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11 Mar 2020

Budget 2020: Heirs could inherit up to £1m tax-free as allowance raised

Fewer estates will be liable for inheritance tax

Heirs will pay less tax on homes inherited from direct relatives from 6 April, with estates worth up to £1,000,000 passed on tax-free.

Inheritance tax is currently set at 40%, but individuals will be able to pass on £175,000 worth of property tax-free - up from £150,000 in 2019-20.

The first £325,000 of an individual's estate is already tax-free, and the £175,000 threshold for homes left to descendants is in addition to this.

This takes the inheritance tax thresholds for individuals' estates in 2020-21 to a maximum of £500,000.

However, married couples and those in civil partnerships can pool their individual allowances, taking the total exemption to £1,000,000 in 2020-21.

For more detail on what your heirs might pay, see our inheritance tax guide.

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When is property tax-free?

For your heirs to qualify for the £175,000 'main residence nil-rate band', it must be included in your estate (i.e. counted within the assets you owned directly, not via a trust) and you need to have lived in it at some stage in your life.

Your heirs must also be considered 'direct descendants', which is defined as one of the following:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Great-grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted children
  • Foster children
  • Children who were under the guardianship of the people passing on their estate.

This means that nephews, nieces, siblings and other relatives will not benefit from the new allowance if a home is passed on to them.

Tax thresholds

The table below shows the inheritance tax thresholds which apply in different circumstances - up to £500,000 for estates left by individuals and £1m for those left by couples.

After 2020-21, the plan is for the main residence nil-rate band to increase annually with inflation.

Inheritance tax property thresholds
Tax yearNil-rate bandResidence nil-rate bandTotal for individualsTotal for couples

The 'nil-rate band'

The graph shows how the main tax-free 'nil-rate band' has been frozen at £325,000 for the past 12 years.

Estates worth more than £2m

If you have a larger estate, the main residence nil-rate band, and therefore the amount you can pass on tax-free, reduces gradually, known as 'tapering'.

For every £2 that your estate is over £2m, the new property allowance is reduced by £1.

So, if your estate is worth £2.4m in the 2020-21 tax year (or £2.3m in 2019-20), you'll lose the entire main residence nil-rate band.

How much inheritance tax will be payable?

To find out how much inheritance tax your heirs are likely to pay on your estate, enter your details into the calculator below.