Families looking to pass on wealth to future generations received a significant boost with the increase in the inheritance tax threshold.
The changes mean that married couples and civil partners can leave up to £950,000 tax-free to their children or grandchildren, helping more families protect their assets and reduce potential inheritance tax liabilities.
Understanding how these allowances work is an important part of effective estate planning and can help families preserve more of their wealth for future generations.
What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax charged on the value of a person’s estate when they die.
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Request Your Free Estate Planning ReviewAn estate can include:
Property and land
Savings and investments
Personal possessions
Business interests
Other valuable assets
In many cases, inheritance tax is charged at 40% on the value of an estate that exceeds the available tax-free allowances.
Careful planning can help reduce the amount of tax payable and maximise what beneficiaries receive.
Understanding the Inheritance Tax Allowance
The inheritance tax allowance consists of two key parts.
he Standard Nil-Rate Band
Every individual has a basic inheritance tax allowance of £325,000.
This allowance can be used against the value of their estate before inheritance tax becomes payable.
For married couples and civil partners, any unused allowance can usually be transferred to the surviving spouse, potentially doubling the available threshold.
The Residence Nil-Rate Band
An additional allowance is available when a person leaves their main residence to direct descendants, such as:
Children
Stepchildren
Adopted children
Grandchildren
This allowance is known as the Residence Nil-Rate Band.
The increase in this allowance raised the total amount an individual could pass on tax-free to £475,000.
For married couples and civil partners, this created a combined inheritance tax threshold of £950,000.
How the Threshold Increased
The Residence Nil-Rate Band was gradually introduced to help families pass on the family home without facing substantial inheritance tax bills.
The allowance increased as follows:
Tax Year Individual Allowance Couple’s Allowance
2018/19 £450,000 £900,000
2019/20 £475,000 £950,000
2020/21 £500,000 £1,000,000
As a result, by 2020/21, eligible couples could potentially pass on up to £1 million tax-free.
Who Qualifies for the Additional Allowance?
The Residence Nil-Rate Band generally applies when:
You own a qualifying residential property.
The property is passed to a direct descendant.
The estate falls within the relevant eligibility rules.
For many homeowners, this additional allowance can significantly reduce or even eliminate inheritance tax liability.
However, larger estates may be subject to additional rules and restrictions, making professional estate planning particularly important.
Why Estate Planning Matters
While the increased inheritance tax thresholds provide valuable opportunities, many families still fail to take full advantage of available allowances.
Proper estate planning can help:
Protect family wealth
Reduce inheritance tax exposure
Ensure assets pass according to your wishes
Simplify matters for loved ones
Preserve more of the family home for future generations
Without planning, beneficiaries may face unnecessary tax liabilities and delays during the administration of an estate.
Protecting Your Family's Future
For homeowners, the family property is often their most valuable asset. Understanding how inheritance tax thresholds work can play a vital role in preserving that wealth for children and grandchildren.
As inheritance tax rules continue to evolve, reviewing your estate plan regularly can help ensure your arrangements remain effective and tax-efficient.
Seeking professional guidance can provide peace of mind and help your family make the most of the available allowances while protecting the legacy you wish to leave behind.
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