What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money. IHT is charged on the part of your estate that’s above the tax-free threshold which is currently £325,000. The estate also includes certain gifts including partially exempt transfers made in the seven years before death. Ben need to clarify this wording
What is the IHT Threshold and How Much is Inheritance Tax?
If the value of your estate is above the £325,000 threshold (known at the nil rate band), the part of your estate above it might be liable for tax at the rate of 40%.
So, if your estate is worth £625,000 and your Nil Rate Band (NRB) is £325,000, the tax charged will be on £300,000 (£625,000 – £325,000). The tax would be £120,000 (40% of £300,000).
However. If the value of your estate is below the £325,000 NRB or you leave everything (even if this is more than £325,000) to your spouse or civil partner, then there will normally be no IHT due on your estate.
You may also choose to leave your entire estate to a Charity or Community Amateur Sports Club and there will also be no IHT due.
Passing on an un-used Nil Rate Band
The NRB is fixed at £325,000 until 2026 (at the time of writing) but can be increased if you are widowed or a surviving civil partner and your former partner passed their entire estate to you at the time of their passing. This can increase the amount of nil rate band available up to £650,000 (£325,000 x 2).
Passing on a Home
There is a further relief (in addition to the nil rate band) that can increase your tax free threshold (from £325,000 to £500,000) called the Residence Nil Rate Band (RNRB). If you leave your home to a direct descendent (such as children or grandchildren) then the RNRB can be claimed further increasing the tax free threshold of an estate. The RNRB can also be passed onto a surviving spouse or civil partner in the same way as the NRB mentioned earlier. Please note there is a tapered withdrawal of the RNRB if the value of the overall estate exceeds £2 million.
When combining the potential allowances available it is possible for a surviving spouse or civil partner to have total allowances of £1 million to offset against the value of their estate:
NRB: £325,000 x 2 = £650,000
RNRB: £175,000 x 2 = £350,000
Total: £650,000 + £350,000 = £1 mllion
Paying IHT
An estate first needs to be valued by listing all of its assets and calculating their value at the date of death and then deducting any debts and liabilities.
Please note that from April 2027 most unspent pension pots and death benefits from a pension will also count as part of your estate when you die. This means the value of your pension will be combined with other assets to determine if your estate owes Inheritance Tax.
As well as valuing all of the estates assets any gifts made by the deceased individual within the 7 years prior to their passing will also need to be included in the value of the estate. These are known as Potentially Exempt Transfers and may be partially subject to a time based taper relief. Ben to check this wording.
You’ll also need to include any gifts given before this period if the person who died continued to benefit from the gift. (Gifts with Reservation – GWR).
If after calculating the value of the estate and offsetting any available tax free allowances (as mentioned earlier) leaves part of the estate that is liable to IHT then this is calculated at 40%.
Any IHT due must be paid by the end of the sixth month following the persons passing. After this point HMRC will start charging interest.
The executors can choose to pay the tax on certain assets, such as property, by instalment over ten years. However, the outstanding amount of tax will still get charged interest.
How can I best avoid paying IHT?
As you will have gathered above, Inheritance Tax is a complicated and potentially very expensive tax. There are various ways IHT can be avoided or reduced and it is important to have a comprehensive assessment of the potential total IHT liability before various planning measures are considered.
If you are concerned that an IHT liability is likely to occur there are several different ways that can be considered to try and reduce the value of an estate as mentioned earlier in this article such as leaving a legacy to Charity or leaving your estate to your spouse or civil partner thus benefitting from combined tax free allowances.
In addition to the above you may wish to consider making gifts from your estate in order to reduce its value. For example, you can make regular cash gifts each tax year of £3,000 (known as the IHT annual exemption) tax free to help reduce the estate’s value.
You can also make larger gifts of cash or assets such as property and if you survive 7 years following the gift, the value of it will leave you estate entirely and not be subject to IHT.
Care and advice should be taken if gifting assets such as property as there will likely be Capital Gains Tax consequences to consider – which may mean that this is not something that should be pursued.
Relief might also be available on certain other types of property, such as farms and business assets in the form of Agricultural Property Relief (APR) and Business Property Relief (BPR). Under current rules APR is available to offset against the value of land occupied for the purposes of agriculture, together with appropriate buildings and farmhouses. Relief can be given at either 50% or 100% depending on whether certain conditions have been met. BPR works in the same way in respect of relevant business property such as a sole trader business and shares giving control of unquoted trading companies. Subject to various conditions relief at 50% and 100% is available depending on the type of asset concerned. Both of these relief’s work in the same way and when applied can potentially mean that qualifying assets are not subject to IHT in a deceased person’s estate.
Please be aware that under current proposals by the Government, the rules governing both APR and BPR will be changing from 6 April 2026. The amount of relief available will be limited from this date with only the first £1 million of combined (if applicable) APR and BPR covered by 100% relief and any value above this amount receiving relief at 50%. These new rules also apply to lifetime gifts on or after 30 October 2024 if the donor passes away on or after 6 April 2026 but within seven years of the gift.
How can we help?
Navigating IHT can be complex as there are many different factors to consider. If you believe that you may have an estate that could potentially be subject to IHT or if you would like some further information on IHT in general please contact us and we would be happy to help.
Whether it is us or another professional advisor, advice should always be sought to ensure you fully understand the value of your estate and the potential IHT implications of this as well as the interaction with other taxes such as Capital Gains Tax. We can help and advise on the best ways to mitigate this for you using methods that suit your circumstances and needs.
Please note that the information contained in this article is correct as of writing in April 2025, however, tax law changes regularly and therefore you should always check that the advice you obtain is up to date and accurate.