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Inheritance Tax (IHT) is a charge on the estate someone leaves behind when they die. It can include property, possessions, and money. This guide explains how Inheritance Tax works in the UK and practical ways you might reduce what your family pays.
If you’re unsure about what qualifies for Inheritance Tax or want help planning, read on for clear explanations and options.
When someone passes away, their estate may be subject to Inheritance Tax if its total value is over the threshold known as the “nil-rate band.” At the moment, this threshold is £325,000. Anything above this may be taxed at 40%, though there are some important exemptions and allowances to consider.
For example, if you leave your home to direct descendants, you might benefit from the additional Residence Nil-Rate Band, which can increase the total tax-free allowance. These rules can change over time, so it’s wise to check the current figures when planning.
Inheritance Tax is usually arranged by the executor or administrator of the estate, and payment is due within six months of death. Delays can result in penalties or interest charges.
What Is The Inheritance Tax Threshold
The Inheritance Tax threshold, often called the nil-rate band (NRB), is the amount you can leave without paying IHT. Currently, it’s set at £325,000. If your estate is worth more than this, anything over the threshold could be taxed at 40%.
An Example of How Inheritance Tax could Affect You
Let’s say your estate is worth £525,000. With the current nil-rate band set at £325,000, only the amount above this threshold—£200,000—would be liable for Inheritance Tax.
At a standard IHT rate of 40%, this could mean a tax bill of £80,000. This example shows how quickly IHT can add up, even on estates that don’t seem especially large.
It’s also important to know that the nil-rate band can be transferable between spouses or civil partners. If one partner doesn’t use all their allowance, the unused portion can often be passed to the surviving partner. This is called the Transferable Nil-Rate Band (TNRB) and can significantly reduce the IHT bill for many families.
What is the Resident Nil Rate Band?
The Residence Nil-Rate Band (RNRB) is an additional allowance on top of the standard nil-rate band. It’s designed to help families pass on their main home to direct descendants without incurring as much Inheritance Tax.
If you leave your family home to your children or other direct descendants—including stepchildren, adopted, or foster children—you can claim this extra threshold. For many estates, this means increasing the tax-free limit from £325,000 to as much as £500,000.
The RNRB has been phased in over time and is now set at £175,000 per person. Like the main nil-rate band, any unused RNRB can often be transferred to a surviving spouse or civil partner, giving couples up to £1 million in combined tax-free allowances if they meet all the conditions.
Here’s a simple breakdown of the current inheritance tax thresholds and allowances:| Allowance | Amount (2024/25) | Details |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Standard tax-free threshold for all estates. |
| Residence Nil-Rate Band (RNRB) | £175,000 | Extra allowance when passing a home to direct descendants. |
| Combined Allowance (Individual) | Up to £500,000 | Using both NRB and RNRB if eligible. |
| Combined Allowance (Couple) | Up to £1 million | When both partners’ allowances are transferable. |
How to Value an Estate
To calculate the value of an estate for Inheritance Tax, start by listing all assets and working out their value at the date of death. This includes property, land, jewellery, shares, and insurance payouts.
You’ll also need to include certain gifts. If the person gave away money or assets in the seven years before they died, these gifts are usually added back into the estate for IHT purposes. Gifts given earlier may also count if the person still benefits from them in some way—for example, giving away a house but continuing to live in it rent-free. These are known as gifts.
Who has to Pay Inheritance Tax?
Inheritance Tax is usually arranged by the executor named in the will. If there’s no will, the responsibility falls to the administrator of the estate. The tax is normally paid out of the estate’s funds before the remaining assets are distributed to beneficiaries.
It’s common for IHT to be paid directly from bank or building society accounts of the deceased using special arrangements with HMRC. This can make paying the bill more straightforward for the person managing the estate.
When does Inheritance Tax have to Be Paid?
Inheritance Tax must usually be paid within six months of the end of the month in which the person died. Before paying, you’ll need to get an IHT reference number from HMRC, which typically takes a few weeks.
If the tax isn’t paid on time, HMRC can charge interest on the amount due. Executors can choose to pay IHT on certain assets, such as property, in instalments over up to 10 years—but interest will still apply to the outstanding balance. If the property is sold before the tax is paid in full, any remaining IHT and interest must be settled at that point.
It’s often a good idea for the executor to make a payment on account within six months, even if the full estate valuation isn’t complete. This can help reduce interest charges later on.
Inheritance Tax and Gifts
Some gifts are exempt from Inheritance Tax altogether. These include certain wedding gifts, small annual gifts up to £3,000 per year, and donations to registered charities. Relief may also apply to specific types of property, like business assets or farmland.
However, larger gifts made within seven years of death are usually added back into the estate’s value when calculating IHT. The amount of tax due can vary depending on how long ago the gift was made, thanks to taper relief, which reduces the tax rate over time.
| Years between gift and death | Tax paid on the gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
How to Reduce Tax
Reducing the amount of Inheritance Tax owed on your estate often involves careful planning. Common strategies include:
Using Life Insurance to Pay your Inheritance Tax
Taking out a life insurance policy can help your family pay any Inheritance Tax bill more easily. While it doesn’t reduce the IHT owed, the payout provides the funds needed to cover the tax without selling property or other assets.
To be effective, the policy should be written in trust. This keeps the payout outside your estate, avoiding further IHT, and ensures the money is paid quickly to your chosen beneficiaries. Many people use whole of life policies for this purpose, as these pay out whenever you die, as long as premiums are maintained.
These policies last for your entire lifetime and pay out whenever you die, provided you keep up with premiums. They’re often used to help cover anticipated Inheritance Tax bills. Premiums can be more expensive as you age, but many plans allow you to lock in a fixed premium and cover amount. This gives certainty over costs and planning. Check out our page for more information on whole life insurance.
If you give assets to loved ones other than your spouse, there’s a risk they’ll face an IHT bill if you die within seven years. A decreasing term policy—also known as Gift Inter Vivos Insurance—is designed to cover this specific risk. The sum insured reduces over the seven-year period in line with taper relief, matching the declining tax liability. This cover only pays out if you die within the term.
If you’d like to learn more about how this type of cover works, take a look at our full guide on Gift Inter Vivos Insurance. It explains how the cover reduces over seven years to match the potential inheritance tax liability on large lifetime gifts.Relevant Life Cover can only be taken out by a company for its employee buts it’s actually a very good way of reducing your tax liability in more ways than one. Not only can you claim it as a taxable expense for the company but as it’s written into trust it’s outside of your estate. Therefore it doesn’t form part of the estate. You can read full detail on relevant life tax treatment here.
Because these rules can be complex, it’s often best to get professional tax advice tailored to your family’s situation.
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Careful planning can help reduce the amount of Inheritance Tax your estate will pay. Here are some of the most common strategies:
You can give away up to £3,000 each year free of Inheritance Tax. Larger gifts may also fall out of your estate if you survive for seven years after giving them. Giving assets to your spouse or civil partner is generally exempt from IHT entirely, though there can be limits if they were born outside the UK.
Placing property, investments, or cash into a trust can remove them from your estate for IHT purposes. Trusts can also help you manage how and when your heirs receive their inheritance. There are various types of trust with different tax implications, so it’s important to get advice before setting one up.
Gifts to UK-registered charities are exempt from Inheritance Tax. If you leave at least 10% of your estate to charity, it can also reduce the IHT rate on the remainder from 40% to 36%. This not only helps good causes but can increase what your family receives overall.
While life insurance doesn’t reduce your IHT bill directly, it can provide funds to cover it. Policies written in trust pay out quickly and stay outside your estate for tax purposes, helping your family settle the bill without selling assets. Whole of Life policies are often used for this purpose because they guarantee a payout whenever you die.
These are just some of the strategies people use to reduce Inheritance Tax. The right approach will depend on your assets, family situation,
The standard nil-rate band is £325,000. Anything above this may be taxed at 40%, although other allowances such as the Residence Nil-Rate Band can increase the threshold.
Inheritance Tax is usually arranged and paid by the executor or administrator of the estate, using the estate’s funds before distributing the rest to beneficiaries.
Options include using your annual gift allowance, placing assets into trust, leaving part of your estate to charity, aInformation regards to taxation levels and basis of reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change. The Financial Conduct Authority do not regulate trusts.
Jody Pearmain
Jody is the Managing Director and founder of My Key Finance Ltd. He has over 22 years of experience as a mortgage & protection adviser. He is an authority within the UK business protection market & specialises in key man insurance, relevant life cover and shareholder protection. Jody has written articles for Business Matters, Business Directory and has been featured in Forbes. He is Authorised & Regulated by the Financial Conduct Authority and is CeMAP qualified.
As editor and author of our blog, Jody hopes to educate and advise people with more in-depth information & guidance on life insurance and business protection.
Jody & his wife Lori featured in the BBC programme “The House £100k Built” He is also a keen Arsenal fan and loves nothing more than watching his son & nephews play football at the weekend.
