The nil-rate bands explained: how £325,000 can become £1 million

Inheritance Tax has a reputation for being complicated, but the core allowances are more straightforward than they first appear. Understanding them is the starting point for working out whether your estate is likely to face a bill at all.

Everyone has a nil-rate band of £325,000. This is the slice of your estate that passes free of Inheritance Tax. Anything above it that does not qualify for an exemption is generally taxed at 40%. The £325,000 figure has not moved since 2009 and is now frozen until at least April 2031.

On top of that, there is an additional residence nil-rate band of up to £175,000. It applies when you leave your main home (or the proceeds of one you have sold) to direct descendants - children, stepchildren, adopted children, foster children or grandchildren. It does not apply if you leave the home to, say, a sibling or a niece. Like the main band, it is frozen until at least April 2031.

Both allowances are transferable between spouses and civil partners. When the first partner dies and leaves everything to the other, their unused allowances pass across. On the second death, the survivor's estate can therefore use two nil-rate bands (£650,000) plus two residence nil-rate bands (£350,000) - a total of £1 million before any Inheritance Tax is due, provided a qualifying home passes to children or grandchildren.

A simple example: a married couple own a home worth £500,000 and have other savings and investments of £400,000, and they leave everything to each other and then to their two children. On the second death, the combined estate of £900,000 sits below the £1 million of combined allowances, so there is no Inheritance Tax to pay.

The residence nil-rate band is withdrawn for bigger estates. For every £2 your estate is worth above £2 million, you lose £1 of the available residence band. Where only one £175,000 allowance is available, it is fully tapered away at an estate value of £2.35 million. Where a full transferred allowance is also available, giving a combined residence nil-rate band of £350,000, it is not fully tapered away until the estate reaches £2.7 million. This 'taper' means some people with valuable homes receive less benefit than they expect.

There is also a downsizing rule: if you sell a larger home and move to a smaller one - or into care - before you die, you can usually still claim the residence band you would have had, provided you leave assets of equivalent value to your descendants. This stops people being penalised for downsizing in later life.

Because both bands are frozen while house prices and investments tend to rise over time, the real value of the allowances is falling year by year. That is fiscal drag in action: estates that would have been comfortably exempt a decade ago are increasingly finding themselves over the line. Add the arrival of pensions into the Inheritance Tax calculation from April 2027, and it is worth more households at least checking where they stand, even if the answer turns out to be reassuring.

We work out your likely exposure, factor in the coming pension change, and help you plan around it alongside your solicitor where needed.