Inheritance Tax (IHT) in the UK is a critical yet often misunderstood part of estate planning. Whether you’re planning your own estate or expecting an inheritance, knowing how the system works can help you legally reduce the tax burden and protect your assets.
In this guide, we’ll cover key areas including inheritance tax thresholds, reliefs, gifting rules, and expert tips to minimize liability.
1. What Is Inheritance Tax?
Inheritance Tax is a tax on the estate (money, property, and possessions) of someone who has died.
When Does It Apply?
IHT is only charged if the value of the estate exceeds the current threshold, known as the nil-rate band.
2024–25 Thresholds
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£325,000: Standard tax-free threshold
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£500,000: If the estate is passed to children or grandchildren and includes a main residence (residence nil-rate band)
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Anything above this is taxed at 40%
2. Who Pays Inheritance Tax?
Usually, the executor of the will or administrator of the estate pays the tax out of the deceased’s assets before distributing inheritance.
If the estate involves gifts or trusts, the recipients may also be responsible for paying tax under certain conditions.
3. Legal Ways to Reduce Inheritance Tax
A. Make Use of Allowances
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Annual gift allowance: You can give away up to £3,000 per year tax-free.
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Small gifts exemption: Gifts of up to £250 per person are tax-free.
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Wedding gifts: You can give tax-free gifts on marriage (£5,000 to children, £2,500 to grandchildren).
B. Gifting Assets Early
Gifts given more than 7 years before death are usually exempt from IHT. This is called the 7-year rule. If you die within 7 years, a sliding scale known as taper relief may reduce the tax owed.
C. Use of Trusts
Placing assets in certain types of trusts can remove them from your estate, reducing IHT liability. This is a complex area and usually requires professional financial planning.
D. Leave Money to Charity
Leaving 10% or more of your estate to charity can reduce the IHT rate on the rest of your estate from 40% to 36%.
4. Inheritance Tax on Property
Your family home is often the largest part of your estate.
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Main residence nil-rate band: An extra £175,000 tax-free threshold applies if you leave your home to direct descendants.
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Transferrable allowance: Married couples can combine allowances, meaning up to £1 million can be passed tax-free.
If your total estate exceeds £2 million, tapering applies to reduce the residence nil-rate band.
5. When Should You Get Inheritance Tax Advice?
Key Scenarios:
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Your estate exceeds £325,000
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You own multiple properties or overseas assets
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You’ve made large gifts in the past 7 years
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You want to set up a trust
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You plan to leave assets to stepchildren or non-relatives
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You’re concerned about liquidity to pay the IHT bill
Working with a qualified estate planner or tax adviser can help you structure your estate tax-efficiently and legally.
6. Common Misconceptions About Inheritance Tax
“I don’t need to worry – my estate is small.”
You might be surprised how quickly your estate can exceed the threshold, especially with rising property values.
“Gifts are always tax-free.”
Only within certain limits. Larger gifts could be taxable if given within 7 years of death.
“Only the wealthy pay inheritance tax.”
Thousands of ordinary families are affected, especially in London and the South East where home values are higher.
7. Inheritance Tax Planning Tips
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Start estate planning early – ideally in your 50s or 60s.
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Document all gifts clearly to avoid future disputes or unexpected taxes.
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Review your will and beneficiaries every few years.
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Use life insurance policies written in trust to cover potential IHT bills.
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Explore business property relief or agricultural relief if applicable.
Inheritance Tax can seem overwhelming, but with the right knowledge and planning, it’s possible to reduce or even eliminate your liability legally. By understanding thresholds, exemptions, and planning tools, you can ensure your estate is passed on according to your wishes – not swallowed by taxes.
Check Our Tax Reclaims Guide