Inheritance tax (IHT) is a tax on the estate of someone who has died. It is charged at 40% on the value of the estate above certain thresholds. Despite being often called a "wealth tax," IHT increasingly affects ordinary families — particularly those who own property in areas where house prices have risen significantly. HMRC collected £7.5 billion in inheritance tax in the 2023/24 tax year, and the number of estates paying IHT continues to grow. Understanding how IHT works is the first step towards effective estate planning.
The Nil-Rate Band
Every individual has a nil-rate band (NRB) — the amount that can be passed on free of inheritance tax. This has been frozen at £325,000 since 2009 and is set to remain at this level until at least April 2028. Anything above this threshold is taxed at 40% (or 36% if at least 10% of the net estate is left to charity).
If a person dies and leaves everything to their spouse or civil partner, no IHT is payable because transfers between spouses and civil partners are exempt. Crucially, any unused nil-rate band can be transferred to the surviving spouse or civil partner. This means that when the second spouse dies, their estate may benefit from a combined nil-rate band of up to £650,000.
The Residence Nil-Rate Band
In addition to the standard nil-rate band, a residence nil-rate band (RNRB) may apply if you leave your home to direct descendants (children, grandchildren, or their spouses). The RNRB is currently £175,000 per person.
Combined IHT Thresholds
- Nil-Rate Band (NRB)
- £325,000 per person
- Residence Nil-Rate Band (RNRB)
- £175,000 per person
- Combined (single person)
- £500,000
- Combined (married couple / civil partners)
- Up to £1,000,000
Source: GOV.UK — Inheritance Tax. The RNRB is tapered for estates worth more than £2 million, reducing by £1 for every £2 above the threshold.
The RNRB taper means that for estates valued at £2,350,000 or more, the RNRB is reduced to zero. This affects wealthier estates and is an area where professional advice can help identify planning opportunities.
Gifts and the 7-Year Rule
One of the most common IHT planning strategies is making gifts during your lifetime. There are several types of exempt gift:
- Annual exemption: £3,000 per year (can be carried forward one year if unused)
- Small gifts: Up to £250 per recipient per year (to anyone not already receiving the annual exemption)
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Gifts from surplus income: Regular gifts made from your normal income (not capital) that do not affect your standard of living
For larger gifts that exceed these exemptions — known as potentially exempt transfers (PETs) — the 7-year rule applies. If you survive for 7 years after making the gift, it falls outside your estate completely. If you die within 7 years, the gift is brought back into your estate for IHT purposes, but taper relief may reduce the tax payable.
Taper Relief on Gifts
| Years Between Gift and Death | IHT Rate on Gift |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% (exempt) |
Important: Taper relief only reduces the tax on the gift itself. It applies only where the cumulative value of gifts in the 7 years before death exceeds the nil-rate band. Source: GOV.UK — Inheritance Tax on gifts
Trusts and IHT
Trusts can play a role in inheritance tax planning, though the rules are complex. When assets are placed into most types of trust, this is treated as a chargeable lifetime transfer. If the value exceeds the nil-rate band, an immediate IHT charge of 20% may apply. Additionally, discretionary trusts are subject to a periodic charge of up to 6% every 10 years on the value of trust assets above the nil-rate band, and an exit charge when assets are distributed.
Despite these charges, trusts remain useful for controlling how and when assets are distributed, protecting assets for vulnerable beneficiaries, and in some cases reducing the overall IHT liability on an estate. This is an area where specialist advice is essential — the tax treatment of trusts is highly technical and the wrong structure can result in unexpected tax bills.
Business Relief
Business relief (formerly known as business property relief) can reduce the IHT payable on business assets. At 100% relief, qualifying assets are effectively exempt from IHT. Assets qualifying for 100% relief include a business or interest in a business (such as a sole trader or partnership share) and shares in an unlisted company. A 50% relief applies to shares controlling more than 50% of a listed company or land and buildings used in a partnership or by a company the deceased controlled.
The assets generally need to have been owned for at least two years before death. Note that from April 2026, the government has announced changes to business relief — 100% relief will only apply to the first £1 million of combined business and agricultural property, with a 50% relief rate applying above that level. This represents a significant change and may affect succession planning for family businesses.
Agricultural Relief
Agricultural property relief (APR) reduces the IHT on the agricultural value of qualifying farmland and buildings. Like business relief, APR can provide up to 100% relief if the property was owned and occupied for agricultural purposes for at least two years before death (or seven years if let to a third party). The same changes announced for April 2026 apply — the £1 million threshold will be shared between business and agricultural property.
How to Calculate Your IHT Liability
Calculating IHT involves several steps. First, add up the total value of the estate — property, savings, investments, personal possessions, and any gifts made within the last 7 years. Then subtract any debts (such as a mortgage), funeral expenses, and exempt transfers (such as gifts to spouses or charities). The resulting figure is the net estate.
Worked Example
A widow with no surviving spouse's nil-rate band leaves her estate to her two children. She owns her home.
| Home value | £450,000 |
| Savings and investments | £200,000 |
| Personal possessions | £30,000 |
| Gross estate | £680,000 |
| Less: Nil-rate band | -£325,000 |
| Less: Residence nil-rate band | -£175,000 |
| Taxable amount | £180,000 |
| IHT at 40% | £72,000 |
If the deceased's late spouse had not used any of their nil-rate band, the combined NRB could be £650,000 and the combined RNRB could be £350,000, potentially eliminating the IHT liability entirely.
When to Get Professional Advice
IHT planning is one of the most common reasons people seek financial advice. Situations where specialist advice is commonly sought include:
- Your estate is likely to exceed the nil-rate band (including RNRB)
- You own a business or agricultural property and want to understand relief eligibility
- You want to make substantial gifts and need to understand the tax implications
- You are considering using trusts as part of your estate plan
- You have a blended family or complex beneficiary arrangements
IHT planning often involves a combination of financial advice and legal advice (for wills and trusts). Read our guides on succession and estate planning and how to choose a financial adviser for further guidance.
This guide is for general information only and does not constitute financial advice. The information is based on publicly available data from the FCA, HMRC, and other government sources. Always seek professional advice before making financial decisions. Figures and thresholds are subject to change — check official sources for the latest values.