When planning the transfer of wealth, particularly for high-value estates, understanding how inheritance tax (IHT) applies can make a significant financial difference. A £1 million estate may sound like a substantial sum, but depending on how it’s structured, a considerable portion could be subject to tax.
Inheritance tax in the UK is complex, with numerous allowances, exemptions, and reliefs. This guide aims to clearly explain how much inheritance tax might be due on a £1 million estate and what legal strategies can be used to reduce it.
Whether you’re planning your estate or anticipating an inheritance, this article will provide clarity and actionable insights.
Is a £1 Million Estate Fully Taxable in the UK?
Not necessarily. Although £1 million is a large estate, not all of it will be subject to inheritance tax, thanks to thresholds like the Nil-Rate Band (NRB) and Residence Nil-Rate Band (RNRB). The structure of the estate, whether it’s held in property, cash, pensions, or other assets, will determine how much is taxable.
Inheritance tax is only levied on the portion of the estate that exceeds the tax-free thresholds. In 2025, the standard inheritance tax rate is 40%, but this is applied only to the taxable portion of the estate after allowances.
Many people mistakenly assume that because the estate is valued at £1 million, the full amount is taxed at 40%. In reality, with careful planning and utilisation of exemptions, the taxable amount can be significantly reduced, or, in some cases, eliminated altogether.
How Is Inheritance Tax Calculated on a £1 Million Estate?
Inheritance tax is calculated by first valuing the entire estate, including property, savings, investments, and personal belongings. From this total, any debts and liabilities are deducted.
Then, the applicable tax-free thresholds are subtracted, and the remaining value is taxed at the prevailing rate. Let’s walk through a simplified example.
Basic Inheritance Tax Calculation on a £1 Million Estate
| Estate Components | Amount |
| Total Estate Value | £1,000,000 |
| Less: Nil-Rate Band (NRB) | £325,000 |
| Less: Residence Nil-Rate Band (RNRB)* | £175,000 |
| Taxable Estate | £500,000 |
| IHT @ 40% | £200,000 |
RNRB applies only if the main residence is left to a direct descendant. In this scenario, despite the estate being worth £1 million, only £500,000 is taxable, resulting in an IHT bill of £200,000.
What Are the Current Inheritance Tax Thresholds in the UK?
Understanding how thresholds work is essential to estimating how much tax you’ll pay. The UK government has introduced several bands and allowances that help reduce IHT liability, particularly for family homes and surviving spouses.
What is the Nil-Rate Band (NRB)?
The Nil-Rate Band is the standard IHT allowance. As of the current tax year, the NRB is £325,000. This means that the first £325,000 of an individual’s estate is not subject to inheritance tax.
What is the Residence Nil-Rate Band (RNRB)?
The Residence Nil-Rate Band offers an additional allowance of up to £175,000, but only if the deceased is passing on their main residence to a direct descendant such as a child or grandchild. If the estate exceeds £2 million, the RNRB is gradually reduced.
Can Unused Thresholds Be Transferred Between Spouses?
Yes. If a spouse or civil partner passes away and doesn’t use their full NRB or RNRB, the unused portion can be transferred to the surviving partner. This means a couple can potentially pass on £1 million tax-free if they meet all criteria.
Can You Legally Reduce the Inheritance Tax on a £1 Million Estate?
Yes, it is possible to legally reduce the inheritance tax on a £1 million estate through careful planning. One of the most effective strategies is making lifetime gifts. Under the seven-year rule, gifts given more than seven years before death are usually exempt from Inheritance Tax (IHT).
However, if death occurs within that period, the gift may still be partly taxable depending on how much time has passed. Another option is donating to UK-registered charities.
Gifts to charities are IHT-free, and if 10% or more of the estate is left to charity, the tax rate on the rest drops from 40% to 36%.
Setting up trusts can also help manage and reduce IHT liability, though these involve complex tax rules and should be arranged with expert financial guidance.
How Does Property Ownership Affect Inheritance Tax?
Property ownership plays a major role in determining inheritance tax (IHT) liability, as property often makes up the largest portion of a UK estate’s value.
The Residence Nil-Rate Band (RNRB) offers an additional tax-free allowance when a main home is left to direct descendants, such as children or grandchildren.
For instance, in a £1 million estate with £500,000 in property, this can reduce the taxable amount by up to £175,000. However, any outstanding mortgage decreases the property’s taxable value, a £400,000 home with a £100,000 mortgage contributes only £300,000 to the estate.
Those owning multiple properties, like buy-to-let or second homes, should note these may not qualify for the RNRB and can push the estate over the £2 million taper threshold, reducing available relief
Are There Any Exemptions or Reliefs That Can Help?
Yes, several exemptions and reliefs can help mitigate IHT liabilities, especially for those with business interests or certain beneficiaries.
Spousal and Civil Partner Exemptions
Transfers between spouses or civil partners are entirely exempt from IHT, regardless of amount. This makes it advantageous for couples to structure ownership and bequests accordingly.
Business and Agricultural Property Relief
Certain types of assets can be passed on either entirely tax-free or at a reduced rate, including:
- Business Property Relief (BPR): For qualifying business assets
- Agricultural Relief: For farmland and related property
These reliefs are subject to strict conditions and often require pre-planning.
Exempt Beneficiaries
Gifts to charities, community amateur sports clubs, or national institutions (like museums) are IHT-exempt. Gifts to unmarried partners, however, do not qualify for any exemptions.
When and How Do You Pay Inheritance Tax to HMRC?
Inheritance tax must be paid by the executor or administrator of the estate. The timeline and payment process are regulated by HMRC.
Timeline for Payment
Inheritance tax must be paid by the end of the sixth month after the month of death. For example, if someone passes away in January, the IHT must be paid by 31 July of the same year. If payment is delayed, interest begins to accrue, even if probate has not yet been granted.
Payment in Instalments and Assets Not Easily Liquidated
In cases where the estate includes high-value assets such as residential property or family-owned businesses, HMRC allows the tax to be paid in ten equal annual instalments.
However, this only applies to the portion of the estate that qualifies and interest still applies on the unpaid balance. If the property is later sold, the remaining IHT must be paid in full.
Executor’s Responsibilities and Legal Support
The executor is personally responsible for settling the IHT. This includes:
- Valuing the estate accurately
- Reporting it using the appropriate HMRC forms (e.g., IHT400 or IHT205)
- Ensuring tax is paid on time before probate is granted
Due to the complexity and potential for liability, many executors appoint solicitors or professional estate planners to manage the process.
What Happens If No Planning Is Done for a £1 Million Estate?
If a £1 million estate is left without proper inheritance tax (IHT) planning, a significant portion could be lost to tax, reducing what beneficiaries actually receive. This can create financial strain and complicate the transfer of assets to loved ones.
Impact of No Planning
- The estate value of £1,000,000 is fully considered for tax purposes.
- No Residence Nil-Rate Band (RNRB) is applied, meaning no additional relief for passing a main home to children or grandchildren.
- The standard tax-free Nil-Rate Band (NRB) of £325,000 is deducted.
- The taxable estate becomes £675,000, which is subject to IHT.
- At the 40% IHT rate, the tax bill amounts to £270,000, over a quarter of the estate.
Without proper planning, beneficiaries may have to sell property or other assets to cover the tax, potentially causing financial hardship and family tension. Early planning can help preserve wealth and ensure a smoother transfer to heirs.
Conclusion
No, inheritance tax is not inevitable, even on a £1 million estate. With the right combination of allowances, reliefs, and proactive planning, it’s possible to significantly reduce or even eliminate IHT liability.
The key is to start planning early. Make use of lifetime gifting rules, consider trusts, utilise your residence allowance, and, where appropriate, seek advice from tax professionals or estate planners.
Avoiding or minimising inheritance tax is completely legal and can make a huge difference in the legacy you leave behind.
Frequently Asked Questions
What is the 7-year rule for gifts in inheritance tax?
The 7-year rule states that gifts made more than seven years before death are exempt from IHT. If the person dies within that period, the gift may still be taxable.
Are joint accounts included in inheritance tax calculations?
Yes, the deceased’s share of any joint accounts is included in the estate and may be subject to inheritance tax.
How does inheritance tax work with second homes?
Second homes are fully taxable under IHT and generally don’t qualify for the Residence Nil-Rate Band.
Can you insure against inheritance tax liability?
Yes, some people take out life insurance policies written in trust to cover anticipated IHT bills.
Do trusts guarantee inheritance tax savings?
Trusts can help reduce IHT, but they are not foolproof and must be set up correctly to benefit from tax efficiencies.
What’s the difference between probate and inheritance tax?
Probate is the legal process of administering an estate, while inheritance tax is a financial obligation that may arise from it.
Is inheritance tax charged before or after debts are settled?
Debts and liabilities are deducted from the estate before calculating the IHT, reducing the taxable amount.
