Inheritance Tax (IHT) is charged on the value of a person's estate — everything they own minus everything they owe — when they die. At 40% on everything above the threshold, it can take a serious bite out of what you leave behind. And with the nil-rate band frozen since 2009, more ordinary families are finding themselves liable.
The nil-rate band
The standard IHT threshold — the nil-rate band — is £325,000. Estates valued below this pay no inheritance tax. This figure has been frozen since 2009 and is set to remain at £325,000 until at least April 2030. When you consider that the average UK house price is now around £290,000, many estates exceed the threshold on property alone.
The residence nil-rate band
There's an additional allowance called the residence nil-rate band (RNRB), worth up to £175,000, which applies when you leave your home to direct descendants — children, grandchildren, or their spouses. This takes the effective threshold to £500,000 for an individual.
For married couples or civil partners, both allowances can be transferred to the surviving partner, giving a combined threshold of up to £1 million. That's a significant amount, but it comes with conditions: the home must be left to direct descendants, and the RNRB starts to taper if the total estate exceeds £2 million.
What counts as your estate
HMRC includes practically everything: your home, savings, investments, personal possessions, life insurance payouts (unless held in trust), and business assets. Debts, funeral costs, and gifts to charity are deducted. Jointly owned assets are usually split according to ownership share.
One area that catches families off guard is that certain gifts made within seven years of death are counted as part of the estate. More on that below.
The seven-year gift rule
You can give away as much as you like during your lifetime, but if you die within seven years of making a gift, it may be subject to IHT. Gifts made three to seven years before death are taxed on a sliding scale (called taper relief), while gifts made within three years are fully taxable at 40%.
Some gifts are exempt regardless of timing:
- Annual exemption — £3,000 per tax year (you can carry forward one unused year)
- Small gifts — up to £250 per person per year
- Wedding gifts — £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else
- Regular gifts from surplus income (provided they don't affect your standard of living)
Leaving money to charity
Gifts to registered charities are exempt from IHT. There's an additional incentive: if you leave at least 10% of your net estate to charity, the IHT rate on the remainder drops from 40% to 36%. This can sometimes mean that leaving more to charity actually results in your beneficiaries receiving more too.
Planning strategies
Common approaches to reducing IHT liability include:
- Making use of exemptions — the annual £3,000 allowance, plus regular gifts from income
- Writing life insurance into trust — keeps the payout outside your estate
- Setting up trusts — though the rules are complex and professional advice is essential
- Agricultural and Business Property Relief — can provide 50% or 100% relief on qualifying assets
IHT planning is one area where professional advice genuinely pays for itself. The rules are intricate, HMRC actively investigates estates, and mistakes can be costly. A solicitor or financial planner specialising in estate planning is worth consulting, particularly if your estate is near or above the threshold.
Paying the tax
IHT is normally paid from the estate before assets are distributed. The executor or personal representative is responsible for this. Tax on property can be paid in annual instalments over ten years if the estate includes illiquid assets. The deadline for payment is usually the end of the sixth month after the month of death.