How the family home and the seven-year rule shape what your children inherit

For most of the last century, Inheritance Tax was something wealthy families planned for. A long run of rising house prices and thresholds that have not moved since 2009 have brought it within sight of many ordinary homeowners. Two rules decide much of what happens: the extra band for a family home, and the seven-year rule for gifts.

Inheritance Tax is normally charged at 40% on the part of an estate above the £325,000 nil-rate band. If a home passes to children or grandchildren, an extra residence nil-rate band of up to £175,000 can raise that to £500,000. Both bands have been frozen and, under the Budget of November 2025, will stay at these levels until 5 April 2031. Here is how they work together, and how gifts made during life fit in.

What is exempt from the start

There is normally no Inheritance Tax to pay on anything left to a spouse or civil partner, a charity or a community amateur sports club, whatever the value. If 10% or more of the net estate is left to charity, the rate on some of the rest can fall from 40% to 36%.

The residence band and who counts as a descendant

The residence nil-rate band only applies when a home, or a share of one, passes to direct descendants. HMRC's guidance includes children and grandchildren and other lineal descendants, their spouses or civil partners, and step-children, adopted and fostered children. Nephews, nieces and brothers or sisters do not qualify. A home left to a nephew therefore gets the £325,000 band but not the extra £175,000.

The band also tapers away for large estates. It is reduced by £1 for every £2 the estate is worth above £2 million, so a single full £175,000 band disappears once an estate reaches £2.35 million.

Couples can pass on unused bands

When the first spouse or civil partner dies, any unused part of their nil-rate band can be added to the survivor's when they die. The same applies to the residence band, in proportion to how much was unused. That is how a couple can pass on up to £1 million: two £325,000 bands plus two £175,000 residence bands.

The seven-year rule for gifts

Gifts made during your lifetime are generally free of Inheritance Tax if you live for seven years after making them, unless they go into a trust. If you die within seven years, the gift counts towards your estate. Gifts are set against the £325,000 nil-rate band first, so a large gift can use up part of the band that would otherwise protect the rest of the estate.

Tax on gifts made within three years of death is charged at the full 40%. For gifts made three to seven years before death, taper relief reduces the rate, but only if the total of gifts in those seven years is more than the £325,000 threshold.

Source: GOV.UK, Inheritance Tax: gifts.

Gifts that are exempt straight away

• The annual exemption: £3,000 of gifts each tax year, which can be split between people. Unused exemption can be carried forward one year only.
• Small gifts: any number of gifts of up to £250 per person each tax year, as long as you have not used another allowance on the same person.
• Wedding or civil partnership gifts: up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else.
• Regular gifts from income: no limit, if they come from surplus monthly income and you can still afford your usual living costs. Paying into a grandchild's savings account each month is a common example.
• Gifts to a spouse or civil partner who lives permanently in the UK.

Giving the house away but still living in it

A gift only counts as made if you stop benefiting from it. HMRC treats giving your home to a relative while continuing to live there as a gift with reservation: it stays in your estate for Inheritance Tax however long you live. Transferring a home also has Capital Gains Tax consequences if it is not your main home, and can affect means-tested support. This is an area for proper legal advice.

Who this matters for, and what to check

This matters for homeowners whose home and savings together approach £500,000 as a single person or £1 million as a couple, and for anyone planning to help children with a deposit or wedding. With thresholds frozen until 2031, just as Income Tax bands are, rising property values bring more estates into scope each year.

1. Keep a simple record of gifts: date, amount, recipient and which exemption applies.
2. Check that your will leaves the home in a way that can use the residence band.
3. If you are widowed, make sure your executors know the first estate's details, since unused bands must be claimed.
4. Think about where large sums sit after a death: deposit protection has limits.

The takeaway

Inheritance Tax is not automatic for families with a home, but it is no longer only a concern for the very wealthy. The residence band rewards leaving a home to children or grandchildren, the transfer rules help couples, and the seven-year rule rewards giving early and keeping records. GOV.UK's guidance is free; a will and any significant gifts are worth discussing with a solicitor.