Passing on Your Hard-Earned Wealth with Confidence

21 July, 2026 5 minutes reading time

Inheritance Tax (IHT) often brings a sense of unease. Many people worry that a lifetime of hard work and sensible saving will simply end with a large bill for their family. These worries often grow as we get older, especially when we start thinking about moving to a smaller, more manageable home. There is a common fear among many of the clients we know that selling the family home will mean losing out on valuable tax allowances.

Fortunately, the tax system in England and Wales is more understanding of later-life changes than you might expect. By understanding a few basic rules, you can make clear plans to pass on your hard-earned assets with confidence.

The Starting Allowances

Inheritance tax is not a tax on everything you own. It applies only to the value of your estate above certain thresholds. The first of these is the standard Nil Rate Band, currently £325,000. If the total value of your estate is below this figure, your family will not pay any inheritance tax.

If you are married or in a civil partnership, you have a major advantage. You can pass any amount of your estate to your surviving partner entirely tax-free. Furthermore, if you do not use your £325,000 allowance when you pass away, your partner can inherit your unused allowance. This is known as the Transferable Nil Rate Band. Together, a married couple can pass on up to £650,000 entirely free of inheritance tax.

Passing on the Family Home

The government also provides an additional tax-free allowance to help families retain their homes. This is the Residence Nil Rate Band, worth up to £175,000 per person.

To qualify for this extra allowance, you must meet two main conditions:

1. You must leave your home (or a share of it) to your direct descendants (children, stepchildren, or grandchildren).

2. Your overall estate must be worth less than £2 million (estates above this value gradually lose this allowance).

As with the standard allowance, this residential allowance is fully transferable between spouses. So, when you combine the standard allowances (£650,000) with the residential allowances (£350,000), a married couple can pass on a total of £1 million entirely tax-free. 

The Reality of Downsizing

A common concern is that moving to a smaller property or a retirement village will disrupt this planning. People worry that selling a valuable family home will forfeit the £175,000 residential allowance.

Thankfully, the rules include a safety net known as the Downsizing Addition.

If you sold a home that would have qualified for the residential allowance on or after 8 July 2015, your estate can still claim the allowance. It does not matter whether you bought a much cheaper property, moved into a rental home, or moved into residential care. As long as you leave assets of equivalent value to your direct descendants, your executors can claim the allowance you “lost” when you sold the original house.

What About Your Pension

For many years, pensions were a unique exception to the inheritance tax rules. They sat entirely outside your estate, meaning you could pass them on to your family tax-free. However, this is changing. Following recent government legislation, from 6 April 2027, any unused money left in your pension pot when you pass away will be included in the calculation of your estate for inheritance tax purposes.

While this might sound worrying, the same protective rules still apply.

• The partner exemption: If you leave your pension to your husband, wife, or civil partner, it remains completely free of inheritance tax.

• The £1 million limit: For married couples passing their estate to their children, the new pension rules will still not trigger a tax bill if the combined value of the house, savings, and pensions stays under £1 million.

If you are concerned that your combined assets (including your pension) might push you over your tax-free allowances, you should review your estate plan with a professional. 

Seeing The Rules in Action

Let’s look at how these rules work for a typical family. 

The Comfortable Retirement

David and Susan own a house worth £500,000 and have £300,000 in savings and other assets. Their total estate is worth £800,000, and they plan to leave everything to their two children.

If David passes away first, he leaves everything to Susan. No tax is due at that stage, and his allowances transfer to her. When Susan later passes away, her executors can use their combined allowances:

• Combined standard Nil Rate Band: £650,000
• Combined Residence Nil Rate Band: £350,000
• Total tax-free allowance: £1 million

Because their total estate of £800,000 is well below the £1 million limit, the children will inherit everything without paying any inheritance tax.

The Downsizing Move

Let’s take the same couple, but imagine that Susan downsizes after David passes away. She sells the £500,000 family home and buys a smaller bungalow for £250,000. She keeps the remaining £250,000 from the sale in her bank account to support her retirement.

When Susan passes away, her estate is still worth £800,000 (the £250,000 bungalow, plus £550,000 in savings and other assets).

Under the downsizing rules, Susan’s executors can look back to the sale of the original home.

Even though her bungalow is worth only £250,000, her executors can claim the full £350,000 combined residential allowance. Once again, her total tax-free allowance remains £1 million, and her children pay zero inheritance tax. 

Our Advice

Understanding these simple foundations can take the stress out of planning for the future. The rules are designed to be flexible, so choosing a home that suits your physical needs in later life does not penalise your family.

Of course, everyone’s circumstances are unique. If you are considering downsizing or want to ensure your Will is structured to make the most of these allowances, please do not hesitate to get in touch. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

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