Inheritance tax and the family home: how the allowances stack up
Inheritance tax is charged at 40% on the value of an estate above the tax-free threshold, but most estates pay nothing. Everyone has a £325,000 nil-rate band, plus a residence nil-rate band of up to £175,000 that applies only when you leave your home to direct descendants. Anything left to a spouse or civil partner is exempt, and unused thresholds transfer to them. That is how a surviving spouse leaving the family home to children can potentially pass on up to £1 million tax-free.
Written by the team behind Agent Sophie, our wills and estates specialist. This guide is general information about UK law, reviewed for accuracy.The two allowances
Inheritance tax (IHT) is charged at 40% on the value of an estate above the tax-free threshold. But most estates pay nothing, because of how the allowances work, especially for couples and for the family home.
Everyone has a nil-rate band of £325,000. This is the slice of the estate taxed at 0%. On top of that is the residence nil-rate band of up to £175,000, which applies only when you leave your home (or its value) to direct descendants: children, grandchildren, and step, adopted or foster children. Combine the two and an individual's tax-free threshold can reach £500,000 where a qualifying home passes to descendants. (The residence band tapers away for large estates worth over £2 million.)
Why couples can shelter up to £1 million
The rules are far more generous for married couples and civil partners, and this is where confusion is greatest. Anything you leave to your spouse or civil partner is exempt from IHT entirely. And any unused threshold transfers to them: when the second partner dies, their estate can use both nil-rate bands and both residence bands. That's how a surviving spouse leaving the family home to the children can potentially pass on up to £1 million tax-free.
So for a couple whose main asset is a home worth, say, £600,000 left to their children, there is often no IHT to pay at all, because the combined thresholds exceed the estate.
Two cautions
These figures assume the home genuinely passes to direct descendants. Leaving it to, say, a sibling or friend loses the residence band. And gifts made in the seven years before death, and assets held in some trusts, can change the sums. Where an estate is near the thresholds, it's worth checking the specifics rather than assuming.
Word the will to unlock the residence bandSophie's IHT check and a will that deliberately leaves the home to direct descendants is what unlocks the residence nil-rate band. The wording has real tax consequences.£5 launch price (normally £14.99)Start my letterCommon questions
How much can pass free of inheritance tax?
Everyone has a £325,000 nil-rate band, plus a residence nil-rate band of up to £175,000 when the home passes to direct descendants, so an individual's threshold can reach £500,000. IHT is charged at 40% only on value above the threshold.
What is the residence nil-rate band?
An extra allowance of up to £175,000 that applies only when you leave your home (or its value) to direct descendants: children, grandchildren, and step, adopted or foster children. It tapers away for large estates worth over £2 million.
How can a couple pass on up to £1 million tax-free?
Anything left to a spouse or civil partner is exempt, and any unused threshold transfers to them. When the second partner dies, their estate can use both nil-rate bands and both residence bands, so a surviving spouse leaving the family home to children can potentially pass on up to £1 million tax-free.
What can reduce or lose the residence band?
The figures assume the home genuinely passes to direct descendants. Leaving it to a sibling or friend loses the residence band. Gifts made in the seven years before death, and assets held in some trusts, can also change the sums.