Inheritance Tax (IHT) is often called Britain’s most hated tax — yet with proper planning, most families can significantly reduce or eliminate the bill entirely. This guide explains the current rules, thresholds, and practical strategies to protect your family’s wealth.
What Is Inheritance Tax?
Inheritance Tax is charged at 40% on the value of a person’s estate (property, savings, investments, and possessions) above a tax-free threshold when they die. It can also apply to certain gifts made during a person’s lifetime.
Despite its reputation, IHT actually affects relatively few estates — roughly 4% of deaths result in an IHT charge. However, rising property prices mean more families are being caught, particularly in southern England.
The tax is paid by the estate (handled by the personal representatives or executors) before assets are distributed to beneficiaries. Beneficiaries receive their inheritance free of IHT.
Current IHT Thresholds
There are two main tax-free allowances:
| Threshold | Amount | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Frozen at this level until at least 2028 |
| Residence nil-rate band (RNRB) | £175,000 | Available when a home is passed to direct descendants (children, grandchildren) |
| Combined individual threshold | £500,000 | NRB + RNRB |
| Combined couple threshold | Up to £1,000,000 | When unused allowances transfer to surviving spouse |
The residence nil-rate band only applies when you leave your main home (or the proceeds from its sale) to direct descendants — children, stepchildren, adopted children, grandchildren, or their spouses.
RNRB Taper for Larger Estates
If the total estate exceeds £2 million, the RNRB is tapered away at a rate of £1 for every £2 above £2 million. This means the RNRB is completely lost once an estate reaches £2.35 million.
Spouse and Civil Partner Exemption
Transfers between married couples and civil partners are completely exempt from IHT — with no upper limit. This is one of the most powerful IHT reliefs available.
Additionally, any unused nil-rate band transfers automatically to the surviving spouse. If the first spouse to die didn’t use any of their £325,000 NRB (because everything passed to the survivor), the surviving spouse’s estate can claim a double nil-rate band of £650,000, plus potentially a double RNRB of £350,000 — giving a combined £1 million threshold.
Important: Unmarried partners (cohabitants) do not qualify for this exemption, regardless of how long they’ve lived together.
Other IHT Exemptions and Reliefs
Several exemptions can be used during your lifetime to reduce IHT:
| Exemption | Amount | Details |
|---|---|---|
| Annual exemption | £3,000 per year | Can carry forward one unused year (max £6,000) |
| Small gifts | £250 per recipient | Unlimited recipients, but can’t combine with annual exemption for same person |
| Wedding/civil partnership gifts | £5,000 from parents; £2,500 from grandparents; £1,000 from others | Must be made before the ceremony |
| Gifts from surplus income | Unlimited | Must come from income (not capital), be part of a regular pattern, and not reduce your standard of living |
| Charity | Unlimited | Leaving 10%+ of net estate to charity reduces the IHT rate to 36% |
The gifts from surplus income exemption is particularly powerful but often overlooked. If you regularly give away income you don’t need for your usual living expenses, those gifts are immediately exempt — no need to survive seven years.
The 7-Year Rule
Larger gifts (known as potentially exempt transfers or PETs) become fully exempt from IHT if you survive for seven years after making them. If you die within seven years, the gift may be taxed, but taper relief reduces the rate:
| Years Between Gift and Death | Effective IHT Rate |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% (fully exempt) |
Taper relief only applies when the total value of gifts exceeds the nil-rate band. Below that, there’s no tax to taper.
Strategies to Reduce Inheritance Tax
There are several entirely legal ways to reduce your family’s IHT bill:
1. Make Use of Exemptions
Use your £3,000 annual exemption every year and make regular gifts from surplus income. Over a decade, these can transfer substantial wealth completely free of IHT.
2. Give Away Assets Early
Large gifts become exempt after seven years under the PET rules. The earlier you start giving, the more likely these transfers will be entirely tax-free.
3. Use Pensions Strategically
Defined contribution pension pots generally sit outside your estate for IHT purposes (though this may change from April 2027). Consider spending other assets first and preserving your pension. See our pension vs ISA comparison.
4. Take Out Life Insurance in Trust
A life insurance policy written in trust doesn’t form part of your estate. The payout can cover the IHT bill, ensuring your family receives their full inheritance.
5. Invest in IHT-Exempt Assets
Shares in qualifying AIM-listed companies and certain business or agricultural property can qualify for Business Property Relief or Agricultural Property Relief, potentially reducing IHT to zero on those assets. See our tax-efficient investing guide for details.
6. Leave 10% to Charity
If at least 10% of your net estate goes to charity, the IHT rate on the remainder drops from 40% to 36%. For larger estates, this can mean your beneficiaries actually receive more than if nothing went to charity.
7. Consider Trusts
Placing assets into certain trusts can remove them from your estate, though the rules are complex and there may be upfront IHT charges. Professional advice is essential.
How to Report and Pay IHT
Personal representatives (executors or administrators) are responsible for reporting the estate to HMRC and paying any IHT due.
- Estates above the IHT threshold must complete HMRC form IHT400
- Smaller, exempt estates can use the simpler IHT205 or report through the probate application
- IHT must be paid within 6 months of the end of the month of death
- IHT on property can be paid in 10 annual instalments (with interest)
- A grant of probate typically can’t be obtained until at least some IHT is paid, which can create cash flow challenges
Banks may release funds directly to HMRC from the deceased’s accounts via the Direct Payment Scheme to help cover the initial bill.
Key Takeaways
- IHT is charged at 40% on estates above £325,000 (or £500,000 with the residence nil-rate band)
- Married couples can combine allowances for up to £1 million tax-free
- Gifts become exempt after seven years, and several annual exemptions are available
- Pensions, life insurance in trust, and charitable legacies are powerful planning tools
- Start planning early — the sooner you act, the more options you have