Inheritance Tax Explained

Inheritance tax (IHT) is a tax on what you leave behind. With the tax-free thresholds frozen while house prices and savings have risen, more families are being drawn into it than ever. Understanding the basics is the first step to planning around it.

The basics: rate and thresholds

Inheritance tax is charged at 40% on the value of your estate above your tax-free allowances. Everything below those allowances is tax-free, and the rate drops to 36% if you leave at least 10% of your net estate to charity.

The two main allowances are:

• The nil-rate band — £325,000. Everyone gets this. No inheritance tax is due on the first £325,000 of your estate.
• The residence nil-rate band — up to £175,000. An extra allowance when you leave your main home to direct descendants (children, grandchildren and their families).

Both allowances are frozen until April 2031, which means more estates will exceed them over time as asset values rise.

Married couples and civil partners

Anything you leave to a UK spouse or civil partner is exempt from inheritance tax. On top of that, any allowances your partner doesn't use pass to you. Combined, a married couple or civil partnership can potentially pass on up to £1 million tax-free once both nil-rate bands and both residence bands are counted.

Note that the residence band is gradually withdrawn for larger estates — it tapers away once an estate is worth more than £2 million.

Giving money away

Gifts can reduce your estate, but the rules matter:

• The seven-year rule: most gifts fall fully outside your estate only if you live for seven years after making them. Die within that window and they may be taxed, on a sliding scale (taper relief).
• Annual exemption: you can give away £3,000 each tax year free of inheritance tax, plus small gifts of up to £250 per person.
• Gifts from income: regular gifts made out of your surplus income — not your capital — can be immediately exempt if they don't affect your standard of living.

A change to be aware of: pensions from April 2027

From 6 April 2027, most unused pension funds will be counted as part of your estate for inheritance tax. This is a significant change that could pull many more families into paying. We cover it in detail in our guide to pensions and inheritance tax.

How protection helps

You can't always avoid an inheritance tax bill — but you can make sure your family has the cash to pay it without selling the home. A whole-of-life policy written in trust provides a tax-free lump sum on death, held outside your estate, that can be used to settle the bill. An adviser can size this against your likely liability.

This guide is general information, not personal tax, financial or legal advice. Inheritance tax rules are complex and depend on your circumstances, which may change. Figures are based on current UK rules. Speak to a qualified adviser for advice tailored to you.