What is inheritance tax?
Inheritance tax (IHT) is a 40% tax on the value of your estate — everything you own — above a certain threshold, paid after your death. It's one of the most disliked taxes in the UK and one of the most planning-sensitive: with the right advice, many families can significantly reduce or eliminate their IHT liability entirely.
The thresholds
Everyone has a nil-rate band (NRB) of £325,000. Your estate pays no IHT on the first £325,000.
If you leave your main residence to direct descendants (children or grandchildren), you can also claim the residence nil-rate band (RNRB) of £175,000 — bringing the effective total threshold to £500,000 per person.
Married couples and civil partners can transfer unused allowances to each other, giving a combined potential threshold of £1,000,000 before IHT applies.
💡 The £325,000 nil-rate band has been frozen since 2009 and is set to remain frozen until at least 2030. With rising house prices, more estates are being dragged into IHT each year — making planning increasingly important for middle-income families, not just the wealthy.
What is included in your estate?
- Property (including your main residence)
- Savings and investments (including ISAs — note: ISAs lose their tax-free status on death)
- Business assets (though Business Relief may apply)
- Life insurance policies not written in trust
- Gifts made within the last 7 years
- Pension funds (proposed changes from April 2027 may bring pensions into scope)
Key IHT planning strategies
Gifting
You can give away assets during your lifetime. Gifts become fully exempt from IHT after 7 years (on a sliding scale called taper relief). Annual gifting allowances include:
- Annual exemption: £3,000/year (can carry forward one year)
- Small gifts: Up to £250 to any number of people per year
- Wedding gifts: Up to £5,000 to a child, £2,500 to a grandchild
- Regular gifts from income: Unlimited, if from surplus income and doesn't affect your standard of living
Trusts
Placing assets into certain types of trust removes them from your estate (after 7 years for some trust types). Trusts also allow you to control how and when assets pass to beneficiaries. Complex area — specialist advice is essential.
Life insurance in trust
A whole of life policy written in trust pays out directly to beneficiaries without forming part of your estate. The payout can be used to cover the IHT bill — ensuring your estate doesn't need to be partially sold to pay the tax.
Business and agricultural relief
Business Property Relief (BPR) and Agricultural Property Relief (APR) can reduce the value of qualifying business or agricultural assets by 50–100% for IHT purposes. Significant planning opportunity for business owners.
Pension planning
Currently, unused pension pots can be passed to beneficiaries outside your estate — making pensions highly efficient for IHT purposes. The government has proposed bringing pension pots within the scope of IHT from April 2027 — this is a significant planning consideration for anyone with substantial pension savings.
⚠️ IHT planning must be done carefully and documented properly. Gifts made with "strings attached" (reservation of benefit) may not reduce your estate. A specialist financial adviser or solicitor is essential for meaningful IHT planning.
When should I start planning?
The earlier the better — the 7-year clock on gifts starts from the date of transfer. But there is always something useful that can be done, regardless of age. A financial adviser specialising in estate planning can model your current exposure and recommend the most effective strategies for your circumstances.