Inheritance Tax (IHT) is a levy that may be charged on your estate including money, possessions, and any share of property — when you pass away. This tax reduces the overall amount of value that will ultimately be transferred to your chosen beneficiaries. Beneficiaries are the individuals or organisations you intend to receive your assets after your death.
Inheritance Tax is sometimes referred to as ‘death duties’, particularly in historical contexts. The term ‘death duties’ was commonly used in the past to describe taxes imposed on estates after death, but over time, ‘inheritance tax’ has become the standard term.
Inheritance Tax can also apply to certain gifts you make during your lifetime. We will explain this aspect in more detail later in this guide.
What Is the Inheritance Tax Threshold?
For the 2025/26 tax year, Inheritance Tax (IHT) applies to estates valued above £325,000 — although this threshold may change in future. Knowing your estates worth is crucial for determining inheritance tax liability. Once the value of your estate surpasses this limit, known as the ‘nil-rate band’, the excess is taxed at 40% (unless it is left to a surviving spouse, in which case, generally, no IHT is due). In certain circumstances, such as when passing on a main residence to a direct descendant, different rules or additional allowances may apply.
The tax applies to the worldwide assets of ‘UK-domiciled individuals’ (those whose permanent home is in the UK). It also covers the UK assets of individuals who are resident overseas.
If you are a UK citizen with a holiday property abroad, it will still form part of your estate for IHT purposes. Similarly, if you are a non-UK national with UK-based property or assets exceeding £325,000 in value, UK Inheritance Tax will apply to those holdings.
Tax rules depend on individual circumstances and may change in the future.
What Is the Inheritance Tax Nil-Rate Band?
With numerous rules, exemptions and reliefs, Inheritance Tax (IHT) can be complex. A clear understanding of inheritance tax allowances, including the nil-rate band and residence nil-rate band, is key to effective Inheritance tax planning.
The nil-rate band effectively acts as a personal IHT allowance. Each individual has their own £325,000 threshold, and Inheritance Tax only applies when the total value of their estate surpasses this amount.
In some circumstances, this allowance can be increased. For example, if you leave your main home to a direct descendant, you may qualify for an additional ‘residence nil-rate band’.
Until 2030, the maximum residence nil-rate band remains frozen at £175,000. This is added to the standard £325,000 nil-rate band, meaning an estate could reach £500,000 before IHT is due.
For example, imagine you leave savings, investments and personal assets worth £110,000 plus a main residence valued at £340,000. The estate’s total of £450,000 would normally exceed the standard nil-rate band. However, if the property passes to a direct descendant, the residence nil-rate band increases your total allowance to £500,000 (£325,000 + £175,000). The use of nil rate bands in this way can significantly reduce the potential IHT payable on an estate.
In this scenario, no IHT would be payable, and £50,000 of your nil-rate band would remain unused. This unused portion can be transferred to a surviving spouse’s estate, thereby increasing their future nil-rate band.
If you jointly own a property, only your share’s value counts toward your estate. For example, if you hold a 50% share, it would be worth £170,000. Combined with savings and possessions, this would still fall within your nil-rate band, regardless of who inherits the estate.
How to Value an Estate for Inheritance Tax
When valuing an estate for Inheritance Tax (IHT), the first step is to estimate its total worth to determine whether it exceeds the IHT threshold. If your initial estimate is above £325,000, a more detailed and accurate valuation is required.
A proper valuation should include:
- All the assets you own, including property, land, savings, investments, and cash.
- Trust assets (‘relevant property’) where you are the beneficiary.
- Gifts made within the past seven years, such as cash, valuables, or contributions to a Junior ISA.
- Any assets held overseas.
It is important to include other assets such as personal belongings, digital assets, and business interests in the valuation.
Once you have the total, deduct any debts, such as mortgages or loans. The resulting figure represents the value of your estate and determines the amount of Inheritance Tax that may be due upon death.
How Much Is Inheritance Tax?
With property prices having risen sharply in recent decades, many people now find that the total value of their estates exceeds the Inheritance Tax (IHT) threshold — even after applying the residence nil-rate band.
The table below illustrates the potential amount of IHT that could be payable, depending on whether the full £175,000 residence nil-rate band is applied to your main home. The tax treatment of estates may vary depending on the composition of the estate and any applicable reliefs.
Please note that this example does not factor in any additional allowances that may be transferred from a deceased partner.
| Total value of estate | IHT payable if full residence nil-rate band (£175,000) claimed | IHT payable if no residence nil-rate band applies |
|---|---|---|
| £325,000 | None | None |
| £400,000 | None | £30,000 |
| £500,000 | None | £70,000 |
| £600,000 | £40,000 | £110,000 |
| £800,000 | £120,000 | £190,000 |
| £1,000,000 | £200,000 | £270,000 |
Effective tax planning can help minimize the IHT payable, as there are various strategies to reduce inheritance tax liabilities, such as using wills, property relief, and lifetime gifts. The tax treatment depends on the specific assets and individual circumstances involved, and may change with future policy updates.
Who Pays Inheritance Tax?
Anyone in the UK whose estate is valued above the £325,000 threshold may be liable for Inheritance Tax (IHT) upon their death. If there is a will, the executor is responsible for arranging payment. If no will exists, this responsibility falls to the estate’s administrator, and intestacy rules determine how the estate is distributed in such cases.
Executors and administrators are responsible for dealing with the estate, which includes paying any outstanding debts and taxes before distributing assets to beneficiaries.
A common misconception is that beneficiaries pay IHT themselves. In reality, the tax is usually settled by the estate before any distributions are made. The main exception involves lifetime gifts, where the recipient of the gift is generally responsible for paying any IHT due.
When Do You Pay Inheritance Tax?
Inheritance Tax (IHT) must be settled within six months of the date of death, and interest will be charged on any late payments. In some cases, payment can be made in instalments for specific assets, such as property, which may need to be sold to cover the liability.
IHT must also be paid before beneficiaries can receive their inheritance. This ensures that sufficient funds are available to meet the tax obligation.
Inheritance Tax for Married Couples
Marriage or civil partnership can offer significant advantages when it comes to Inheritance Tax (IHT).
If your will leaves all your assets to your spouse or registered civil partner, there is usually no IHT to pay. In addition, your nil-rate band remains unused, allowing your partner to effectively double their allowance. These arrangements can help ensure that assets are passed on to family members efficiently, supporting long-term family estate planning.
The legal personal representatives of the surviving spouse or civil partner must claim the transfer of the unused nil-rate band upon the second partner’s death. Structuring these arrangements, such as through trusts, can help retain control over assets for the benefit of family, and can substantially reduce the amount of IHT due on assets inherited by children, relatives, or other beneficiaries.
Quick Example of How It Works
Mr Allan passed away in 2018, leaving his entire estate to his wife. Because the assets were transferred to his spouse, none of Mr Allan’s nil-rate band was used. Mrs Allan later died in 2020, leaving an estate valued at £600,000 to her nieces and nephews.
Since Mr Allan’s nil-rate band remained unused, 100% of it (£325,000) could be transferred to Mrs Allan’s own nil-rate band (£325,000), giving her a combined allowance of £650,000.
As a result, no Inheritance Tax was payable.
Had Mr Allan’s nil-rate band not been transferred, the estate would have faced £110,000 in IHT — 40% of the £275,000 excess over Mrs Allan’s individual nil-rate band of £325,000.
Inheritance Tax on Gifts – Overview
Transferring assets or funds to beneficiaries during your lifetime is a widely used strategy to mitigate future Inheritance Tax (IHT) liabilities. However, there are specific rules governing what can be gifted and when these transfers can take place. It is crucial to understand each rule related to gifts and their tax implications to ensure your estate planning is both effective and compliant.
When calculating the value of your estate for IHT purposes, HMRC includes the total value of certain gifts made within the seven years prior to death, or at any time where you continued to derive benefit from the gifted property. These are known as ‘gifts with reservation of benefit’.
To make the most of available allowances and reliefs, it is advisable to start planning early so you can maximize the benefits of lifetime gifts.
Exempt Transfers
Exempt transfers are gifts that can be made at any time without triggering Inheritance Tax (IHT) liabilities. These include:
- Gifts between spouses or civil partners of any amount, which are fully exempt.
- Annual exemptions of up to £3,000 in each tax year.
- Regular gifts out of income, which can help prevent the value of an estate from increasing. There is no fixed limit, but the donor must retain enough income to maintain their usual standard of living.
- Wedding or civil partnership gifts of up to £5,000 to children, £2,500 to grandchildren, or £1,000 to others.
- Small gifts of up to £250 per person, per tax year.
- Gifts to charities, political parties or national institutions, which are fully tax-free during life and on death.
Potentially Exempt Transfers (PETs)
Potentially Exempt Transfers (PETs) refer to gifts made to individuals, as well as certain types of trusts, that exceed the available exemptions. There is no immediate Inheritance Tax (IHT) charge at the time of the gift. However, if the donor dies within seven years, and the total value of the PET pushes the estate above the nil-rate band, IHT will become payable.
Gifts made less than three years before death are subject to the full 40% rate. Gifts made between three and seven years before death benefit from taper relief, which applies on a sliding scale.
For example, if a PET of £100,000 is made and the donor dies within three years with an estate valued at £300,000, the PET is added, creating a total of £400,000. This results in an IHT charge of £30,000 (40% of the £75,000 above the nil-rate band). If the donor survives seven years, no tax is due.
Chargeable Lifetime Transfers (CLTs)
A Chargeable Lifetime Transfer (CLT) occurs when an individual makes a gift that is not outright — for example, placing assets into a flexible or discretionary trust.
If the total value of CLTs made within the previous seven years is below the nil-rate band, no immediate Inheritance Tax (IHT) is payable. However, if the new CLT, when combined with previous transfers, exceeds the nil-rate band, a 20% lifetime IHT charge applies to the excess amount.
Provided the donor survives for at least seven years after making the CLT, the value will generally fall outside their estate for IHT purposes. If the donor dies within seven years, the CLT amount is included in their estate. Any IHT already paid on the CLT during their lifetime will be deducted from the total tax due upon death.
Things to Consider Before Making Lifetime Gifts
While lifetime gifts are often viewed as a straightforward way to reduce future Inheritance Tax (IHT) exposure, the rules can be complex and require careful planning.
In addition to complying with HMRC regulations, it is important to assess whether gifting assets is financially sustainable, ensuring you retain sufficient funds to support your lifestyle in later years — particularly to cover potential care costs.
You should also consider the timing of when beneficiaries will gain access to gifted assets. For example, if you wish to give money to children or grandchildren while retaining control over when they receive it, placing the funds in a trust may be appropriate.
Professional financial advice can help ensure your strategy is both tax-efficient and aligned with your long-term goals. When seeking advice, choose professionals who have dealt with similar cases and can help deal with the complexities of estate planning. Dealing with all legal and financial aspects efficiently is crucial to ensure a smooth transfer of assets.
Who Pays Inheritance Tax on Gifts?
Gifts that fall within the scope of Inheritance Tax (IHT) are assessed first when applying the nil-rate band. If their value exceeds the available allowance, the recipients of those gifts are responsible for paying the 40% tax due on the excess — regardless of whether the gift has been spent or sold.
Probate and Inheritance Tax
In general terms, probate refers to the process of administering a deceased person’s estate, covering all associated legal and financial matters.
More specifically, probate is the legal document that must be obtained to give the named executor formal authority to distribute assets according to the terms of the will.
Probate will not be granted until the estate has been accurately valued and at least part of the Inheritance Tax liability has been settled. HM Revenue & Customs (HMRC) oversees the collection of inheritance tax and ensures compliance with tax regulations during the probate process.
Trusts and Inheritance Tax
A trust is a legal structure that allows you to place an asset or gift under the control of a trustee, or group of trustees, for the benefit of a designated beneficiary.
Trusts can also be an effective part of IHT planning strategies, helping individuals manage and mitigate inheritance tax liabilities as part of their overall estate planning.
Once the asset is transferred to the trustees, it no longer legally belongs to you. As a result, it is generally not included in the value of your estate for Inheritance Tax purposes, provided other relevant rules are satisfied. This can help reduce the eventual tax liability for your beneficiaries.
In addition, gifting money into a trust allows you to determine how and when those funds are distributed, ensuring your intentions are followed after your death.
However, once the money is transferred, you may lose personal access to it. For this reason, it is essential to seek expert advice before making any major decisions.
Equity Release and Inheritance Tax
Equity release refers to financial products that enable homeowners to access the money tied up in their property, usually as tax-free payments. By releasing equity, the overall value of your estate may be reduced, potentially lowering future Inheritance Tax liabilities. You can find more detailed information about equity release and IHT here.
Inheritance Tax Reliefs
Although Inheritance Tax (IHT) is charged on the total value of an estate, certain assets may qualify for valuable reliefs. The main types include:
- Business Relief – This can reduce the taxable value of a business or its assets for IHT purposes.
- Agricultural Relief – This may apply to the transfer of agricultural property, reducing the amount of IHT payable.
Seeking professional financial advice can help determine whether these reliefs apply to your estate.
Using Life Insurance to Pay Inheritance Tax
A life insurance policy can be used to cover some or all of an anticipated Inheritance Tax (IHT) liability.
To achieve this, the policy must be a whole-of-life insurance plan, which pays out upon death, rather than a term policy that only provides cover for a fixed period. The policy should also be written in trust, ensuring the payout is excluded from the estate and therefore not subject to IHT.
This approach does not account for the 10-year anniversary charge, which applies to some trusts, but this is usually irrelevant if the policy is designed solely to meet future IHT liabilities.
Provided premiums are maintained and the cover is sufficient, beneficiaries can receive their full inheritance without deductions to settle the IHT bill.