UK Inheritance Tax Planning: Complete Calculator Guide 2025/26

What is Inheritance Tax (IHT)?

Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. It's one of the UK's most controversial taxes, often called the "death tax," and can significantly reduce the wealth passed to your beneficiaries if proper planning isn't undertaken.

Despite its reputation, IHT affects a relatively small proportion of estates. According to HMRC, only about 4-5% of UK estates pay inheritance tax. However, rising property prices mean more estates are crossing the threshold, making IHT planning increasingly important for middle-class families.

Who Pays Inheritance Tax?

IHT is typically due if the total value of your estate exceeds £325,000 (the nil-rate band). However, several exemptions and reliefs can substantially increase this threshold:

• Spouse/Civil Partner Exemption: Transfers between spouses are completely tax-free with no limit
• Residence Nil-Rate Band: An additional £175,000 when passing your home to direct descendants
• Charity Exemption: Gifts to UK registered charities are exempt
• Transferable Allowances: Unused allowances can be transferred to a surviving spouse

The estate's executor is responsible for paying any IHT due, typically within six months of death, though they can pay in instalments for certain assets like property.

Understanding the Nil-Rate Band (NRB)

The nil-rate band is the threshold below which no inheritance tax is charged. For 2025/26, this stands at £325,000, a figure that has been frozen since 2009 and will remain frozen until at least April 2028.

How the NRB Works

Any value in your estate up to £325,000 can be passed on tax-free. Everything above this threshold is typically taxed at 40%. The nil-rate band applies to your entire estate, not individual gifts or bequests.

Transferable Nil-Rate Band

One of the most valuable IHT planning tools is the ability to transfer unused nil-rate band between spouses. If your spouse or civil partner died without using all of their £325,000 allowance, you can claim the unused portion, potentially giving you up to £650,000 tax-free.

Residence Nil-Rate Band (RNRB)

Introduced in April 2017, the Residence Nil-Rate Band provides an additional allowance of up to £175,000 when you pass your main residence to direct descendants (children, grandchildren, or their spouses).

RNRB Qualifying Conditions

To qualify for the RNRB, you must meet these criteria:

• Your estate includes a residence you've lived in
• You leave the property to direct descendants
• Your estate is valued at £2 million or less

The £2 Million Taper

The RNRB is reduced by £1 for every £2 your estate exceeds £2 million. This means it disappears completely for estates worth £2.35 million or more (assuming the full £175,000 RNRB).

Downsizing and the RNRB

Special rules allow you to claim the RNRB even if you downsize or sell your home, provided you pass assets of equivalent value to direct descendants. This prevents people from losing the benefit if they move to a smaller property or into care.

The 7-Year Rule and Lifetime Gifts

Making gifts during your lifetime is one of the most effective IHT planning strategies. The "7-year rule" is central to understanding how gifts are taxed.

How the 7-Year Rule Works

If you give away assets and survive for 7 years, those gifts are completely exempt from IHT. If you die within 7 years, the gifts may be taxable, but taper relief reduces the tax owed.

Annual Gift Exemptions

Certain gifts are immediately exempt, regardless of when you die:

• Annual Exemption: £3,000 per tax year (can carry forward one unused year)
• Small Gifts: £250 per person to unlimited recipients
• Wedding Gifts: £5,000 to children, £2,500 to grandchildren, £1,000 to others
• Regular Gifts from Income: Unlimited, if from surplus income and don't affect your living standard

Business Property Relief (BPR) and Agricultural Relief

Two valuable reliefs can reduce IHT on specific types of assets to zero:

Business Property Relief

BPR provides up to 100% relief on qualifying business assets, including:

• A business or interest in a business
• Shares in an unlisted company
• Shares controlling more than 50% of a listed company
• Land, buildings, or machinery owned and used in a business

You typically need to have owned the business assets for at least 2 years before death. BPR at 100% applies to most trading businesses, while 50% relief applies to certain other business assets.

Agricultural Property Relief (APR)

APR provides up to 100% relief on agricultural property, including:

• Agricultural land
• Pasture
• Woodland
• Agricultural buildings

The property must have been owned and occupied for agricultural purposes for at least 2 years (or owned for 7 years and occupied by someone else for agriculture).

Trusts and IHT Planning

Trusts are powerful estate planning tools that can help manage IHT liability while maintaining some control over assets.

Types of Trusts for IHT Planning

1. Bare Trusts
Simple trusts where beneficiaries have an immediate right to assets. Gifts into bare trusts are potentially exempt transfers subject to the 7-year rule.

2. Interest in Possession Trusts
One person (life tenant) has the right to income, while another (remainderman) inherits the capital later. Can be useful for second marriages.

3. Discretionary Trusts
Trustees have discretion over distributions. Subject to IHT charges: 20% on entry (if over NRB), 10-yearly charges of up to 6%, and exit charges.

4. Loan Trusts
You lend money to a trust; the loan remains in your estate, but investment growth is outside. Useful for immediate IHT planning without giving up access to capital.

When to Consider Trusts

• Beneficiaries are too young to manage assets
• You want to protect assets from divorce or creditors
• Complex family situations (second marriages, disabled beneficiaries)
• You need flexibility in how assets are distributed
• You want to reduce your estate gradually while maintaining some control

IHT Planning Strategies

1. Spend and Enjoy

The simplest strategy: use your wealth during your lifetime. Holidays, home improvements, and supporting family during your lifetime reduces your estate naturally.

2. Make Regular Gifts

Maximise annual exemptions (£3,000) and small gifts (£250). Consider regular gifts from surplus income which are immediately exempt.

3. Life Insurance in Trust

A life insurance policy written in trust pays out to beneficiaries without forming part of your estate, providing liquidity to pay IHT bills without forced asset sales.

4. Pension Contributions

Pensions are normally outside your estate for IHT. Since pension freedoms (2015), you can pass pensions to beneficiaries tax-efficiently, especially if you die before age 75.

5. Charitable Giving

Leaving 10% or more of your net estate to charity reduces the IHT rate from 40% to 36% on the remainder, while supporting causes you care about.

6. Equity Release

Releasing equity from your home reduces your estate value. Use funds for gifts or spending. However, consider the impact on inheritance for beneficiaries and ensure it makes financial sense.

7. Deed of Variation

After death, beneficiaries can redirect inheritances within 2 years, potentially optimising IHT. For example, redirecting assets to grandchildren or charity.

Common IHT Planning Mistakes to Avoid

1. Leaving Planning Too Late

The 7-year rule means early planning is essential. Starting in your 60s gives time for gifts to become exempt.

2. Gifts with Reservation of Benefit

Giving away your home but continuing to live there rent-free doesn't work. The asset remains in your estate.

3. Ignoring the RNRB

Ensure your will leaves your home to direct descendants to claim the additional £175,000 allowance.

4. Poor Record Keeping

Keep detailed records of all gifts with dates and values. Executors need this information to calculate IHT correctly.

5. Not Reviewing Your Will

Life changes (marriage, divorce, births, property purchases) should trigger will reviews to ensure IHT efficiency.

6. Overlooking Transferable Allowances

If your spouse died without using their full NRB or RNRB, ensure you claim the transfer. You need to apply using form IHT402.

7. DIY Complex Planning

While simple gifting is straightforward, trusts and complex arrangements need professional advice. The cost of advice is far less than the cost of mistakes.

Real-World IHT Scenarios

Scenario 1: The Family Home

Situation: Married couple, main residence worth £600,000, savings and investments £200,000. First death in 2020, second death in 2024. Children inherit everything.

Result: No IHT due because combined allowances exceed estate value.

Scenario 2: The Second Marriage

Situation: Widow remarries. Estate £900,000. Wants to ensure children from first marriage inherit, but also provide for new spouse.

Solution: Interest in possession trust. New spouse gets income from investments for life, children inherit capital on spouse's death. This uses available NRB now while providing for spouse.

Scenario 3: The Business Owner

Situation: Business worth £3 million, other assets £500,000. Wants to pass business to son, other assets to daughter.

Planning Tip: Son receives business tax-free (BPR). Take out £70,000 life insurance policy in trust to cover IHT on other assets, ensuring daughter receives full £500,000.

When to Seek Professional Advice

While basic IHT planning can be done yourself, consider professional advice if:

• Your estate exceeds £500,000 (or £1 million for couples)
• You own a business or agricultural property
• You have complex family situations (second marriages, disabled beneficiaries)
• You're considering trusts or complex gifting strategies
• You have overseas assets or beneficiaries abroad
• You want to use BPR-qualifying investments

Professional advisers include:

• Solicitors: For wills, trusts, and legal structures
• Financial Advisers: For investment strategies, BPR schemes, and life insurance
• Accountants: For business valuations and tax calculations
• Estate Planners: For comprehensive estate planning strategies

IHT Planning Checklist

Use this checklist to ensure you've covered the basics:

• ☐ Created or updated your will in the last 3 years
• ☐ Calculated your estimated estate value
• ☐ Understood your NRB and RNRB entitlements
• ☐ Checked for transferable allowances from deceased spouse
• ☐ Maximised annual gift exemptions (£3,000/year)
• ☐ Considered regular gifts from surplus income
• ☐ Reviewed life insurance options written in trust
• ☐ Ensured your home passes to direct descendants (for RNRB)
• ☐ Explored BPR or APR if you own business/agricultural assets
• ☐ Maintained records of all gifts made
• ☐ Considered pension contributions to reduce estate
• ☐ Reviewed charitable giving opportunities
• ☐ Sought professional advice if estate is complex or valuable
• ☐ Discussed your plans with beneficiaries to avoid surprises
• ☐ Appointed trusted executors who understand your wishes

Conclusion

Inheritance tax planning isn't just for the wealthy. With the nil-rate band frozen at £325,000 since 2009 and UK house prices rising, more middle-class families face IHT bills on family homes and modest savings.

The good news is that effective planning can dramatically reduce or eliminate IHT:

• Married couples can shield up to £1 million (£650,000 NRB + £350,000 RNRB)
• Early gifting under the 7-year rule removes assets from your estate
• Business and agricultural reliefs can provide 100% exemption
• Life insurance in trust provides liquidity without increasing IHT
• Charitable giving reduces rates while supporting good causes

The key is to start early. The 7-year rule means that IHT planning in your 60s and 70s is far more effective than waiting until your 80s. Even simple steps like using annual exemptions and making regular gifts can save thousands.

Remember, IHT rules are complex and change frequently. What works today may not work tomorrow, so review your plan regularly and seek professional advice for complex situations.