What is Inheritance Tax (IHT)?
In the event of your passing, your family may be faced with inheritance tax (IHT), a charge on the value of your entire estate. This can include your finances, property, business interests, and personal assets (such as jewellery, cars and other valuable items).
It can also apply to certain gifts that you made during your lifetime.
Without effective planning, IHT can reduce the amount your family and loved ones (beneficiaries) receive.
Our tax team can offer hands-on assistance and practical advice covering:
- Asset protection for business and agricultural assets, the family home, nursing home costs, and trust wills.
- Planning ahead using Wills, Trusts, Enduring Power of Attorney (EPOA), and gifting.
- Advice on inheritance tax and how to plan for it.
- Completion and submission of the inheritance tax form IHT400.
- We’ll help you to register a tax-efficient Trust and advise you on its management.
- Management, completion and submission of annual Trust tax returns.
What is the inheritance tax (IHT) threshold?
In the 2024/25 tax year, IHT was applied to estates worth more than £325,000. When the value of your estate exceeds this limit, known as the 'nil-rate band' (NRB), everything over the threshold is taxed at 40% (unless you're leaving it to your surviving spouse, in which case, no IHT is payable.
IHT is levied on the worldwide assets of 'UK domiciled individuals' (people whose permanent home is in the UK). It also applies to the UK assets of people who live abroad.
What counts as my estate for IHT?
To understand whether your estate may be liable for inheritance tax (IHT), it’s important to estimate its total value. If it exceeds the current nil-rate band of £325,000, a more detailed valuation will likely be required.
A valuation should include:
- All assets you own, such as property, land, savings, investments, and cash.
- Your share of any jointly owned assets.
- Any assets held in trust where you’re a beneficiary.
- Certain life insurance policies – unless written in trust.
- Gifts made within the past seven years – including money, valuables, or contributions to accounts like a Junior ISA. Some small gifts may be exempt, and taper relief may apply to gifts made more than three years before death.
- Overseas assets you hold.
Once your total assets are added together, any outstanding debts – such as mortgages or loans – are deducted to calculate the net value of your estate. This figure helps determine whether inheritance tax may be payable and at what level.
When do you pay Inheritance Tax?
IHT must usually be paid within six months of your death and, if payment is delayed, HMRC may charge interest. In some cases – such as where the estate includes property – it may be possible to pay in instalments, particularly if the asset needs to be sold to cover the tax due.
It must also be paid before any beneficiaries of your estate can receive the assets left to them. This is to ensure the funds are available to pay the correct amount of IHT.
Does a spouse pay Inheritance Tax?
Being married or in a civil partnership isn’t just a personal commitment, but it can also provide significant inheritance tax (IHT) advantages.
When you leave your estate to your spouse or civil partner, inheritance tax (IHT) is not usually payable on your death. In addition, your full nil-rate band – currently £325,000 – will remain unused. This can then be transferred to your partner, effectively doubling their IHT allowance to £650,000 in the event of their own death.
To benefit from this, the legal personal representatives of the surviving partner must formally claim the unused allowance when the second death occurs. This can significantly reduce the IHT due on assets passed to children, family members, or other beneficiaries.
Is there any IHT on gifts?
Giving money or assets to your beneficiaries while you're still alive is one of the most common strategies to reduce Inheritance Tax. However, there are rules around what you can give, and when you can give it.
When the value of your estate is calculated, it will include the total value of certain gifts you made in the seven years before your death, or at any time if you continued to benefit from the gifted property thereafter (these are known as 'gifts with reservation of benefit').
Broadly, lifetime gifts tend to fall into three main categories:
1. Exempt transfers
Exempt transfers are gifts you can legitimately make at any time, without incurring any inheritance tax. These include:
- Gifts of any value between spouses or registered civil partners.
- Annual gifts of up to £3,000 in each tax year.
- Regular payments out of your income. These must come from surplus income and not affect your standard of living. There’s no fixed limit, but the gifts must be part of a regular pattern and affordable based on your after-tax income.
- Wedding gifts or civil partnership ceremony gifts (you can give £5,000 to your children, £2,500 to grandchildren or £1,000 to anyone else).
- Small gifts of up to £250 per person, per year (as long as the recipient hasn’t also received another exempt gift, such as part of the £3,000 allowance).
- Gifts to charities, political parties or national organisations (these are tax-free during your lifetime, and when you leave money to charity in your will).
2. Potentially exempt transfers (PETs)
Potentially Exempt Transfers (PETs) are gifts made to individuals that exceed the usual inheritance tax exemptions.
There is no inheritance tax to pay at the time the gift is made. However, if you pass away within seven years and the value of the PET causes your estate to exceed the nil-rate band, IHT may become payable.
If the gift was made less than three years before your death, the full 40% IHT rate could apply. For gifts made between three and seven years before death, a sliding scale known as taper relief may reduce the amount of tax due.
3. Chargeable lifetime transfers (CLT)
A gift may be treated as a Chargeable Lifetime Transfer (CLT) when it is not made outright – for example, when assets are placed into a flexible or discretionary trust.
If the total value of your CLTs over the previous seven years is within the available nil-rate band (currently £325,000), no immediate inheritance tax is due. However, if the cumulative value of CLTs exceeds that threshold, a lifetime IHT charge of 20% applies to the excess.
Chargeable lifetime transfers will usually fall outside of your estate for IHT purposes if you survive for at least seven years after the CLT was made. However, if you die within seven years of making the CLT, then its value will be part of your estate.
Are there any IHT reliefs?
Even though Inheritance Tax is payable on the total value of your estate, relief is available on certain assets. The types of relief available are:
- Business Relief (BPR) – May reduce the taxable value of a business or its qualifying assets when passed on.
Agricultural Relief (APR) – May reduce the IHT payable on the transfer of eligible agricultural property.
Both reliefs can significantly reduce the IHT burden in the right circumstances. However, changes introduced in the Autumn 2024 Budget have impacted how much BPR and APR can be claimed.
How does Estate Planning save IHT?
Inheritance tax (IHT) can significantly reduce the value of what you leave behind. Anything above the current nil-rate band of £325,000 may be taxed at 40%.
Depending on your circumstances, there are a number of ways to minimise the IHT you may have to pay, including:
- Making lifetime gifts to family or friends
- Placing assets into a trust for future beneficiaries
- Making use of the nil-rate band and other reliefs, such as Business Relief (BPR) and Agricultural Relief (APR)
- Donating to charity
- Placing life insurance or pension policies into trust, so they fall outside your taxable estate
How we can help
Planning ahead for inheritance tax can make a significant difference to how much of your estate is passed on to your loved ones.
By understanding the various strategies available, such as gifts, trusts, and using allowances, you can minimise the tax burden on your estate.
Proactive and informed planning will ensure that your wealth is distributed according to your wishes, with the least possible financial strain on your heirs.
If you would like to learn more about IHT and succession planning, please contact our Tax team.