Inheritance Tax is one of the most debated and misunderstood taxes in the UK. It in theory only affects a minority of estates, but with rising property values and falling tax reliefs, more families are finding themselves pulled into its scope.

What Is IHT?

Inheritance Tax (IHT) is a tax on the value of someone’s estate when they die, above certain allowances.

What allowances are available:

• Nil Rate Band:

Every individual gets a tax-free allowance of £325,000, known as the nil-rate band.
This means the first £325,000 of your estate is free from IHT, regardless of who inherits it.

• Residence Nil-Rate Band up to £175,000:

This is an additional inheritance tax allowance available when you pass your main home (or share of it) to direct descendants, such as:

1. Children (including adopted, step, or foster children)
2. Grandchildren
3. Great-grandchildren

You can claim up to £175,000, but it’s limited to the value of the home (or share of it) being inherited, whichever is lower.

Example:

If your home is worth £140,000, the RNRB available is capped at £140,000, not £175,000.

You also won’t qualify for this allowance if:

• The property is left to someone who isn’t a direct descendant (e.g. sibling, niece, partner)
• Your estate is worth more than £2 million — in which case the allowance is reduced (tapered) by £1 for every £2 over the £2 million threshold.

Can allowances transfer between spouses?

Yes.

When someone dies and leaves everything to their spouse or civil partner, no IHT is paid at that point due to the spousal exemption.

Even more helpfully, any unused IHT allowances (both nil-rate and residence nil-rate) can be transferred to the surviving spouse. 

For example:

• If John dies and leaves everything to his wife Sarah, no IHT is due.
• When Sarah later dies, her estate can use both her own allowances and John’s, giving her estate up to:
  • £650,000 of nil-rate band
  • £350,000 of residence nil-rate band (provided the home is worth £350,000 or more)
    = £1 million total tax-free allowance

What if the estate exceeds these Allowances?

If the value of the estate exceeds the combined tax-free thresholds, the excess is taxed at 40%.

Example:

• Sarah’s total estate: £1.3 million
• Combined allowances: £1 million
• Taxable amount: £300,000
• IHT due: £120,000

What’s included and what isn’t?

Included in the estate:

• Homes and other property
• Savings and investments
• Business or farm assets (with special reliefs)
• From April 2027: unused pension funds and pension death benefits – see below

Excluded:

• Assets passed to a spouse or civil partner
• Personal belongings under certain limits
• Death-in-service benefits (continuing to be exempt post-2027)

IHT on pensions: changes from April 2027

What’s changing?

Currently, unused pension funds (and death benefits from registered pension schemes) are not part of your estate for IHT purposes. That will change from 6 April 2027, when most unused pension pots will be brought into the IHT net .

We have gone into more detail on this in our recent blog post on Major Pension Tax Shake-Up: Inheritance Tax Set to Hit Unused Pensions from 2027

What can you do to mitigate IHT:

• Make Use of Your Gift Allowances

- You can give away up to £3,000 per year (annual exemption) IHT-free.

- Small gifts of up to £250 per person per year are also exempt.

- Wedding gifts are exempt up to £5,000 (child), £2,500 (grandchild), or £1,000 (others).

• Make Larger Gifts and Survive 7 Years

- Gifts above your annual allowances are known as Potentially Exempt Transfers (PETs).

- If you survive 7 years, they fall out of your estate and are fully IHT-free.

- Taper relief can reduce the tax if you die between years 3–7 depending on the size of the gift.

• Regular Gifts from surplus income

- You can give away money regularly from income (not capital), as long as it doesn’t affect your standard of living.

- There’s no limit, but it must be habitual and clearly documented.

• Put Life Insurance in Trust

- Life insurance payouts form part of your estate unless written in trust.

- Putting a policy in trust can keep the payout outside of your estate and speed up payment to beneficiaries.

• Use Trusts for Estate Planning

- Trusts can help control how and when assets are passed on and may remove them from your estate (depending on structure). Again the 7-year survival period applies, and this can even be increased to 14 years in some cases.

• Use Business Relief or Agricultural Relief

- Certain business or agricultural assets can qualify for up to 100% IHT relief if conditions are met.

- Useful for those with qualifying family businesses, farms, or AIM-listed shares.

• Leave a Legacy to Charity

- Gifts to UK-registered charities are IHT-free.

- If you leave 10% or more of your estate to charity, the IHT rate on the remaining estate drops from 40% to 36%.

• Seek Professional Financial and Legal Advice

- IHT planning is complex and personal. There is no one size fits all and it must be tailored to the individual needs.

Final Thoughts

Inheritance Tax is often seen as a tax on the wealthy — but with house prices and frozen allowances, many ordinary families now find themselves affected.

The key thing to remember is: IHT is not inevitable.

By making use of your allowances, gifting over time, protecting assets with trusts, using pensions efficiently, and reviewing your estate regularly, you may be able to dramatically reduce the tax bill your loved ones might face.

Planning ahead doesn’t mean giving everything away, it means being smart with what you have and putting the right structures in place early.

If you're unsure where to start or want to make sure your assets are passed on as tax-efficiently as possible, speak to a financial adviser who can help you build a plan tailored to your family and your goals.

This article is for general information only and does not constitute financial, legal, or tax advice. It reflects legislation and HMRC guidance for the 2025/26 tax year, which may change. Inheritance Tax planning can be complex and may not suit everyone. Strategies involving trusts, pensions, or insurance may require regulated advice. Tax treatment depends on individual circumstances. Always seek personalised advice before making financial decisions.