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As rising numbers of estates become liable for inheritance tax – thanks to property values and frozen thresholds – it’s more important than ever to plan for it. IHT payments are forecast to reach a record high of £9.1bn in 2025-26.
Planning for IHT will become even more urgent when unused pension pots become liable for the tax in 2027. And for farmers and business owners, the end of full IHT relief for farms and businesses is coming from 2026.
So, how much of your estate is truly at risk, and what can you do about it? This guide will demystify inheritance tax, walking you through crucial exemptions and legitimate strategies for passing on more to your loved ones. We'll equip you with the knowledge to navigate IHT effectively and help ensure your wealth goes to those you intend it for.
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Inheritance tax (IHT) is a tax on the estate of someone who has died, including their property, possessions and money. The inheritance tax rate is 40%. But it’s not charged on all of your estate, only the part that is above the inheritance tax thresholds.
Everyone gets an allowance before they have to pay any inheritance tax. So in fact most estates don’t pay inheritance tax, as it’s only charged on estates above a certain value.
Couples who are married or in a civil partnership don’t have to pay anything on assets they leave to each other. If you are widowed, your estate can also benefit from the unused percentage of your late spouse’s nil rate band.
If you are leaving your home to your children or grandchildren, you can use your late spouse’s unused residence nil rate band too (even if they died before 2017 when the residence nil rate band was introduced, and even if they never lived in the home you are passing on).
You won’t pay IHT on assets you leave to charity.
Up until now, pension pots that can be passed on are free of inheritance tax, but the government plans to change this from 2027. Mike Ambery, retirement savings director at Standard Life, part of Phoenix Group, said the plan to include pensions in IHT represents a fundamental shift to how wealthier individuals think about accessing their money in retirement.
“At present it makes more sense to access ISAs and other forms of saving before touching pensions. In time we’re likely to see more pensions accessed earlier to prevent them from becoming part of people’s IHT bill at a later date.”
The inheritance tax thresholds in the UK are:
This takes your total allowance up to £500,000, or £1 million if you are married or in a civil partnership. Anything above these amounts is taxed at 40%. If your total estate (not just your home) is worth more than £2 million, then the residence nil rate band starts to be reduced by £1 for every £2 above £2 million.
There is no residence nil rate band on estates worth more than £2.35 million, or £2.7 million for couples who are married.
Inheritance tax thresholds will be frozen until 2030. The freeze was initially put in place until 2028 by the previous government but this was extended in the autumn Budget. The main IHT exemption, the ‘nil rate band’, has been frozen since 2009, although the residence nil rate band was introduced in 2017.
For people with family businesses or farms, it’s worth remembering that at the Autumn Budget 2024, it was also announced that, from April 2026, the availability of 100% IHT relief for business property relief (BPR) and agricultural property relief (APR) will be capped. Assets eligible for 100% APR or 100% BPR will qualify for full relief up to £1 million, with 50% relief above that amount.
Payment of inheritance tax is usually handled by the executor of the will, if there is one. If there is no will, then whoever is administering the estate will arrange this. Inheritance tax is paid from funds held within the estate, or through the sale of assets – for example a house.
It is important to know that although paying inheritance tax at a time of mourning or grieving can be difficult, the money is not directly paid by the beneficiaries of the will. Any inheritance tax due must be paid at the end of six months after the person’s death, or will be charged late-payment interest of 8.25%.
There several ways to reduce inheritance tax on an estate. The main methods are through the various different gifting allowances, and in some cases setting up trusts. The earlier you engage in UK inheritance tax planning, the better when trying to avoid inheritance tax.
Currently you can give away £3,000 a year without triggering a potential reduction in your main IHT allowance on death, says Ian Cook, financial planner at Quilter Cheviot. “Any gift above that limit will be counted as part of the estate on death, unless you have survived seven years after making the gift. This is why it is so important to start your UK inheritance tax planning as early as possible,” he adds.
You can carry any unused exemption forward to the next tax year, but only for one tax year. There are other gifting allowances that you can use on top of the £3,000 allowance.
For example, on top of that £3,000 annual exemption for gifting, you can give up to £250 to any number of people each tax year, meaning you can help fill children’s ISAs or make gifts to family and friends and at the same time avoid inheritance tax.
There are additional exemptions for wedding gifts too - £5,000 to a child, £2,500 to a grandchild or great-grandchild or £1,000 to anyone else. The other lesser-known rule is making gifts out of surplus income. This is where you give regular financial gifts, so long as you use your income (such as pension, dividends or bond payments, but not your capital) to make them and they don’t affect your standard of living.
Similarly, birthday and Christmas gifts from regular income are exempt from inheritance tax. Cook said: “This is not a very well-used or known-about exemption, but it is important to keep records of both the payments and your own financial position so it can be proved that you did not make gifts that looked to simply evade inheritance tax.”
Some people set up trusts as part of their IHT planning. Trusts do not form part of your estate, since they no longer belong to you – once the money is in there, it is no longer accessible by you. They are instead managed by trustees on behalf of a beneficiary that you intend the money to go to – although you do set the rules on how and when the money is paid out.
There are two main types of trust – bare trusts and beneficiary trusts – which each have a different tax treatment. The rules are complicated, but depending on the circumstances the tax treatment may be an improvement on the 40% IHT rate.
As with most tax affairs, IHT can be complicated. It can be worth getting professional advice from a financial adviser or specialist solicitor.
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