The nil-rate band: frozen since 2009
Inheritance tax (IHT) is charged at 40% on the value of your estate above a certain threshold - the nil-rate band. Since April 2009, that band has been fixed at £325,000. It has not moved with inflation, with wage growth, or with the spectacular rise in property values that has taken place in the intervening seventeen years.
The result is a phenomenon known as fiscal drag: estates that would never have attracted IHT a generation ago now fall squarely within its scope. A family home purchased in Surrey in 1995 for £180,000 may now be worth £900,000. The threshold has not kept pace.
The nil-rate band has been frozen at £325,000 since 2009. In real terms, it is worth considerably less today than when it was set - meaning more families pay inheritance tax every year without any change in the headline rate. The current freeze is confirmed until at least April 2030.
The residence nil-rate band
In 2017, the government introduced an additional allowance - the residence nil-rate band (RNRB) - specifically to reduce IHT on the family home. It currently stands at £175,000 per person and applies when a residential property is passed to direct descendants (children, grandchildren, or their spouses).
Combined with the standard nil-rate band, a married couple or civil partnership can potentially pass up to £1 million to their children free of inheritance tax: £325,000 each in standard nil-rate bands (£650,000 combined), plus £175,000 each in residence nil-rate bands (£350,000 combined).
However, the RNRB tapers away for larger estates. For every £2 your estate exceeds £2 million, you lose £1 of RNRB. Estates over £2.35 million lose it entirely. For many Surrey families with significant assets, the residence nil-rate band offers less relief than it appears to at first.
The October 2024 Budget: what changed
The Autumn Budget of October 2024 introduced two significant changes that will affect many families who had previously planned around IHT exemptions.
Pensions and IHT from April 2027
Under changes announced by the government, unused defined contribution pension funds are expected to be brought within the IHT calculation from April 2027. The detailed administration of this is still developing, so pension nominations and wider estate planning should be reviewed with up-to-date advice.
Agricultural and Business Property Relief: cap above £2.5 million
Agricultural Property Relief (APR) and Business Property Relief (BPR) previously offered 100% exemption from IHT on qualifying assets with no upper limit. From April 2026, that relief is capped. The first £2.5 million of qualifying agricultural and business property per individual remains fully exempt, but above that threshold, relief drops to 50% - meaning the excess is taxed at an effective rate of 20%.
For farming families and business owners who had structured their affairs around the assumption of full exemption, this change represents a material shift in their tax position.
Gifting: the annual exemption and the seven-year rule
Two longstanding gifting strategies remain in place, and both are worth understanding clearly.
The annual gifting exemption: £3,000
Each tax year you can give away up to £3,000 free of IHT with no strings attached. Unused allowance from the previous year can be carried forward once, giving a maximum of £6,000 in a single year. Separately, you can make gifts of up to £250 to any number of individuals, and regular gifts from surplus income may also qualify for exemption if properly documented.
The seven-year rule
Any gift you make above the annual exemption is a "potentially exempt transfer." If you survive seven years from the date of the gift, it falls out of your estate entirely. If you die within seven years, the gift is brought back into your estate and taxed - though taper relief reduces the rate if you survive between three and seven years. Larger estates benefit most from beginning a structured gifting programme early.
The Surrey context: why property values change everything
Surrey consistently ranks among the highest-value property markets in England. Average house prices in many parts of the county - Elmbridge, Guildford, Waverley, Woking - have significantly exceeded the combined nil-rate bands available to a single person for many years.
For families where the main asset is a property held in a single name - perhaps after a spouse has died - the IHT exposure can be substantial.
For example, on an £850,000 estate, with one nil-rate band (£325,000) and one residence nil-rate band (£175,000) available, £500,000 of the estate is tax-free. Inheritance Tax at 40% would be payable on the remaining £350,000, giving a tax bill of £140,000.
As this example refers to a widowed individual, it's also worth noting that any unused nil-rate band and residence nil-rate band from a late spouse or civil partner may be transferable, which could reduce this figure further — in some cases to nil, depending on the value of the first estate.
Add a pension pot, investments, and cash savings, and the picture changes further. For families in this position, IHT planning is not an abstract concern - it is a practical matter with material consequences for what the next generation inherits.
What you can do
Effective IHT planning typically involves a combination of measures: maximising the use of available exemptions and reliefs, reviewing pension nominations in light of the 2027 changes, considering whether trusts within a Will could protect certain assets, and ensuring that gifting strategies are documented and structured correctly.
The single most important first step is understanding where you actually stand. Many families significantly overestimate or underestimate their IHT exposure until they work through the numbers carefully.
The information in our guides is provided for general information only and is not a substitute for advice based on your individual circumstances.
Wills, trusts, inheritance tax, Lasting Powers of Attorney and estate planning can be complex, and the right approach will depend on your family, finances, assets and wishes. Laws, tax rules, allowances and guidance can also change over time.
You should not act, or decide not to act, solely on the basis of the information in these guides. Where appropriate, you should obtain personalised legal, financial or tax advice before making any decisions.
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