Understanding UK Inheritance Tax (IHT): How to Plan Effectively
Inheritance Tax (IHT) is often misunderstood and sometimes overlooked until it’s too late to plan around it. But with property values rising and thresholds remaining relatively static, more and more estates are being pulled into the IHT net. Whether you’re planning your estate or expect to receive one, understanding the key rules and strategies could save your family thousands.
What Is Inheritance Tax (IHT)?
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, IHT is charged at 40% on the value of the estate above certain thresholds.
Key Thresholds and Allowances
1. Nil-Rate Band (NRB)
The standard IHT-free threshold is £325,000. This is the amount you can pass on tax-free when you die.
2. Residence Nil-Rate Band (RNRB)
If you leave your main home to your children or grandchildren, you may be able to claim an additional £175,000 of IHT-free allowance (as of the 2024/25 tax year).
Together, a married couple or civil partners can combine their allowances, potentially passing on up to £1 million tax-free.
Who Pays Inheritance Tax?
The tax is usually paid by the estate before any inheritance is distributed. If you’re a beneficiary, you typically don’t pay IHT yourself — unless you receive a gift on which IHT becomes due.
What’s Included in an Estate?
- Property (e.g., your home)
- Cash (bank accounts, ISAs — excluding Lifetime ISAs)
- Investments and shares
- Vehicles
- Life insurance (unless held in trust)
- Personal possessions (jewellery, art, etc.)
Gifts and Inheritance Tax
Seven-Year Rule
Gifts made more than seven years before your death are generally exempt from IHT. Gifts made within seven years may be taxed on a sliding scale (taper relief).
Annual Exemption
You can give away £3,000 per tax year IHT-free. Unused exemption can be carried forward one year.
Other Exempt Gifts
- £250 per person per year (small gifts)
- Wedding gifts (£5,000 to children, £2,500 to grandchildren)
- Gifts out of excess income (must be regular and not affect your standard of living)
Smart IHT Planning Strategies
1. Write a Will
A well-structured will ensures your assets go to who you intend — and in the most tax-efficient way.
2. Use Trusts
Trusts can help control when and how assets are passed on. They may reduce IHT, though they come with complexity and sometimes their own tax rules.
3. Life Insurance
A life insurance policy placed in trust can cover an IHT bill and avoid becoming part of your estate.
4. Make Lifetime Gifts
Gifting earlier rather than later means you’re more likely to survive the seven-year rule — and your assets are potentially growing outside your estate.
5. Downsize and Release Equity
If your home significantly boosts your estate’s value, consider downsizing or using equity release schemes as part of your planning.
6. Leave a Charitable Legacy
Leaving at least 10% of your estate to charity can reduce your IHT rate from 40% to 36%.
7. Business and Agricultural Relief
Certain business assets and farmland may qualify for up to 100% IHT relief. This is crucial for family businesses and farms.
Common Mistakes to Avoid
- Delaying action: Planning only works if done early.
- Not reviewing your will regularly
- Assuming ISAs are IHT-free — they’re not.
- Failing to use the residence nil-rate band properly
- Incorrectly structured life insurance
What Should You Do Now?
- Estimate Your Estate’s Value
Include all assets, properties, and significant possessions. - Consult a Professional
Speak to an estate planner or solicitor. Tax rules change, and tailored advice is essential. - Start Gifting (Smartly)
If it fits your means, start transferring wealth early using the seven-year rule and other exemptions. - Review and Update Your Will
Ensure it aligns with your current wishes and makes use of tax efficiencies. - Check How Life Insurance is Held
Policies in trust can avoid adding to your estate’s IHT liability. - Use Our UK IHT Checklist and Calculator
Use a UK IHT Checklist to start planning. Get an illustration of liabilities using an Inheritance Tax Calculator
Final Thought
The UK inheritance tax system isn’t going away — and doing nothing could cost your loved ones tens or even hundreds of thousands of pounds. But with timely, smart planning, you can pass on more of your wealth the way you intend — and much less to HMRC.