UK Inheritance Tax Guide 2025
Understanding thresholds, exemptions, and strategies to protect your estate
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Table of Contents
1. Inheritance Tax Basics
Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. It's often called the "death tax" and is one of the most disliked taxes in the UK.
Key Facts
- Tax rate: 40% on the value above the threshold
- Threshold: £325,000 (nil-rate band) + £175,000 (residence nil-rate band)
- Who pays: The estate, before distribution to beneficiaries
- When it's due: Usually within 6 months of death
- Reduced rate: 36% if you leave 10%+ of your estate to charity
What's Included in Your Estate?
- Property (your home and any other property)
- Savings and investments
- Personal possessions (cars, jewellery, art)
- Business assets and shares
- Life insurance payouts (unless in trust)
- Gifts made in the 7 years before death
- Any assets you've given away but still benefit from
What's Deducted?
- Debts (mortgages, loans, credit cards)
- Funeral expenses
- Outstanding bills
Example: Basic IHT Calculation
Estate value:
- House: £450,000
- Savings: £100,000
- Investments: £50,000
- Possessions: £25,000
- Total: £625,000
Less mortgage: -£100,000
Net estate: £525,000
Less nil-rate band: -£325,000
Taxable amount: £200,000
IHT at 40%: £80,000
2. Thresholds & Nil-Rate Bands
The Nil-Rate Band (NRB)
Everyone has a nil-rate band of £325,000. If your estate is below this, no IHT is due. This threshold has been frozen since 2009 and will remain frozen until April 2030.
The Residence Nil-Rate Band (RNRB)
An additional £175,000 allowance when passing your home to direct descendants (children, grandchildren, or their spouses).
| Situation | NRB | RNRB | Total Tax-Free |
|---|---|---|---|
| Single person, no home to descendants | £325,000 | £0 | £325,000 |
| Single person, home to descendants | £325,000 | £175,000 | £500,000 |
| Married couple, home to descendants | £650,000 | £350,000 | £1,000,000 |
Transferable Allowances
When one spouse dies and leaves everything to the other, their nil-rate bands are preserved. The surviving spouse can use both:
- Double NRB: £650,000
- Double RNRB: £350,000
- Combined maximum: £1,000,000 tax-free
Frozen Thresholds - The Hidden Tax Rise
The nil-rate band has been £325,000 since 2009 and will stay frozen until 2030. Due to house price inflation:
- 2009: Average UK house price £150,000
- 2024: Average UK house price £290,000
- Many more families are now caught by IHT
- IHT receipts have nearly tripled in 15 years
3. Exemptions & Reliefs
Several exemptions can reduce or eliminate IHT on parts of your estate.
Spouse/Civil Partner Exemption
Transfers between married couples or civil partners are completely exempt from IHT, regardless of value.
Unlimited value
Charity Exemption
Gifts to UK registered charities are exempt. Leave 10%+ of your net estate to charity and the IHT rate drops from 40% to 36%.
Unlimited value + rate reduction
Business Property Relief (BPR)
Qualifying business assets can receive 50% or 100% relief. Includes unlisted shares, sole trader businesses, and partnerships.
50-100% relief
Agricultural Property Relief (APR)
Qualifying agricultural property can receive 50% or 100% relief. The property must have been used for agriculture.
50-100% relief
Woodland Relief
Value of timber (not land) can be deferred until the timber is sold. Often combined with BPR.
Deferral of tax
Heritage Property Relief
Nationally important buildings, land, and objects may qualify if public access is given.
Conditional exemption
4. Gifting Rules
Gifting is one of the main ways to reduce IHT. But there are rules about when and how gifts are taxed.
The 7-Year Rule
Gifts made more than 7 years before death are completely exempt from IHT. Gifts made within 7 years may be taxed on a sliding scale:
| Years Before Death | Tax 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% |
Annual Exemptions
These gifts are always exempt, regardless of when you die:
| Exemption | Amount | Notes |
|---|---|---|
| Annual exemption | £3,000 per year | Can carry forward 1 unused year |
| Small gifts | £250 per person | To any number of people |
| Wedding (parent) | £5,000 | To each child getting married |
| Wedding (grandparent) | £2,500 | To each grandchild |
| Wedding (anyone else) | £1,000 | To any person |
| Normal expenditure | Unlimited | Regular gifts from income |
Gifts from Normal Expenditure
One of the most powerful exemptions - unlimited gifts are exempt if:
- Made from income (not capital)
- Part of your normal spending pattern
- Don't affect your standard of living
Gifts with Reservation
If you give something away but continue to benefit from it, it's a "gift with reservation" and stays in your estate. For example:
- Giving your house to children but still living in it (unless you pay market rent)
- Giving away art but keeping it on your wall
- Giving shares but receiving the dividends
5. Property & The Family Home
For many families, the family home is the largest asset and the main reason they face IHT. Here are the key rules and strategies.
Residence Nil-Rate Band Requirements
To claim the £175,000 RNRB, you must:
- Leave a residence to direct descendants (children, grandchildren)
- It must have been your home at some point
- The estate must be worth less than £2 million for full RNRB
Downsizing Rules
If you sell or downsize your home before death, you may still claim RNRB if:
- You downsized on or after 8 July 2015
- The sale proceeds or smaller property plus other assets go to descendants
- You would have qualified if you'd kept the original home
Property Strategies
Don't Give Away Your Home
Many people think they can avoid IHT by giving their home to their children and continuing to live there. This doesn't work! It's a "gift with reservation" and the property stays in your estate. You'd also lose control of your own home. The only exception is if you pay full market rent.
Tenants in Common
If you own property with someone (spouse, partner), consider owning as "tenants in common" rather than "joint tenants". This allows:
- Each person to leave their share to whoever they choose
- Use of trusts for your share
- Potentially protecting the first-to-die's share from care home fees
Equity Release
Releasing equity from your home can reduce its value for IHT. The borrowed money becomes a debt (reducing your estate) or can be given away (subject to 7-year rule). But consider:
- Interest accumulates over time
- Less to leave to beneficiaries
- May affect means-tested benefits
6. IHT Planning Strategies
1. Use Your Annual Exemptions
£3,000 per year (plus previous year if unused). Over 20 years, a couple can give away £120,000 completely tax-free.
2. Regular Gifts from Income
Make regular, documented gifts from surplus income. Keep records showing income, normal expenses, and gifts. No upper limit if you can prove it.
3. Life Insurance in Trust
Take out a life insurance policy written in trust. The payout:
- Goes directly to beneficiaries, not your estate
- Doesn't count towards IHT
- Can be used to pay IHT on other assets
- Pays out quickly (no waiting for probate)
4. Trusts
Putting assets in trust removes them from your estate (after 7 years). Options include:
- Discretionary trusts: Flexible, trustees decide distributions
- Interest in possession: Named beneficiary gets income
- Bare trusts: Assets held for specific beneficiary
5. Business Investment
Invest in BPR-qualifying assets for 2+ years:
- Unlisted trading company shares (100% relief)
- AIM-listed shares (100% relief, may change 2026)
- Agricultural property
6. Charitable Giving
Leave 10%+ of your net estate to charity and the IHT rate drops from 40% to 36%. In some cases, leaving more to charity means more for your family too.
Example: Charity Rate Reduction
Estate: £1,000,000 (after nil-rate bands)
Option A: Leave nothing to charity
- IHT: £1,000,000 × 40% = £400,000
- Family receives: £600,000
Option B: Leave 10% (£100,000) to charity
- Taxable estate: £900,000
- IHT: £900,000 × 36% = £324,000
- Family receives: £576,000
- Charity receives: £100,000
Family "loses" £24,000, but charity gains £100,000. Good cause, lower tax.
7. Deed of Variation
After death, beneficiaries can redirect their inheritance within 2 years. This can optimise IHT, shift assets to the next generation, or redirect to charity.
7. Paying Inheritance Tax
When Is IHT Due?
- Due date: 6 months after the end of the month of death
- Interest charged after this date
- Must be paid before probate is granted
- Some IHT may need paying upfront to get probate
Payment Options
- Direct payment: From estate funds or beneficiary contributions
- Bank loans: Executors may borrow against estate assets
- Instalment option: Property and certain assets can be paid over 10 years
- Acceptance in lieu: HMRC may accept heritage assets instead of tax
The Instalment Option
For these assets, IHT can be paid in 10 annual instalments:
- Land and buildings
- Business or share in a business
- Shares giving control of a company
- Unquoted shares (certain conditions)
Interest is charged on the outstanding amount. If the asset is sold, remaining tax becomes due immediately.
What Executors Need to Do
- Value the estate accurately
- Complete IHT forms (IHT400 if tax is due)
- Pay any tax owed (or arrange instalments)
- Apply for probate
- Distribute estate to beneficiaries
8. Recent & Upcoming Changes
October 2024 Budget Announcements
- Nil-rate bands: Frozen until April 2030 (no change)
- Agricultural Property Relief: Will be limited from April 2026
- Business Property Relief: 100% relief capped at £1 million from April 2026
- AIM shares: May lose 100% BPR from April 2026
- Pension funds: Will be included in estates from April 2027
What This Means for Planning
- Start planning earlier - the 7-year clock is ticking
- Review business succession arrangements before 2026
- Consider spending or gifting pension funds rather than leaving them
- Life insurance becomes more important to cover IHT
Get Professional Advice
IHT planning is complex and the rules change. Consider consulting:
- A solicitor specialising in wills and probate
- A financial adviser with estate planning expertise
- An accountant for business relief matters
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James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.