Introduction: The Silent Tax Freeze That Affects Every Family Home
Inheritance Tax (IHT) has long been one of the most emotionally charged taxes in the UK. What makes it more controversial today is the government’s decision to freeze the nil-rate band at £325,000 until April 2026, and now effectively extend it until 2030. On the surface, nothing changes — but in reality, house prices and wealth have continued to rise. So more estates will be taxed, and more families could face a 40% IHT bill after death.
Yet, wealthy families, landlords, and even middle-income homeowners have one powerful option: gifting assets now, while using the UK tax system’s various exemptions, trusts, and reliefs to legally pass on over £1 million tax-free.
This article explains how the frozen nil-rate band works, why it is dragging more homeowners into inheritance tax, and how families can start gifting wealth now — without triggering IHT or Capital Gains Tax (CGT) in many situations.
2. What Exactly Is the Nil-Rate Band and Why Is It Frozen?
2.1 Nil-Rate Band (NRB) — The Basics
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Every individual has a £325,000 tax-free inheritance allowance (unchanged since 2009).
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Any value of an estate above this threshold is taxed at 40%.
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Married couples or civil partners can transfer any unused allowance to the surviving spouse — giving them a combined £650,000.
2.2 Residence Nil-Rate Band (RNRB)
In addition to the standard NRB, there is the Residence Nil-Rate Band (RNRB), currently set at £175,000 per person, and available when a primary residence is left to direct descendants (children, grandchildren, etc.).
Combined, a couple could pass £1 million tax-free — but only if eligibility rules are met.
2.3 The Freeze Until 2030
The government originally froze the NRB and RNRB until 2026. Rising inflation, deficits, and political caution have now extended this freeze to 2030. This means:
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No increase in the threshold despite rising property values.
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More families paying inheritance tax than ever before.
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HMRC’s annual IHT revenue is expected to surpass £9 billion by 2028.
3. Why This Freeze Is a “Stealth Tax”
Inflation and rising house prices mean the real value of £325,000 has fallen significantly since 2009. Many estates that would have been completely tax-free ten years ago are now liable to IHT.
For example:
| Year | Average UK Home | Nil-Rate Band | IHT Due? |
|---|---|---|---|
| 2009 | £156,000 | £325,000 | No |
| 2024 | £290,000–£350,000 | £325,000 | Possibly |
| 2026-2030 | £300,000+ (forecast) | £325,000 | Very likely |
This is why the freeze is often called a “fiscal drag” measure — people are being quietly pulled into the IHT net without any change in rules.
4. How to Gift £1M+ Tax-Free Today: Legal Strategies
Families do not need to wait for IHT to apply. With careful planning, many can transfer wealth while still alive — not only saving tax but also helping children or grandchildren when they need it most. Here’s how:
4.1 Use the Annual Gift Allowance (£3,000 Per Year)
Each individual can gift £3,000 per tax year free from IHT. Unused allowance from the previous year can be carried forward — meaning up to £6,000 per person, or £12,000 per couple, in one go.
Over ten years, a couple could gift £120,000 tax-free, without touching their main allowances.
4.2 Regular Gifts Out of Surplus Income
If someone has a consistent surplus income, they can legally gift part of it every year without it ever counting towards IHT.
Conditions:
✔ Gift must come from surplus (after living expenses).
✔ Must form a regular pattern (e.g., monthly/annual transfers).
✔ Must not reduce the giver’s standard of living.
Popular uses: Funding grandchildren’s school fees, gifting monthly rent to children, or contributing to pensions.
4.3 The 7-Year Rule: Potentially Exempt Transfers (PETs)
Larger gifts of any size are exempt from IHT if the giver survives 7 years from the date of the gift.
If death occurs within 7 years, taper relief applies:
| Years Survived | IHT Rate on Gift |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% (fully exempt) |
This is one of the most commonly used strategies to move large sums £500,000–£1,000,000+ tax-free between generations.
4.4 Gifting the Family Home — Can It Be Done Tax-Free?
Yes, but only in specific cases, such as:
✔ Downsizing and gifting cash instead of property.
✔ Gifting the property but paying market rent to stay there (known as “Gift with Reservation” rules).
✔ Transferring property into a trust (more complex but powerful for estates over £2M).
However, gifting property might trigger Capital Gains Tax if it is not the donor’s primary residence — which is why expert advice is essential.
4.5 Trusts — Still Legal, Still Powerful
Trusts allow parents or grandparents to gift assets while retaining some control. Common types:
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Bare Trusts — simplest form, assets go directly to beneficiaries at 18 or 21.
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Discretionary Trusts — trustees decide how and when assets are distributed.
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Interest in Possession Trusts — someone receives income for life; capital passes to children later.
Note: Transfers over £325,000 into trust may trigger a 20% lifetime IHT charge, but this can still be more efficient than a 40% death charge.
4.6 Using the Residence Nil-Rate Band (RNRB) Properly
To maximise the full £1 million tax-free allowance for couples, the family home must be left to direct descendants.
But estates valued over £2 million start to lose RNRB — reduced by £1 for every £2 above the threshold.
This is why gifting or transferring assets early is often essential to keep the estate below £2M.
5. Case Study: How a Family Gifted £1.2M Without Paying IHT
Situation:
David (70) and Margaret (68) own a £900,000 home and £700,000 in savings/investments — total estate £1.6M. They have two children.
Strategy:
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Gift £200,000 from surplus income & ISAs over 5 years.
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Place £325,000 each into discretionary trusts, using NRB.
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Pass family home directly to children in their wills (RNRB used).
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No CGT as house remains main residence.
Outcome:
✔ £1.2M passed to children tax-free
✔ Remaining estate under £650,000 — covered by both nil-rate bands
✔ £0 paid in IHT
6. Professional Advice Matters
Tax rules around IHT, gifting, CGT, and trusts are complex — especially when property, rental income or business assets are involved. A specialist such as My Tax Accountant can provide tailored planning, calculate potential liabilities, and structure gifts or trusts properly to meet HMRC rules.
