Inheritance Tax on Property: How a £550,000 House Is Taxed (and When It Isn't)
A home isn't taxed at 40% on its full value. Inheritance Tax (IHT) only bites on the part of an estate above the available tax-free bands. For someone leaving their main home to their children, two bands stack up — the £325,000 nil-rate band plus the £175,000 residence nil-rate band — so a £550,000 house can pass with only £50,000 taxed (£20,000 of IHT), and a £500,000 home can pass with none at all.
The catch is that the second, more valuable band — the residence nil-rate band — comes with strict conditions. Get them wrong (leave the house to a sibling, or hold a buy-to-let instead of a main home) and you lose £175,000 of allowance, which is £70,000 of tax. This guide walks one £550,000 house through the maths step by step, then covers who qualifies, what doesn't, and how the bill actually gets paid.
The two bands that shield a home
Everyone gets a nil-rate band (NRB) of £325,000 — the slice of any estate that is taxed at 0%. Above that, the standard IHT rate is 40% (a reduced 36% rate applies if you leave 10%+ of the net estate to charity). These figures are frozen until 5 April 2030. (Source: GOV.UK — Inheritance Tax.)
On top of that, the residence nil-rate band (RNRB) of £175,000 is an extra slice that applies only when a home is passed to direct descendants. Stack the two and a single person's tax-free threshold can reach £500,000. (Source: GOV.UK — passing on your home.)
| Band | Amount (2026–27) | Condition |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Available to every estate |
| Residence nil-rate band (RNRB) | £175,000 | Home passes to direct descendants; estate under £2m |
| Combined (single person) | £500,000 | Both conditions met |
| Standard IHT rate above bands | 40% | 36% if 10%+ left to charity |
Worked example: a £550,000 home left to children
Worked example — Margaret's estate
Margaret, a widow, dies owning her main home in Leeds, valued by the estate agent at £550,000 at the date of death. She has no other significant assets. Her will leaves the house equally to her two adult children, Ruth and Tom.
Step 1 — Start with the estate value.
Taxable estate = £550,000.
Step 2 — Apply the nil-rate band.
£550,000 − £325,000 NRB = £225,000 remaining.
Step 3 — Apply the residence nil-rate band. The home is passing to her children (direct descendants), and the estate is well under the £2m taper threshold, so the full £175,000 RNRB applies.
£225,000 − £175,000 RNRB = £50,000 taxable.
Step 4 — Apply the 40% rate.
£50,000 × 40% = £20,000 of Inheritance Tax due.
Result: on a £550,000 house, only £50,000 is taxed and the bill is £20,000 — an effective rate of about 3.6% on the whole property, not 40%. Had the house been worth £500,000 or less and left the same way, the bill would have been nil.
One detail that doubles the headroom for couples: when the first spouse or civil partner dies leaving everything to the survivor, no IHT is due and their unused NRB and RNRB transfer to the survivor's estate. A surviving spouse can therefore have up to £325,000 + £325,000 + £175,000 + £175,000 = £1,000,000 of combined threshold before any tax is due (Source: GOV.UK). Margaret's example assumes she had already used some of her late husband's allowance, leaving her with a single set of bands.
Who counts as a "direct descendant" — and who doesn't
The RNRB is the part people lose by accident. It only applies if the home passes to a direct descendant. HMRC defines that as:
- A child, grandchild or other lineal descendant — including adopted, foster and stepchildren, and a child the deceased was guardian of;
- The spouse or civil partner of such a descendant.
It explicitly does not include siblings, nephews, nieces, or other relatives. (Source: GOV.UK — residence nil-rate band guidance.)
So if Margaret had left her £550,000 home to her sister instead of her children, she would lose the £175,000 RNRB entirely. The maths becomes £550,000 − £325,000 = £225,000 taxable × 40% = £90,000 — £70,000 more tax, purely because of who inherits the house.
The £2 million taper
The RNRB also tapers away on larger estates. For every £2 the net estate exceeds the £2 million taper threshold, the RNRB is reduced by £1. An estate of £2.35m or more loses the £175,000 band completely. (Source: GOV.UK.)
Buy-to-let and second homes: no RNRB, fully exposed
The residence nil-rate band attaches to a property the deceased lived in as their home at some point. A buy-to-let, holiday let, or pure investment property does not qualify for the RNRB — only one property can be nominated as the qualifying residence, and it must be one the deceased actually occupied.
That means investment property is shielded only by the £325,000 NRB (shared across the whole estate) and is otherwise exposed to the full 40% rate. A £550,000 buy-to-let with no main home to absorb the NRB would face roughly £550,000 − £325,000 = £225,000 × 40% = £90,000 of IHT — the same as leaving a main home to a non-descendant.
Paying the property tax bill: instalments vs selling
Property is illiquid — you usually can't write a cheque for the IHT until the house sells. HMRC allows two routes (Source: GOV.UK — paying in yearly instalments):
| Option | How it works | Cost / catch |
|---|---|---|
| 10-year instalments | Pay the IHT on the land/building in 10 equal annual instalments. First instalment due at the end of the 6th month after death. | Interest is charged on the outstanding balance (HMRC's late-payment rate, 7.75% at the start of 2026). The whole remaining balance falls due immediately when the property is sold. |
| Sell the house | Sell during the estate administration and pay the IHT in full from the proceeds. | No ongoing interest, but you crystallise the sale price — relevant for loss relief below. |
In practice many executors elect instalments to get probate moving, then settle the balance from the sale proceeds once the house completes. Note the IHT generally has to be at least partly paid before the grant of probate is issued — which is why instalments and "direct payment" arrangements from the deceased's bank exist.
Valuing the property, and reclaiming tax if it sells low
The house is valued at its open market value at the date of death — what a willing buyer would pay. For an estate that owes IHT, the property is reported to HMRC on supplementary form IHT405 (“Houses, land, buildings and interests in land”), which accompanies the main IHT400 return. (Source: GOV.UK — IHT405.)
Worked example — the falling market
Margaret's house was valued at £550,000 at death and the £20,000 IHT was calculated on that figure. But the market softened, and the executors sold it 14 months later for £510,000 — £40,000 below probate value.
Because the sale happened within four years of death and the person liable for the tax sold the land, the executors can claim IHT loss-on-sale relief on form IHT38. The actual £510,000 sale price is substituted for the £550,000 probate value.
Recalculated: £510,000 − £325,000 NRB − £175,000 RNRB = £10,000 taxable × 40% = £4,000 of IHT. That's a £16,000 refund versus the original bill — tax that would otherwise be paid on value the estate never actually received.
Loss relief must be claimed within four years of death (Source: GOV.UK — IHT38). The relief looks at the aggregate of all qualifying land sold within the window, and HMRC can adjust if other estate property sold for a gain — so take advice before lodging the claim.
Quick recap
- A home is taxed only on the slice above the available bands — not 40% of the whole value.
- £325,000 NRB + £175,000 RNRB = up to £500,000 tax-free for a single person; up to £1m for a surviving spouse using both partners' bands.
- The RNRB needs the home to pass to children/grandchildren — not siblings, nieces or nephews — and tapers away above a £2m estate.
- Buy-to-lets and second homes get no RNRB.
- Pay via 10-year (interest-bearing) instalments or from the sale; reclaim overpaid tax on IHT38 if the house sells below probate value within four years.
Free download: the UK property-IHT checklist. A one-page walkthrough of bands, RNRB conditions, instalment timing, and the IHT405/IHT38 forms.
You're on the list — we'll be in touch.
Frequently asked questions
Do you pay 40% inheritance tax on the whole value of a house?
No. The 40% rate applies only to the part of the estate above your tax-free bands. With the £325,000 nil-rate band plus the £175,000 residence nil-rate band, a £550,000 home left to children has just £50,000 taxed — £20,000 of IHT, an effective rate of about 3.6% on the property.
What is the inheritance tax threshold on property in the UK?
The standard nil-rate band is £325,000. If you leave your main home to direct descendants, the £175,000 residence nil-rate band adds on, lifting a single person's threshold to £500,000 (up to £1 million for a surviving spouse using both partners' unused bands). These figures are frozen until 5 April 2030.
Does a buy-to-let or second home qualify for the residence nil-rate band?
No. The residence nil-rate band applies only to a property the deceased lived in as their home. Buy-to-lets, holiday lets and pure investment properties get no RNRB and are exposed to the full 40% rate once the £325,000 nil-rate band is used up.
Can I pay inheritance tax on a house in instalments?
Yes. IHT on land and buildings can be paid in 10 equal annual instalments, with the first due at the end of the sixth month after death. Interest is charged on the outstanding balance, and the whole remaining balance becomes due immediately if you sell the property.
Can I get inheritance tax back if the house sells for less than the probate value?
Yes. If qualifying land or buildings sell for less than their probate value within four years of death, the person liable for the tax can claim loss-on-sale relief on form IHT38. The actual sale price is substituted for the probate value, reducing the IHT due.
Who counts as a direct descendant for the residence nil-rate band?
Children (including adopted, foster and stepchildren), grandchildren and other lineal descendants, plus their spouses or civil partners. It does not include siblings, nephews, nieces or other relatives — leaving the home to them loses the £175,000 band.
General information, not personal United Kingdom tax/legal advice. Verify with a qualified professional.
Sources: GOV.UK — Inheritance Tax; passing on your home; residence nil-rate band guidance; paying in yearly instalments; forms IHT405 and IHT38. Figures current for the 2026–27 tax year, frozen until 5 April 2030.