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What is Inheritance Tax?
Inheritance Tax is a tax on the estate of someone who has died, including all property, savings, investments, possessions, historic gifts and money. Whether tax is due depends on the overall value and who you leave things to.
The standard Inheritance Tax rate is currently 40%.
In some circumstances, certain assets may qualify for a reduced rate of 36%, 20% or even be exempt altogether. Tax is charged only on the portion of your estate that exceeds the tax-free threshold, known as the nil-rate band, which is currently £325,000. This threshold has remained unchanged since 2009 and is set to stay frozen until at least 2030.
A brief explanation of the tax-free allowances
The nil-rate band. This is the standard tax-free allowance of £325,000 that applies to everyone. It’s the amount of your estate that can pass on without Inheritance Tax.
The residence nil-rate band. An extra allowance of up to £175,000 may apply if you leave your main home to your children or other direct descendants.
There’s normally no Inheritance Tax to pay if either:
the value of your estate is below the £325,000 threshold, or
you leave everything above the £325,000 threshold to your spouse, civil partner, a charity, museum, university, or a community amateur sports club
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced that from 6 April 2027, unused pension savings will be included in your estate for IHT purposes. The full details of how this will work are still to be confirmed. |
Who is responsible for paying it?
If you’ve named someone in your will as an executor, they’ll take care of the paperwork, including any tax due. If there’s no will, an administrator, usually a family member, will be appointed to manage your estate. They’ll work out if any Inheritance Tax needs to be paid and arrange payment from your estate.
Leaving money to a spouse or civil partner
Anything you leave to a UK-based spouse or civil partner is exempt from Inheritance Tax, regardless of value. You can also pass on any unused nil-rate band and residence nil-rate band to them, potentially allowing a couple to pass on up to £1 million tax-free.
Passing on your home
Since 2017, you can increase your tax-free threshold by up to £175,000 (this amount is frozen until 2030) if you leave your main residence to your children, grandchildren, or other direct descendants. This additional allowance is called the residence nil-rate band. If your spouse or civil partner passed away before you, any unused portion of their residence nil-rate band can also be transferred to you, regardless of whether their name was on the property.
The residence nil-rate band can be reduced or lost altogether if your estate is worth more than £2 million, if your main residence is valued below £175,000, if you do not have direct descendants, or if you choose not to leave your property to them.
Gifts and exemptions
You can make certain gifts during your lifetime that are exempt from Inheritance Tax. These include:
Gifts to your spouse or civil partner
Donations to registered charities
Regular gifts from surplus income
Small gifts of up to £250
Up to £3,000 in annual gifts
Wedding gifts (up to £5,000 for a child, £2,500 for a grandchild, £1,000 for others)
Understanding taper relief
If you give away assets and die within seven years, the value of those gifts may still count as part of your estate and increase the overall Inheritance Tax bill.
Your executors can claim taper relief which reduces the tax on any amount over your available nil-rate band. Taper relief applies to gifts made between three and seven years before death. The longer you live after making the gift, the lower the tax will be.
Years between gift and death | Tax due |
|---|---|
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+ years | 0% |
Numbers in action
For example, if you gave away £375,000 and died four years later, the gift would exceed your £325,000 tax-free allowance by £50,000. Normally, this would mean £20,000 in tax (40% of £50,000). But because the gift was made between three and four years before death, taper relief reduces the rate to 32%, lowering the tax to £16,000.
Helping you plan ahead
Good estate planning can help reduce or even remove your Inheritance Tax liability. While tax efficiency matters, it’s also about making sure your assets go to the people you care about. Our Independent Financial Advisers can explain your options and help you make the most of the allowances available. They’ll tailor their advice to your circumstances so you can plan with confidence.
Tools and further support
You can visit the official Government website for up-to-date guidance on Inheritance Tax thresholds, rules and allowances.
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Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.
This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.
The Financial Conduct Authority does not regulate advice on taxation, Trusts, Estate Planning or Will writing.
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FP2025-284 – Last updated July 2025