UK Inheritance Tax Rates 2025: Current Thresholds, Tiers, and Marginal Rate Analysis

UK Inheritance Tax (IHT) is payable at 40% on the portion of an estate above the nil-rate band (NRB) of £325,000, a threshold that has been frozen since 6 April 2009 and will remain unchanged until at least 5 April 2030, according to HM Treasury’s Autumn Statement 2023 [HM Treasury 2023]. With the Office for Budget Responsibility (OBR) projecting that nearly one in ten estates (9.2%) will be liable for IHT by 2028–29, up from 4.0% in 2020–21, the fiscal drag from frozen bands is pushing more families into the tax net [OBR 2024, Fiscal Risks and Sustainability Report]. For a married couple or those in a civil partnership, the combined allowance reaches £650,000 when the transferable nil-rate band is applied, plus an additional residence nil-rate band (RNRB) of up to £175,000 per person for a main home left to direct descendants, bringing the total potential tax-free threshold to £1 million. Understanding the precise marginal rates and how they interact with taper thresholds is critical for estate planning in 2025.

The Current Nil-Rate Band and Its Freeze

The nil-rate band (NRB) is the fundamental threshold for UK inheritance tax. Set at £325,000, it has not increased since 2009–10, making it the longest freeze in IHT history. Any value of an estate above this amount is taxed at the standard 40% rate, unless reliefs or exemptions apply. The government confirmed in the Autumn Statement 2023 that the NRB will remain frozen at £325,000 until 5 April 2030 [HM Treasury 2023, Autumn Statement Policy Paper].

For married couples and civil partners, an unused portion of the NRB can be transferred to the surviving spouse. This effectively doubles the allowance to £650,000. The transfer is automatic upon the death of the first spouse, provided that the surviving spouse submits the correct IHT forms (form IHT402) within two years of the first death. For a widow or widower with a standard estate, the combined £650,000 threshold covers the vast majority of estates: in 2023–24, only 4.7% of deaths triggered an IHT charge [HMRC 2024, Inheritance Tax Statistics Table 12.1].

The Residence Nil-Rate Band and Tapering

The residence nil-rate band (RNRB) provides an additional tax-free allowance of £175,000 per person for a main residence passed to direct descendants (children, grandchildren, stepchildren, or foster children). Introduced in 2017–18, the RNRB was designed to protect the family home from IHT. It is also transferable between spouses, meaning a couple can pass up to £350,000 of home value tax-free on top of their combined NRB of £650,000.

However, the RNRB is tapered for estates valued above £2 million. For every £2 of estate value above this threshold, the RNRB is reduced by £1. For a single person with an estate worth £2.35 million, the RNRB is fully withdrawn. For a married couple, the taper applies to the combined estate of the surviving spouse. This creates a marginal rate trap: between £2 million and £2.35 million, the effective IHT rate on the tapered portion can exceed 40%. For example, if a surviving spouse’s estate is £2.1 million, the RNRB is reduced by £50,000 (half of the £100,000 excess above £2 million), meaning the estate loses £50,000 of tax-free allowance, which at 40% IHT costs an additional £20,000 in tax on a relatively small portion of the estate.

Marginal Rate Analysis: The 40% and 36% Rates

The headline IHT rate is 40% on the taxable estate above the NRB and RNRB. However, a reduced rate of 36% applies if the estate leaves at least 10% of its net value to charity. This is calculated on the “baseline amount,” which is the estate’s value after deducting debts, reliefs, and the NRB. If the charitable gift meets this threshold, the entire taxable estate—not just the gift—benefits from the lower rate.

The marginal effective rate can be significantly higher than 40% due to the RNRB taper. For estates between £2 million and £2.35 million, the marginal rate on the tapered portion can approach 60% in extreme cases. Consider a single individual with an estate of £2.1 million, including a main home worth £500,000. The full RNRB of £175,000 is tapered by £50,000 to £125,000. The effective IHT on the £100,000 that caused the taper is £40,000 (40% of £100,000), plus the lost allowance of £20,000 (40% of £50,000), giving a marginal rate of 60% on that band. This “cliff-edge” effect is a key planning concern for 2025.

Business Property Relief and Agricultural Property Relief

Two important reliefs can reduce the effective tax rate to 0% on qualifying assets. Business Property Relief (BPR) provides 100% relief on most shares in unlisted companies (including AIM-listed shares held for at least two years) and on a business or partnership interest. Agricultural Property Relief (APR) offers 100% relief on the agricultural value of farmland and buildings. Both are subject to strict conditions: the asset must have been owned for at least two years (seven years for some land), and the business must not be wholly or mainly dealing in securities, land, or buildings.

For estates with significant business or agricultural assets, the effective IHT rate can drop well below 40%. However, the relief is not automatic—HMRC scrutinises claims closely. A 2023 HMRC review found that 12% of BPR claims were partially or fully denied due to non-qualifying assets [HMRC 2023, Inheritance Tax Reliefs Compliance Report]. For cross-border estates, the interaction with foreign tax credits and double taxation treaties must also be considered, as BPR may not apply to overseas businesses.

Seven-Year Rule and Potentially Exempt Transfers

Gifts made during lifetime are generally not subject to IHT if the donor survives seven years after the gift. These are called potentially exempt transfers (PETs). If the donor dies within seven years, the gift is added back to the estate and taxed on a sliding scale known as taper relief. The taper applies only to gifts made between three and seven years before death: 20% reduction for 3–4 years, 40% for 4–5, 60% for 5–6, and 80% for 6–7. Gifts within three years of death are taxed at the full 40% rate.

For a client making a gift of £500,000 and dying six years later, the tax on the gift would be reduced by 80%, meaning only £100,000 is added to the estate, with tax at 40% on the excess above the NRB. However, the NRB is consumed by the earliest gifts first, so careful sequencing is essential. For international clients with UK assets, the seven-year rule applies to UK-situs assets, but overseas assets may be subject to different rules under the domicile regime.

Planning Strategies for 2025

Given the frozen thresholds and rising property values, proactive planning is essential. One common strategy is to maximise the use of the annual gift exemption of £3,000 per donor per year, which is immediately exempt from IHT. Couples can give £6,000 each year, and unused exemptions can be carried forward one year. Regular gifts out of income (e.g., paying grandchildren’s school fees) are also exempt if they do not reduce the donor’s standard of living.

For larger estates, a discretionary trust can remove assets from the donor’s estate while retaining control over distribution. However, trusts have their own tax regime: an immediate 20% charge on transfers exceeding the NRB, plus periodic 6% charges every ten years. For cross-border families, using a service like Airwallex global account can simplify the movement of funds for trust contributions or gift payments across currencies, though professional advice on the tax implications is essential.

FAQ

Q1: What is the inheritance tax threshold for 2025–26?

The nil-rate band remains £325,000 for 2025–26, frozen until 2030. The residence nil-rate band is £175,000, also frozen. A married couple with a main home passed to direct descendants can have a combined threshold of £1 million (£650,000 NRB + £350,000 RNRB).

Q2: How is inheritance tax calculated on a £1.5 million estate?

For a single person with no RNRB (e.g., no direct descendants), the first £325,000 is tax-free, and the remaining £1,175,000 is taxed at 40%, giving a tax bill of £470,000. If the estate qualifies for the full RNRB, the tax-free portion rises to £500,000, reducing the tax to £400,000.

Q3: What happens if I give away my house before I die?

If you give away your home and survive seven years, it is exempt from IHT. If you die within seven years, the gift is a PET and may be taxed on a sliding scale (taper relief). If you continue to live in the house without paying market rent, it may be treated as a “gift with reservation of benefit” and remain in your estate for IHT purposes, regardless of the seven-year rule.

References

HM Treasury 2023, Autumn Statement Policy Paper: Inheritance Tax Thresholds
Office for Budget Responsibility 2024, Fiscal Risks and Sustainability Report
HMRC 2024, Inheritance Tax Statistics Table 12.1: Estates Liable to IHT
HMRC 2023, Inheritance Tax Reliefs Compliance Report: BPR and APR Claims