The Inheritance Tax Act 1984 (IHTA 1984) is the primary piece of legislation governing how inheritance tax is charged on estates, lifetime gifts, and trusts in England and Wales. Despite its reputation as a tax on the wealthy, the Act contains generous reliefs and exemptions that mean around 96% of families in England and Wales never pay a penny.
What Does the Act Actually Cover?
The IHTA 1984 is not just about what happens when someone dies. It governs the entire lifecycle of wealth transfer — from lifetime gifts and trusts to the administration of estates after death. Its key provisions include the nil-rate band, the residence nil-rate band, the seven-year rule, spousal exemptions, and business and agricultural property reliefs.
The Nil-Rate Band: Your Tax-Free Buffer
Every individual has a nil-rate band of £325,000 — a threshold below which no inheritance tax is charged. Anything above this is taxed at 40%. The nil-rate band has been frozen at £325,000 since 2009, meaning that rising property values have gradually brought more estates into the IHT net over time.
If you are married or in a civil partnership, any unused nil-rate band can be transferred to your surviving spouse. This means a couple can shelter up to £650,000 from IHT — or up to £1 million when the residence nil-rate band is also taken into account.
The Residence Nil-Rate Band
Introduced in 2017, the residence nil-rate band (RNRB) provides an additional £175,000 allowance when you leave your main residence to direct descendants — children, stepchildren, or grandchildren. Combined with the standard nil-rate band, a single person can shelter up to £500,000 from IHT.
The Seven-Year Rule
One of the most powerful planning tools in the Act is the ability to make lifetime gifts that fall outside your estate after seven years. These are known as Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, it becomes fully exempt from IHT. If you die within seven years, taper relief reduces the tax owed on a sliding scale.