The basics
Inheritance tax is charged at 40% on the part of your estate above your allowances when you die. Everything left to a spouse or civil partner is exempt, whatever the amount, and so is everything left to charity.
| Allowance | Amount | Notes |
|---|---|---|
| Nil-rate band | £325,000 | Everyone. Frozen until at least April 2030. |
| Residence nil-rate band | £175,000 | Only if you leave your home (or its value: see below) to children, grandchildren or other direct descendants. Reduced by £1 for every £2 the estate exceeds £2 million. |
| Transferable to a surviving spouse | Up to double | Whatever your late partner did not use passes to you, so a widow or widower can have £650,000 plus £350,000. |
So a married couple leaving a home to their children can pass on up to £1 million before any tax. A single person, £500,000. Most estates in the UK pay no inheritance tax at all.
The downsizing rule
The residence nil-rate band is meant for people who leave a home to descendants. The obvious worry: if you sell a £450,000 house and buy a £300,000 bungalow, or sell up and rent, do you lose part of that £175,000?
No. Since 8 July 2015 there is a "downsizing addition". If you downsized, sold up, or moved into care on or after that date, your estate can still claim the residence nil-rate band you would have had, as long as assets of at least that value are left to direct descendants. The rules are fiddly (your executors will need the dates and the value of the old home), so keep the completion statement from the sale with your will.
How gifts fit in
Money you give away and survive seven years is out of your estate. Die within seven years and it is added back, using up your nil-rate band first. Annual exemptions (£3,000 a year, wedding gifts, gifts from surplus income) are outside all of this. Gifting a deposit goes through it, and the calculator shows a rough figure for your own estate.
Three things downsizers get wrong
- Assuming there is tax to save. If your estate, including the new home and the cash from the sale, is under your allowances, there is no inheritance tax to plan around. Gift because you want to, not to save tax that was never due.
- Gifting the house to the children and staying in it. A "gift with reservation of benefit": it stays in your estate for inheritance tax, the children may face capital gains tax later, and you lose control of your own home. Do not do this without a solicitor's advice, and usually not at all.
- Forgetting the pension. From April 2027 unused pension funds are due to be included in estates for inheritance tax. If you have a large pension pot, this may change the sums; ask an adviser.
What to do
- Make or update your will. A downsizing move is the natural moment.
- Set up lasting powers of attorney for property and for health, while you are well.
- Keep a folder: the sale completion statement, a note of gifts made and when, and the will.
- If the estate is anywhere near £1 million (couple) or £500,000 (single), or you own other property or a business, see a solicitor or a later-life financial adviser. Where to find one.
A note on the numbers. Tax thresholds, benefit limits and typical costs are correct as far as we know at the time of writing (2026) and, unless we say otherwise, are for England. Scotland, Wales and Northern Ireland differ in places. Rules change and your circumstances matter. This is information, not advice: check the current position and talk to a solicitor, an FCA-authorised adviser or a tax professional before you act.
Quick answers
Will I pay inheritance tax if I downsize?
Downsizing itself does not create a tax charge. The question is the size of your estate when you die. Selling a home and keeping the cash leaves the estate the same size; gifting some of it and living seven years makes it smaller.
Does the family home allowance apply if I move into a retirement flat?
Yes, if you leave the flat (or, through the downsizing rule, its equivalent value) to direct descendants. It applies to a flat as much as to a house.
Do I lose the family home allowance if I rent after selling?
No, thanks to the downsizing addition, provided the sale was on or after 8 July 2015 and you leave assets of equivalent value to descendants.
Get the free downsizing checklists.
Six printable PDFs: the self-check, the ups and downs worksheet, the step-by-step plan, the money planner, the gifting-a-deposit guide and the room-by-room declutter list. Free, in your inbox in a minute.