Inheritance Tax and your home
The short answer
Everyone can leave £325,000 free of Inheritance Tax. If your home goes to your children or grandchildren, the residence nil-rate band adds up to £175,000 more, taking the tax-free amount to £500,000. Married couples and civil partners can pass unused allowances to each other, so together they can leave up to £1 million tax-free. The extra £175,000 shrinks for estates over £2 million.
The two allowances
The nil-rate band, £325,000. Everyone has this, whoever they leave their estate to. Inheritance Tax is 40% on anything above it, or 36% if at least 10% of the estate goes to charity.
The residence nil-rate band, up to £175,000. This only applies to a home you've lived in, or a share of one, that passes to your direct descendants. It's capped at the value of the home: if your share of the home is worth £120,000, that's the most you get.
Both allowances are frozen at these levels until April 2031.
Who counts as a direct descendant
Children and grandchildren, including adopted, foster and stepchildren, and their spouses or civil partners. Nephews, nieces, brothers, sisters and friends don't count. Leave your home to a niece and the extra allowance is lost.
The home has to be inherited by them, through your will, the intestacy rules or another legal route. If it's held in a trust where they don't become entitled straight away, the allowance usually doesn't apply.
Worked examples
| Estate | Home goes to | Tax-free | Inheritance Tax |
|---|---|---|---|
| £600,000, single | Children | £500,000 | £40,000 |
| £600,000, single | A nephew | £325,000 | £110,000 |
| £950,000, widowed | Children | £1,000,000 | £0 |
In the first two, the estate includes a home worth £350,000. Leaving it to a nephew rather than to children costs £70,000, because the £175,000 residence allowance is lost.
In the third, the estate includes a home worth £450,000. When the first partner died, everything went to the survivor, which is tax-free between spouses and leaves the first partner's allowances unused. Those pass to the survivor, so on the second death the estate has two nil-rate bands (£650,000) and two residence allowances (£350,000).
Estates over £2 million
The residence allowance falls by £1 for every £2 the estate is worth over £2 million. A single person's £175,000 is gone completely at £2.35 million. For a surviving spouse with a transferred allowance, the full £350,000 is gone at £2.7 million.
The test uses the whole estate after debts, but before reliefs and exemptions. That means an estate can lose the allowance even if most of it goes to a spouse or charity tax-free.
Things to check
Your will. Make sure the home, or enough of the estate to cover its value, goes to children or grandchildren if you want the extra allowance. A will written before 2017 may not have been drafted with it in mind.
Downsizing. If you moved to a smaller home, or sold your home, after 8 July 2015, your estate may still be able to claim the allowance you've lost, as long as other assets of the same value go to direct descendants.
Claiming the allowances. Neither the residence allowance nor a late spouse's unused allowances are given automatically. The executors claim them when they report the estate to HMRC.
Gifts. Gifts you make in the seven years before you die can still count towards the estate. Some are exempt straight away, including £3,000 a year of gifts and gifts out of surplus income.
Pensions. Unused pension funds are due to count towards the estate for deaths from 6 April 2027, which could take more estates over these thresholds.
Common questions
Can I give my home to my children now to avoid the tax? Only if you really give it up. If you carry on living in a home you’ve given away without paying a full market rent, it’s treated as still part of your estate when you die, under the “gift with reservation” rules. And a gift of a home can mean Capital Gains Tax for you on any part that isn’t your main home, and for your children when they later sell.
Does a buy-to-let count for the extra allowance? Only a home you’ve lived in at some point can qualify. A property you’ve only ever let out doesn’t count, so the residence allowance can’t be used against it, even if it goes to your children. If you own more than one home you’ve lived in, your executors can choose which one the allowance applies to.
What if the home is left to children in a trust? It depends on the trust. The allowance can apply when children become entitled to the home straight away, for example under some trusts for children under 18. A discretionary trust, where the trustees choose who benefits, usually loses it. It’s worth taking advice before using a trust in a will.
Work it out with your own figures
Estimate the tax on an estate, with the home allowance, a spouse's unused allowances and gifts.
Open the Inheritance Tax CalculatorNext step: see how your pension will count for Inheritance Tax from April 2027.