rates and how it works in 2024

Inheritance tax is a deeply unpopular levy charged on your estate when you die – but there are some tax-free allowances that can reduce what you owe up to a certain threshold. 

While the main allowance covers any assets, there’s extra protection available if you want to leave your home to your heirs. If you’re aiming to keep your estate below the tax-free thresholds, then some inheritance tax planning might be in order.

This guide explains the inheritance tax rules as they currently stand, covering: 

• What is the inheritance tax threshold?
• How do I calculate my inheritance tax bill?
• How does the seven-year rule work?
• Using your pension to avoid inheritance tax
• Investing to reduce inheritance tax
• Leaving money to children and grandchildren

What is the inheritance tax threshold in 2024?

Each individual is taxed at a rate of 40pc on all their assets above a threshold of £325,000. This threshold is known as the nil-rate band.

But from April 2017 an added protection known as the “family home allowance”, or “main residence nil-rate band”, began to be phased in. This is now worth £175,000 per person, and applies when you leave your main property to a direct descendant, such as a child, step-child or grandchild.

How do I calculate my inheritance tax bill?

The spousal exemption means married couples and civil partners can effectively pool their allowances to pass on up to £1m to their heirs tax-free. 

However, estates over £2m lose the family home relief at a rate of £1 for every £2 over the threshold. Your estate will have no allowance at all if it’s worth over £2.2m.

If you pass away within seven years of making gifts that exceed the usual allowances, there may be inheritance tax to pay. The usual 40pc rate is tapered depending on how long ago the gift was made, and anything owing will either be taken from the estate or – if there’s not enough to cover it – the person who received the gift may be asked to pay up.

You can also use the Telegraph’s inheritance tax calculator to work out what your estate could end up paying.

In reality, few estates will actually be charged 40pc. The graph below shows the effective tax rate paid by estates of different sizes.

As you can see, the largest estates end up paying less than much less wealthy families. That is because wealthier people are more likely to have a wealth manager helping them reduce their bill with tax planning, as we will discuss later on in this article.

How does the seven-year rule work?

Seven really is the magic number when it comes to inheritance tax. 

Seven years is the length of time for any gifts to officially be counted as outside of your estate, meaning that when you pass away they will be outside the reach of inheritance tax. 

If you were to die within seven years, your heirs could face a tax bill – but, depending on how much time has passed since the gift was made, you won’t necessarily get a 40pc tax bill, as the tax rate tapers after the first couple of years.

Not all gifts come under the scope of inheritance tax, and there are plenty of ways to avoid getting caught in the seven-year trap.

Increasingly, families are realising the power of the seven-year rule and are giving away more wealth to children and grandchildren earlier in life than was typically the case in the past.

What if I downsize?

People who sell an expensive property will be eligible for an “inheritance tax credit” so can still qualify for the new threshold, as long as most of the estate is left to descendants.

This is known as the “downsizing addition”. It means you will be no worse off if you move to a lower value home or sell your house altogether to move into care. 

This downsizing relief allows you to claim the main residence nil-rate band (described above) to offset inheritance tax, even if you no longer own the property in question.

Should I set up a trust?

If you want to give money away to your heirs, but you’re nervous about what the recipient will do with it, you might consider setting up a trust. Not only can trusts help retain control over how and when the money is spent, but they can also reduce a potential inheritance tax bill – as long as you live at least seven years after setting it up.

It may also be worth putting life insurance into trust. Doing this means your loved ones don’t need to wait until probate is granted for the policy to pay out, and the money won’t be counted as part of your estate when you die. Just make sure you follow the rules.

Using equity release to gift money

Equity release lets over-55s withdraw cash from the value of their property free of tax. For inheritance tax purposes, some people choose to then give this money to their loved ones as a way to take it out of their estate.

However, this is a complicated and somewhat risky strategy. Equity release is a form of debt that must be repaid either when you die or go into long-term care, and as borrowing costs are expensive it is only really suitable for those with large estates. Our guide can reveal the key rules you’ll need to remember if you’re considering this strategy.

Using your pension to avoid inheritance tax

Pension savings are considered to be outside of your estate for inheritance tax purposes, making them a useful way to cut your tax bill. Since the 2015 “pension freedom” reforms, more people are using pensions as a way to shield their wealth from inheritance tax (though, income tax will still apply when the beneficiary makes a withdrawal).

The important thing is knowing what kind of pension scheme you have, and how that can be passed onto your beneficiaries. 

Those with a defined contribution (DC) pension can leave a lump sum, while that won’t be possible if you have a defined benefit (DB) pension. That said, this kind of scheme will usually keep paying your spouse or nomination beneficiary after you’re gone.

Investing to reduce inheritance tax

Some shares listed on the Aim, London’s junior market, qualify for business relief when the investor dies, once they have been held for more than two years. Effectively, this means the shares, or at least a proportion of the value of the shares, will be free of inheritance tax.

There are plenty of well-known brands that started out in the Alternative Investment Market, such as Fever-Tree and Young’s the brewer, but companies tend to be smaller and riskier, so you have a greater chance of losing your cash.

Be warned: aside from the inherent risks of investing, accountants have long predicted that, sooner or later, the government will eventually scale back or abolish this relief altogether. 

Leaving money to children and grandchildren

Parents wanting to send their children to private school could also benefit from the fact that transfers made for children’s education are exempt for inheritance tax purposes.

However, this exemption doesn’t extend to generous grandparents, unless they use the “surplus income” rule or survive the gift by seven years.

For grandparents wanting to pass on their wealth, there are several ways to do it while keeping it safe from the tax man. You can paying into your grandchild’s pension or Junior Isa, using trusts or using your own pension. There are different rules involved with each option, so make sure you’re clued up before you go ahead.

Other unusual ways to avoid inheritance tax

In addition to being widely considered unfair by its very nature, inheritance tax is also incredibly complicated to navigate – not least because of the large number of carve-outs and reliefs that make it easier for the super-rich to avoid paying the tax, but more difficult for the middle classes to avoid it.

From inheriting National Trust buildings and rare works of art, to valuable war medals, there are lots of assets you can inherit that are outside the clutches of inheritance tax. However, if you merely say you’ve given a gift to an heir – such as a valuable artwork – but still maintain use of it, you might end up with a visit from the inheritance tax police. 

We’ve found some other niche exemptions – you never know, they might help cut your bill.

Inheritance tax FAQS

What is inheritance tax in the UK?

Inheritance tax is a levy charged on a deceased’s person estate. The main rate is 40pc above a tax-free allowance but the actual rate paid varies dramatically. Inheritance tax bills must be paid by the end of the sixth month after death.

How much can you inherit without paying taxes?

People who were married or in a civil partnership can pass on £1m tax-free (if that includes a family home). Single people can pass on £500,000. In theory, unlimited amounts can be passed on using various inheritance tax reliefs, but only on very precise conditions.

Do I have to pay inheritance tax on my parents’ house?

It depends. Most couples can pass on £1m tax-free. This includes £350,000 in respect of passing on a main residence to a direct descendant, but not a second home. Once the inheritance tax bill is calculated it is up to the executor of the deceased’s will to settle up. Depending on the mix of assets, it may be possible to pay the bill from cash or the sale of investments instead of the property.

Can I give my house to my son or daughter to avoid inheritance tax?

Yes you can, however it is very easy to fall foul of the rules and tax experts generally caution against giving away a property purely for tax reasons. 

For starters, as with other financial gifts, you must survive at least seven years from giving away the property for it not to count as part of your estate for the purposes of inheritance tax. 

Then there the “gift with reservation of benefit” rules which mean you must not continue to use the property after it is given away. If you do continue to use it, you must pay the market rental rate. HMRC does check whether a gift has truly been made, so make sure you understand the rules before going ahead.