DISCRIMINATION BUILT IN TO INHERITANCE TAX
The vast majority of us will not pay Inheritance Tax. In 2024/25 only 6% - about one in 17 - of estates will pay it. And even after the changes made in the 2024 Budget only about one in 11 will pay it in 2029/30. Nevertheless, Inheritance Tax remains one of the most feared and hated taxes. Especially by those who feel it discriminates against them. And the rules do discriminate against the heirs of people who are childless, or single, or who do not own their own home.
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When someone dies their estate is assessed for Inheritance Tax. If their assets exceed their threshold then the tax is normally levied at 40% of the excess. But there are four different thresholds, some worth double or treble the basic one.
Main Residence Band
The thresholds start with the basic nil-rate band (as it is formally called) of £325,000. But if you own the home you live in you can have up to an additional £175,000 making a total of £500,000. It is called the main nil-rate residence band or MRNRB. There are two main conditions to get it
- The additional amount is the value of the home with a maximum of £175,000.
- The home must be left to direct descendants. That means children, grandchildren, or great grandchildren of the person who has died. It does not include cousins, nephews, nieces, sisters, brothers, uncles, aunts, or any other relatives. However, the definition of a direct descendant does include adopted, step, and foster children.
For those who do qualify there is a third rule which reduces the main residence band if the total estate including the home exceeds £2 million. It disappears at the rate of £1 for every £2 above £2 million so the £175,000 extra vanishes as the estate reaches £2.35 million.
These rules discriminate against the childless and of course those who do not own their own home. They also discriminate against wealthier families!
Marriage
One special threshold is limitless. Everything you leave to a spouse (including a civil partner) is completely free of Inheritance Tax whatever its value. If you have a spouse, it is usually best to leave everything to them. If you have a partner who is not a spouse then marrying or civil partnering them is the best inheritance tax planning you can do. If you do not they are treated like any other heir when you die, however long you have been together and however many children you have shared.
There is a second inheritance tax advantage to marrying. Not only is everything left to a spouse free of the tax when the first of the couple dies, but when the second dies their heirs get double the normal allowances. So it really is win win.
That is why rule number one of IHT planning is - marry the one you love!
Second to die
If the person who dies is a widow (including widowers and bereaved civil partners of course) and their partner left everything to them - as recommended above - then the heirs get double the normal thresholds.
The basic threshold of £325,000 is doubled to £650,000. So their heirs can inherit that much entirely free of inheritance tax. If they own their home their heirs also get double the main residence threshold - so the £175,000 is doubled to £350,000. Added up those two thresholds reach the magic £1 million exempt from tax, which is often talked of but in practice applies only to a minority of estates.
These rules discriminate against the unmarried - single or divorced - and magnify the discrimination against the childless and those who do not own their own home.
The complex web of thresholds
|
Inheritance Tax Thresholds |
|||
|
Marital status |
Children |
Home ownership |
IHT begins over |
|
Single or divorced |
No children |
Don’t own home |
£325,000 |
|
No children |
Own home |
£325,000 |
|
|
Children |
Don’t own home |
£325,000 |
|
|
Children |
Own home |
Up to £500,000* |
|
|
Widowed (spouse let them everything) |
No children |
Don’t own home |
£650,000 |
|
No children |
Own home |
£650,000 |
|
|
Children |
Don’t own home |
£650,000 |
|
|
Children |
Own home |
Up to £1,000,000** |
|
|
Married |
leave everything to spouse or civil partner and it is all free of
IHT |
||
* Including up to £175,000 of the value of a home left to a direct descendant. ** Including up to £350,000 of the value of a home left to a direct descendant. If the value of home exceeds £2 million, the extra allowance of £175,000 or £350,000 for a widow is tapered away by £1 for every £2 above £2 million. And disappears at £2.35m or £2.7m (widow). | |||
The table sums up the rules and tabulates the discriminations. However, not all the details are captured in this table which, believe it or not, is simplified!
If your estate is large or your circumstances are complex you should always seek professional legal and tax advice about how the rules apply to your affairs and what tax would be due. Find one through the Association of Lifetime Lawyers or the Society of Trust and Estate Practitioners.
Never consider any scheme to reduce inheritance tax by putting your home or assets into a trust. It will not work and you - or more likely your heirs - will have to spend more money undoing it. Read more about the dangers in this report.
Paul Lewis
2 October 2025
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