Inheritance Tax Nil-Rate Band UK 2025: The £325,000 Allowance Explained

Every UK estate has a tax-free slice before inheritance tax applies. That slice is called the nil-rate band, and it stands at £325,000 for 2025/26. Assets within the band pass to beneficiaries without a 40% inheritance tax charge. Everything above the available allowances is taxed at 40%, unless specific reliefs or exemptions apply. The nil-rate band has been frozen at £325,000 since April 2009, which means more estates pay tax each year as property and investment values rise.

This guide explains how the nil-rate band works, how it combines with other allowances, and how to estimate tax on a given estate. Use our inheritance tax calculator to model tax on your estate value including nil-rate bands.

What the nil-rate band covers

The nil-rate band applies to the net value of your estate. That includes property, savings, investments, personal possessions, and your share of jointly owned assets. Debts and funeral expenses reduce the total. Lifetime gifts made within seven years of death may also be pulled back into the estate for tax purposes, though gifts more than seven years before death generally fall outside the calculation.

The band is per person, not per estate. When a married couple or civil partners plan together, two nil-rate bands may be available across both deaths if the first partner's unused allowance passes to the survivor. That can mean up to £650,000 of nil-rate band before any residence nil-rate band is considered.

Worked examples

An estate worth £500,000 with a single nil-rate band of £325,000 leaves £175,000 taxable. At 40%, inheritance tax is £70,000. Beneficiaries receive £430,000 after tax from an estate that appeared to be half a million.

An estate worth £325,000 or less pays no inheritance tax, assuming no lifetime gifts within seven years push the total above the band. An estate of £1,000,000 with only the standard nil-rate band faces tax on £675,000, producing a bill of £270,000 before any residence nil-rate band or spouse transfer.

Run your own figures through the inheritance tax calculator to see how the nil-rate band affects your specific estate value.

Transfers between spouses

Transfers between UK-domiciled spouses and civil partners are generally exempt from inheritance tax. When the first partner dies and leaves everything to the survivor, the estate typically pays no tax and the nil-rate band is unused. The unused percentage can transfer to the survivor's estate on second death, doubling the available band to £650,000.

The transfer is not automatic in all cases. The executor of the first estate must elect to transfer the unused band to the survivor, or the second estate claims it using records from the first death. Keeping paperwork from the first death, including the inheritance tax return if one was filed, makes the second claim smoother.

What counts in the estate

HMRC looks at the total value of assets you own at death. Your main home is usually the largest item. Buy-to-let properties, ISAs, pensions that are not in drawdown with a remaining pot, shares, bonds, vehicles, jewellery, and business interests all count. Life insurance payouts may count if the policy was not written in trust and pays into your estate.

Assets held abroad may be subject to UK inheritance tax if you are UK-domiciled. Property overseas can also attract tax in the country where it sits. If you own investment property, any capital gains tax position during your lifetime is separate from inheritance tax on death, though both taxes affect the wealth you pass on. Our capital gains tax calculator helps with lifetime disposals, while inheritance tax applies to the value at death.

Lifetime gifts and the seven-year rule

Gifts you make during your life can reduce your estate for inheritance tax, but only if you survive seven years from the date of the gift. Gifts within seven years of death are added back and use up nil-rate band. The tax on gifts tapers if you die between three and seven years after making them, under taper relief.

Everyone has an annual exemption of £3,000 per year for gifts, plus small gift allowances and exemptions for wedding gifts to children and grandchildren. Regular gifts out of surplus income can also be exempt if they meet HMRC conditions. These exemptions chip away at the estate without using nil-rate band, which is useful for gradual estate reduction.

Business and agricultural reliefs

Some assets qualify for 100% or 50% relief from inheritance tax. Business Property Relief can shield qualifying trading business assets. Agricultural Property Relief applies to farmland and related property. These reliefs can wipe out tax on business assets that would otherwise consume nil-rate band, leaving the band available for other assets like the family home.

Reliefs have strict conditions. A business must be a trading business, not mainly an investment holding company. Relief can be lost if assets are sold or the business changes character before death. Professional advice is worth taking if your estate includes a trading company, which also intersects with how you extract income during your life through salary and dividends covered in our dividend tax guide.

The freeze and fiscal drag

Because the nil-rate band has not risen since 2009, more estates cross the threshold each year through simple price growth. A home bought for £200,000 in 2009 might be worth £450,000 today. Add pensions and savings and a middle-class estate can easily exceed £325,000. The government has extended the freeze to 2030, which pulls more families into inheritance tax without raising the headline rate.

Fiscal drag is the quiet mechanism here. The 40% rate stays the same, the band stays the same, but nominal asset values rise. Planning around the frozen band matters more each year. Couples who ignore estate planning until the second death can waste the first partner's nil-rate band if the paperwork was not handled correctly.

Paying inheritance tax

Inheritance tax on death is generally due within six months of the end of the month of death. The tax must be paid before HMRC issues a grant of probate in most cases, which creates a cashflow problem for illiquid estates. Banks can sometimes release funds from the deceased's account to pay tax if presented with the right forms. A loan against property is another common solution.

The nil-rate band directly reduces the bill, but it does not reduce the need for liquid funds to pay tax on assets that cannot be sold quickly. Life insurance written in trust is one way families provide cash to pay tax without waiting for a property sale.

Nil-rate band vs residence nil-rate band

The standard nil-rate band applies to all assets. The residence nil-rate band is an extra allowance when you pass your main home to direct descendants. It is worth up to £175,000 per person and can take a single person's total allowance to £500,000. The two bands work together but have different rules. The residence band tapers away on estates above £2 million.

When modelling your estate, start with the £325,000 nil-rate band, then add residence nil-rate band if applicable, then double both if a spouse transfer applies. The inheritance tax calculator handles these combinations and shows the tax due after all available bands are applied.

Practical steps for estate planning

List your assets and their approximate values. Deduct debts. Note any gifts made in the last seven years. Check whether your will passes assets in a way that uses both spouses' bands efficiently. Consider whether your pension nominations keep funds outside the estate. Review life insurance trust arrangements.

The nil-rate band is the starting point for every calculation. Knowing that £325,000 passes tax-free sounds reassuring until you tot up property and savings and realise the gap. Early planning, proper wills, and use of exemptions over time reduce the 40% charge on the excess. For most families, the nil-rate band is not an abstract tax concept. It is the difference between passing on a home intact and forcing beneficiaries to sell it to pay HMRC.

Executors must file an inheritance tax return when the estate exceeds the reporting threshold, even if tax is nil after reliefs. Keeping a clear schedule of assets against the nil-rate band during the administration makes the return faster and reduces the risk of HMRC querying the valuation of property or investments. Beneficiaries inherit what is left after tax, so every pound of nil-rate band used is a pound that stays in the family rather than going to the Treasury.

Professional valuations for property, jewellery, and unquoted shares are worth obtaining before you submit the return. HMRC can challenge estimated figures, and a revised assessment with interest is more expensive than a proper valuation at the outset. The nil-rate band does not reduce the need for accurate asset values. It only sets how much of the total passes without tax at 40% on the remainder.