Inheritance tax planning helps your family keep more of what you leave behind. This guide walks through the UK thresholds for 2025/26, the reliefs and exemptions available, and the practical steps (gifting, trusts, life insurance, and using a spouse’s allowances) that can bring an estate’s IHT bill down or remove it entirely.

Key Points

• Inheritance Tax is charged at 40% on the part of an estate above £325,000. This nil-rate band is frozen until April 2031.
• Estates that pass a main home to children or grandchildren get an extra £175,000 residence nil-rate band, lifting the threshold to £500,000 per person.
• Married couples and civil partners can combine allowances and pass on up to £1 million tax-free where the conditions are met.
• Gifts, trusts, life insurance written in trust, and charitable giving are the main tools used to reduce a liability.
• Rules around business property, agricultural property, and pensions are changing in 2026 and 2027, so plans drawn up a few years ago may need a review.

What is Inheritance Tax (IHT)?

Inheritance Tax is a tax on the value of someone’s estate when they die. The estate covers property, savings, investments, personal possessions, and any business interests, less debts and funeral costs.

For people who are long-term UK residents, IHT applies to assets worldwide. For others, it usually only applies to UK assets.

Beneficiaries don’t pay tax on what they inherit. They may, however, pay income tax on rent or interest the inherited assets later produce, or capital gains tax on an inherited property if they sell it. A spouse or civil partner can inherit the whole estate free of IHT, which is the single biggest exemption in the system.

Because the £325,000 threshold has been frozen since 2009 while house prices have climbed, IHT now affects far more middle-income families than it once did. Early planning is worthwhile for anyone whose home and savings together approach the threshold.

Thresholds: Nil-Rate Band and Residence Nil-Rate Band

The standard nil-rate band for 2025/26 is £325,000. Anything above that is taxed at 40%.

If you pass a home (or share of one) you have lived in to a child, grandchild, or other direct descendant, the residence nil-rate band adds another £175,000. That lifts the personal threshold to £500,000.

A surviving spouse or civil partner can also inherit any unused portion of their late partner’s nil-rate band and residence nil-rate band. In practice this means a couple can pass on up to £1 million tax-free when a qualifying home is left to direct descendants.

The residence nil-rate band tapers away on larger estates. For every £2 the estate exceeds £2 million, £1 of the band is lost. It disappears entirely once the estate reaches £2.35 million.

Both bands are now frozen until April 2031.

What’s Your Estate Worth for IHT?

Valuing the estate is the first practical step. It involves:

• Listing all assets at their open-market value on the date of death, including the home, other property, bank accounts, investments, pensions (rules changing in 2027, see below), business interests, vehicles, jewellery, and art.
• Deducting liabilities such as mortgages, loans, credit-card balances, and funeral expenses.
• Recording any gifts made in the seven years before death, which may need to be added back in.

For straightforward estates, this can be done by the executor. For estates with property, business assets, or trusts, a professional valuation is usually needed and the process can take several months.

What’s Included in an Estate

The full list of assets typically caught by IHT includes:

• Property: the family home plus any rental, holiday, or overseas property.
• Investments: shares, bonds, funds, and investment accounts.
• Cash: current accounts, savings, ISAs, and premium bonds.
• Personal belongings: jewellery, art, antiques, vehicles, and collectibles.
• Business assets: shares in a private company or a sole-trader business.
• Life insurance: counts as part of the estate unless written in trust.

Some assets sit outside the estate or attract relief: gifts to a spouse or civil partner, gifts to UK charities, and qualifying business or agricultural assets (within the limits described below).

Who Pays IHT, and When?

The executor named in the will pays the IHT from the estate’s funds. If there’s no will, the administrator handles it. Tax is due six months after the end of the month in which the person died, and HMRC charges interest after that.

For property and certain other illiquid assets, IHT can be paid in ten annual instalments, but interest still runs on the outstanding balance.

Gifts made in the seven years before death can also pull tax back into the picture, which is why timing matters when planning.

How to Reduce an IHT Liability

There’s no single trick that removes IHT, but a combination of the methods below usually brings the bill down significantly. The earlier the planning starts, the more options stay open.

Gifting Assets

Giving money or assets away during your lifetime takes them out of your estate, provided you live for seven years afterwards. These are known as Potentially Exempt Transfers (PETs).

Useful allowances that sit alongside the seven-year rule:

• Annual exemption: £3,000 a year can be given away IHT-free. Any unused portion can be carried forward one tax year.
• Small gifts: up to £250 per person per year to as many people as you like.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
• Regular gifts from income: payments made out of surplus income (not capital) that don’t affect your standard of living. These are immediately exempt with no seven-year wait, but you need clear records.
• Gifts to a spouse, civil partner, or UK charity: fully exempt with no limit.

If a larger gift is made and the donor dies within seven years, the gift is brought back into the estate. Taper relief reduces the tax on the gift itself if death occurs between three and seven years after it was made. Taper relief reduces the tax on the gift, not the nil-rate band itself.

Chargeable lifetime transfers, usually gifts into certain trusts, follow different rules and can attract an immediate 20% charge on amounts above the nil-rate band.

Using Trusts

Setting up a trust lets you move assets out of your estate while keeping a say over how and when beneficiaries receive them. Common reasons to use one include protecting money for young children, ring-fencing assets in a second marriage, or supporting a vulnerable relative.

Once assets are in a trust you generally can’t get them back, and trusts carry their own tax rules, including periodic and exit charges every ten years for many discretionary trusts. The seven-year rule still applies to the original transfer in.

Equity Release

Equity release lets homeowners aged 55 or over draw tax-free cash from their property while continuing to live in it. The borrowing (plus rolled-up interest) reduces the value of the estate and therefore the IHT bill.

It also reduces what your beneficiaries inherit and is expensive over the long term because of compound interest, so it’s worth comparing against gifting from other assets and getting independent advice before signing up.

Using the Residence Nil-Rate Band

To claim the £175,000 residence nil-rate band, three conditions need to be met:

• The property must have been your residence at some point. It doesn’t have to be your final home, as downsizing rules allow the relief to be preserved.
• It must be left to direct descendants, including children (step, adopted, and foster), grandchildren, or their spouses.
• The estate must be under the £2 million taper threshold.

The relief is claimed by the executor on form IHT435 and isn’t applied automatically.

IHT Reliefs and Exemptions

Business Relief (sometimes called Business Property Relief) currently gives 100% relief on shares in unlisted trading companies and on a sole trader’s or partnership’s business, provided the assets have been held for at least two years.

Agricultural Relief applies to qualifying farmland and farm buildings on similar terms.

From April 2026 these reliefs are being capped. The first £1 million of combined qualifying business and agricultural assets will keep 100% relief; anything above that figure will get 50% relief, producing an effective 20% IHT rate on the excess. AIM-listed shares are due to be capped at 50% relief from the same date. The £1 million allowance is transferable between spouses and civil partners.

Charitable giving: anything left to a UK charity is fully exempt. If 10% or more of the net estate is left to charity, the rate on the rest of the estate drops from 40% to 36%.

Pensions are outside the estate for IHT under current rules. This is changing: most unused pension funds and death benefits will be brought into the IHT net from April 2027, which is a significant shift for anyone using a pension as a wealth-transfer tool.

Life Insurance to Cover an IHT Bill

A whole-of-life policy written in trust is a common way to cover a known IHT liability. Because the policy sits in trust, the payout doesn’t form part of the estate and goes to the beneficiaries quickly, without waiting for probate. They then use it to pay HMRC.

Two points matter:

• Choose the trust structure carefully, as it usually can’t be changed later.
• If the policy isn’t written in trust, the payout falls into the estate and itself gets taxed at 40%, which defeats the purpose.

Premiums on a whole-of-life policy rise sharply with age and health issues, so this works best when arranged early.

Married Couples and Civil Partners

Anything left between spouses or civil partners is free of IHT. Any nil-rate band the first partner doesn’t use transfers to the survivor, as does any unused residence nil-rate band.

Where the combined estate stays under £2 million and the family home passes to children or grandchildren, a couple can pass on up to £1 million with no IHT to pay.

For unmarried couples, none of these spouse rules apply. A will and a structured plan become especially important.

Planning Your Estate

Effective estate planning rests on a few foundations:

• A current will: without one, the intestacy rules decide who inherits, which often produces results no one wanted and can waste reliefs.
• An up-to-date list of assets and beneficiaries: kept somewhere the executors can find it.
• A lasting power of attorney: separate from IHT, but part of the same conversation, since it lets someone act for you if you lose capacity.
• A regular review: Budgets change rules, families change shape, and asset values change. A plan written five years ago may no longer fit.

Keeping Records and Getting Advice

Detailed records of lifetime gifts (dates, amounts, recipients, and whether they came from income or capital) make the executor’s job much easier and help HMRC accept exempt-gift claims, particularly for regular gifts out of income.

Where the estate includes a business, farmland, trusts, foreign property, or a possible IHT bill in the six-figure range, professional advice usually pays for itself. A solicitor handles the will and probate, a financial adviser models the gifting and insurance options, and an accountant values the business interests and runs the IHT calculation.

Weighing Up Gifts

Gifting is powerful but isn’t risk-free:

• Affordability: once a gift is made, you can’t ask for it back. Make sure you keep enough capital and income for your own needs, including potential care costs.
• Which assets to give: cash is simple; gifting property or shares can trigger capital gains tax now in exchange for a lower IHT bill later.
• Timing: the seven-year clock only starts when the gift is made, so earlier is better.
• Records: keep them. Executors and HMRC will rely on them.

Conclusion

IHT planning is about combining the allowances and reliefs that already exist (the £325,000 nil-rate band, the £175,000 residence nil-rate band, the spouse exemption, the seven-year gifting rule, business and agricultural reliefs, the charity rate, and life insurance in trust) into a plan that fits your family.

With the nil-rate bands frozen until 2031, business and agricultural reliefs being capped from April 2026, and pensions coming into scope in April 2027, reviewing your plan now is more important than it has been for some time.

Frequently Asked Questions

What is Inheritance Tax?

Inheritance Tax is the tax HMRC charges on the value of someone’s estate when they die. It reduces what the beneficiaries actually receive.

What is the Inheritance Tax threshold for 2025/26?

The standard nil-rate band is £325,000. Estates that include a main home left to direct descendants can claim an extra £175,000 residence nil-rate band, taking the threshold to £500,000 per person.

How does the nil-rate band work?

Each person has a £325,000 nil-rate band. Only the value of the estate above that figure is taxed, normally at 40%. Any unused portion passes to a surviving spouse or civil partner.

Who is responsible for paying Inheritance Tax?

The executor named in the will, or the administrator if there is no will, pays the IHT from the estate before assets are passed to beneficiaries. Payment is due six months after the end of the month of death.

What type of life insurance helps cover Inheritance Tax?

A whole-of-life policy written in trust is the usual choice. The payout sits outside the estate, isn’t itself taxed, and reaches the beneficiaries quickly so they can settle the HMRC bill.