Inheritance tax (IHT) is charged at 40% on estates over £325,000. With UK property values, more families than ever are affected. But with proper planning, you can legally reduce or even eliminate your IHT bill.
IHT Thresholds 2025
| Allowance | Amount |
|---|---|
| Nil-rate band | £325,000 |
| Residence nil-rate band (RNRB) | £175,000 |
| Individual maximum | £500,000 |
| Married couple maximum | £1,000,000 |
IHT rate: 40% on everything above your threshold
Reduced rate: 36% if you leave 10%+ of your estate to charity
How Inheritance Tax Works
What's Included in Your Estate?
- Property
- Savings and investments
- Personal possessions
- Business assets
- Some trust assets
- Gifts made in last 7 years
- Some life insurance payouts
What's NOT Included?
- Assets left to spouse/civil partner
- Assets left to charity
- Pensions (most types)
- Some business and agricultural assets
- Life insurance in trust
The Nil-Rate Band (£325,000)
Everyone gets a £325,000 allowance. Estates below this pay no IHT.
Transferable Nil-Rate Band
If your spouse dies and doesn't use their full allowance, the unused amount can be transferred to your estate. This effectively means married couples can have £650,000 before IHT applies.
Residence Nil-Rate Band (£175,000)
Extra allowance if you leave your home to direct descendants (children, grandchildren).
Conditions:
- The property was your residence
- It's left to direct descendants
- Your estate is under £2 million (tapers above this)
Combined Allowances
Individual: £325,000 + £175,000 = £500,000
Couple: £1,000,000 combined (both allowances transferable)
Legal Ways to Reduce Inheritance Tax
1. Make Use of Exemptions
Annual exemption: Give away £3,000 per year tax-free (can carry forward one year)
Small gifts: £250 per person per year to any number of people
Wedding gifts: Up to £5,000 to children, £2,500 to grandchildren, £1,000 to others
Gifts from income: Regular gifts from surplus income (not capital) are exempt
2. Make Larger Gifts (7-Year Rule)
Gifts become exempt if you survive 7 years. If you die within 7 years, tax may be due on a sliding scale:
| Years Since Gift | Tax Rate |
|---|---|
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% |
3. Leave to Charity
Gifts to charity are IHT-free. Leave 10%+ of your estate to charity and the rate drops from 40% to 36%.
4. Put Life Insurance in Trust
Life insurance payouts go into your estate unless written in trust. Writing in trust keeps the payout out of your estate.
5. Business Property Relief
Business assets may qualify for 50% or 100% relief. Useful for business owners.
6. Agricultural Property Relief
Farming property may qualify for 50% or 100% relief.
7. Consider Trusts
Some trust arrangements can help reduce IHT, but this is complex - get professional advice.
When is IHT Paid?
- IHT is due within 6 months of death
- Interest is charged on late payments
- Executors are responsible for paying IHT
- IHT on property can be paid in instalments over 10 years
Frequently Asked Questions
Do I have to pay inheritance tax if I inherit?
No. IHT is paid by the estate before distribution. Beneficiaries receive their inheritance after tax.
Is inheritance tax fair?
Opinions vary. Some see it as a tax on already-taxed money. Others view it as preventing wealth concentration. Either way, legitimate planning to reduce it is legal and sensible.
Will IHT thresholds increase?
The nil-rate band has been frozen at £325,000 since 2009 and is frozen until at least 2028. With inflation, more estates are caught each year.
Can I give my house to my children to avoid IHT?
If you continue to live there, it's a "gift with reservation of benefit" and still counts in your estate. This doesn't work.