What Is Inheritance Tax? UK Allowances and Life Insurance

Inheritance Tax is a tax on an estate after death and on some transfers during life. Whether any tax is payable depends on the estate, gifts, exemptions and available allowances; there is no single tax-free figure that applies to everyone.

The main UK allowances

The standard nil-rate band is £325,000. A separate residence nil-rate band of up to £175,000 may apply when a qualifying home passes to direct descendants. The residence allowance is restricted by the value inherited and reduces by £1 for every £2 that an estate exceeds £2 million. The additional allowance is not available simply because someone owns a home.

Spouses, civil partners and the £1 million example

Transfers to a spouse or civil partner are generally exempt, subject to relevant residence and other rules. Unused percentages of the nil-rate bands may be transferable to a surviving spouse or civil partner. Qualifying estates can therefore sometimes benefit from combined allowances of up to £1 million, but this is not an automatic allowance for every couple. Unmarried partners do not receive the same spouse exemption.

What rate applies?

The standard rate is 40% on the taxable amount above the available allowances, after relevant exemptions and reliefs. A reduced 36% rate can apply to some assets where the charitable-giving conditions are met. Gifts, trusts, business or agricultural assets and overseas connections can change the calculation. Obtain specialist tax advice rather than assuming an online example fits your estate.

Gifts and the seven-year rule

Some gifts are exempt and some become exempt if the donor survives the required period. Gifts where a person continues to benefit, and transfers into certain trusts, can follow different rules. Taper relief is not a blanket reduction in the value of every gift. Keep records and use GOV.UK’s guidance on gifts when discussing an estate plan with a qualified adviser.

How life insurance can help

An appropriately arranged whole-of-life policy may provide money towards an expected liability. A policy held personally can itself increase the estate, so ownership and a suitable trust matter. A trust does not make every tax consequence disappear: type, funding, beneficiaries and administration need consideration. Read our life insurance trust guide and how life insurance can be taxed.

A practical starting point

List the home, savings, investments, debts, existing policies and significant gifts, then consider who inherits. An insurance adviser can discuss cover to fund a liability, while a tax adviser or solicitor should confirm the estate calculation and legal arrangements. Our whole-of-life guide explains the types of premiums and cover to check.

Compare your options

Speak to our advice team about the protection discussed here. Initial quotations are subject to the insurer assessing the application. Cover begins only when the insurer confirms the policy is in force; completing a form or receiving a quote does not start cover.

Updated October 2026. General information, not a personal recommendation or a quotation. Eligibility, exclusions, premiums and tax treatment depend on the policy and individual circumstances. Discount Life Cover is a trading style of My Key Finance Ltd, authorised and regulated by the FCA, FRN 628996.

Further information: GOV.UK: Inheritance Tax; HMRC: thresholds.