HMRC collected a record £8.25 billion in Inheritance Tax (IHT) in the 2024/25 tax year — up from £7.5 billion the year before. With the nil-rate band frozen at £325,000 since 2009 and set to remain there until at least 2030, rising property values are quietly pulling more and more ordinary families into scope. This guide explains how IHT works, what the current thresholds are, and the legal strategies families use to reduce — or eliminate — their bill.
What Is Inheritance Tax?
Inheritance Tax is a tax on the estate — the property, money, and possessions — of someone who has died. In England, Wales, and Northern Ireland, IHT is charged at 40% on the value of an estate above the available nil-rate band. Scotland follows the same rules, as IHT is a reserved (UK-wide) tax. The tax is typically paid by the executor before the estate is distributed to beneficiaries, and it must be paid — at least in part — before probate is granted. This can create a cash-flow problem for estates where most of the value is tied up in property.
The headline rate
IHT is charged at 40% on the taxable estate. A reduced rate of 36% applies if at least 10% of the net estate is left to a qualifying charity.
The Nil-Rate Band and Residence Nil-Rate Band
Every individual has a nil-rate band (NRB) of £325,000 — the amount they can pass on free of IHT. This has been frozen since 2009 and will remain at £325,000 until at least 2030. In addition, since April 2017, a residence nil-rate band (RNRB) of up to £175,000 applies when a main residence is passed to direct descendants (children, grandchildren, stepchildren, or adopted children). Together, these allowances can shelter up to £500,000 per person from IHT. Crucially, both bands are transferable between spouses and civil partners: if the first spouse to die does not use their full allowance, the unused portion passes to the survivor, potentially doubling the combined threshold to £1 million.
| Allowance | Amount | Conditions |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Available to everyone; frozen until at least 2030 |
| Residence nil-rate band (RNRB) | Up to £175,000 | Main residence passed to direct descendants only |
| Combined individual maximum | £500,000 | NRB + RNRB (subject to taper for estates over £2m) |
| Combined couple maximum | £1,000,000 | Both NRBs and RNRBs transferred on first death |
| RNRB taper | Reduced by £1 for every £2 over £2m | Fully withdrawn for estates above £2.35m |
Who Pays Inheritance Tax?
Despite the perception that IHT is a tax on the wealthy, the freeze on thresholds means it increasingly affects middle-income families — particularly homeowners in London and the South East where average house prices regularly exceed £500,000. HMRC estimates that around 4% of UK deaths currently result in an IHT liability, but that proportion is rising each year. The Office for Budget Responsibility projects that by 2029/30, IHT receipts will exceed £13 billion annually.
Gifts and the Seven-Year Rule
One of the most widely used IHT planning strategies is lifetime gifting. Any gift you make falls outside your estate for IHT purposes if you survive for seven years after making it. These are known as potentially exempt transfers (PETs). If you die within seven years of making a gift, taper relief reduces the IHT due on a sliding scale — but only on the gift itself, not on the rest of the estate.
IHT Estimate Calculator
A quick estimate based on current nil-rate bands. Not financial advice — consult a solicitor for your situation.
Include property, savings, investments, and personal possessions.
Leaving ≥10% reduces IHT rate from 40% to 36%.
| Years survived after gift | IHT rate on gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% (fully exempt) |
Annual and Other Gift Exemptions
Several gift exemptions allow you to reduce your estate each year without triggering the seven-year rule at all. These exemptions are available immediately — there is no waiting period.
| Exemption | Amount | Notes |
|---|---|---|
| Annual exemption | £3,000 per year | Unused allowance can be carried forward one year only |
| Small gifts | £250 per person | To any number of individuals; cannot combine with annual exemption for same person |
| Wedding / civil partnership gifts | £5,000 (parent), £2,500 (grandparent), £1,000 (other) | Must be given before the ceremony |
| Gifts from surplus income | Unlimited | Must be regular, from income (not capital), and not affect your standard of living |
| Gifts to charity | Unlimited | Also reduces IHT rate to 36% if ≥10% of net estate is left to charity |
| Gifts to spouse / civil partner | Unlimited | Recipient must be UK-domiciled; deferred tax, not eliminated |
Business Property Relief and Agricultural Property Relief
Business Property Relief (BPR) and Agricultural Property Relief (APR) have historically allowed qualifying business assets and farmland to be passed on free of IHT. However, the Autumn Budget 2024 introduced significant changes that took effect from 6 April 2025. Under the new rules, the combined BPR/APR relief is capped at £1 million per person (£2 million for couples). Assets above this threshold attract IHT at 20% (rather than the standard 40%), payable in instalments over ten years. For business owners and farmers, this represents a material change to long-established planning assumptions.
Pensions and the 2027 Rule Change
Until recently, defined contribution pension pots were one of the most powerful IHT planning tools available: unused pension funds passed outside the estate entirely and could be inherited free of IHT. That is changing. From 6 April 2027, unused pension funds and death benefits will be brought into scope for IHT. This affects anyone who has been using their pension as an inheritance vehicle rather than drawing it down for retirement income. The change is expected to affect around 8% of estates and will require many families to revisit their estate planning strategies before the deadline.
Action required before April 2027
If your estate planning relies on passing an unused pension pot to your beneficiaries free of IHT, you should review your strategy before April 2027. Options include drawing down more pension income earlier, making gifts from surplus income, or increasing life insurance held in trust.
Life Insurance Written in Trust
A life insurance policy written in trust sits outside your estate and pays out directly to your named beneficiaries — free of IHT and without waiting for probate. This is one of the most cost-effective ways to provide your family with an immediate lump sum to cover any IHT liability, funeral costs, or living expenses while the estate is being administered. The key is that the policy must be written in trust at the time it is taken out, or subsequently assigned into trust. A policy that is not in trust will form part of your estate and may itself attract IHT.
A Practical IHT Reduction Checklist
There is no single strategy that works for every estate. The most effective IHT planning typically combines several of the following approaches, reviewed regularly as circumstances change.
- Make a will — without one, the intestacy rules apply and your estate may be distributed in a way that wastes nil-rate bands
- Ensure your nil-rate bands are transferable — confirm your spouse's unused NRB and RNRB will transfer to you on their death
- Use your annual gift exemption every year — £3,000 per year (£6,000 if carrying forward last year's unused allowance)
- Consider regular gifts from surplus income — these are immediately exempt and can be substantial over time
- Review your pension strategy before April 2027 — the rules are changing and early action gives you more options
- Write life insurance policies in trust — this keeps the payout outside your estate and speeds up payment to beneficiaries
- Consider charitable giving — leaving at least 10% of your net estate to charity reduces the IHT rate from 40% to 36%
- If you own a business or farmland, take specialist advice on BPR/APR — the rules changed materially in April 2025
What Your Executor Needs to Know
Your executor is responsible for calculating and paying any IHT due before probate is granted. This requires a full, accurate valuation of your estate — every bank account, investment, property, pension, and personal possession. The more organised your records, the faster and cheaper this process will be. HMRC requires executors to submit an IHT return (form IHT400 for taxable estates, or IHT205 for simpler estates) within twelve months of the date of death. Interest accrues on unpaid IHT from six months after death, so delays are costly.
Related reading
Why Estate Planning MattersIHT planning is one part of a complete estate plan. This guide explains all four pillars — wills, LPAs, financial records, and final wishes — and why 60% of UK adults have no plan in place.
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How to Write a Will in the UKYour will is the foundation of your IHT planning. This step-by-step guide covers the legal requirements, what to include, and how to structure gifts to minimise your estate's tax liability.
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What Is Probate and How Long Does It Take?IHT must be paid before probate is granted. This guide explains the full probate process, the IHT catch-22, and how to avoid the most common delays.
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What Is a Mirror Will and Should You Have One?Mirror wills have important IHT implications, particularly for couples with children from previous relationships. This guide explains how they work and when a life interest trust may be a better option.
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