Inheritance Tax
Inheritance Tax can cost your family a lot of money. We can advise you on how to keep more for yourself and your loved ones with a Tax Planning Report. Don’t let your family lose out to the taxman – read our tips below, and contact us today.
What Is Inheritance Tax
Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. It takes into account all of your property, possessions and money, such as:
- Bank accounts
- Your home(s)
- Land
- Shares
- Vehicles
- A payout from an insurance policy
- Jointly-owned assets
- Investments
- Unused pension funds, for deaths on or after 6 April 2027
- Art and jewellery
It applies to the value of your estate in excess of £325,000, which is the standard Inheritance Tax Nil Rate Band (NRB). However, if you leave your home to your children or grandchildren, the Residence Nil Rate Band (RNRB) of £175,000 increases your allowance to £500,000. The RNRB is reduced by £1 for every £2 by which your estate exceeds £2 million, so it is lost altogether on larger estates. IHT is charged at 40% on your estate above the NRB and RNRB, and after the various reliefs available.
Two changes are worth planning for now. Most unused pension funds and pension death benefits come within the estate for IHT for deaths on or after 6 April 2027. And from 6 April 2026, Business Relief and Agricultural Relief share a single £2.5 million allowance, with relief above it restricted to 50%.
Your Executors – the people dealing with your estate – must pay IHT to HMRC.
What are the exemptions?
There are many exemptions to IHT. Effective planning could save your family thousands of pounds. You need to think ahead as soon as possible, as exemptions can take years to be applied.
Leaving your estate to others
Legacies – gifts in your Will – to the following are exempt from IHT:
- A spouse or civil partner
- The nation
- A charity
- A political party
The rate of IHT is also reduced to 36% if you leave at least 10% of the net value of your estate to charity.
Your spouse or civil partner may inherit any unused NRB and RNRB. Where both allowances pass in full and the family home goes to direct descendants, a couple’s combined allowances can reach £1 million – but only where the estate is below the £2 million taper threshold.
Overseas Assets
If you are a long-term resident of the UK, you must pay IHT on assets held worldwide. Since 6 April 2025 this test has replaced the old one based on domicile: you are a long-term resident if you have been UK resident for at least 10 of the previous 20 tax years. If you are not a long-term resident, only your UK assets are within the scope of IHT.
People who leave the UK stay within scope for a further three to ten years, depending on how long they were resident here. Some assets outside the UK are excluded property for those who are not long-term residents, but the rules are detailed and depend on your own circumstances.
Business Relief
Business Relief reduces the value of a business or its assets for IHT purposes. The rules changed significantly on 6 April 2026.
Business Relief and Agricultural Relief now share a single combined allowance of £2.5 million per person. Qualifying assets within that allowance attract 100% relief. Above it, relief falls to 50%, which gives an effective IHT rate of 20% on the excess.
Any unused allowance can be transferred to a surviving spouse or civil partner, so a couple can pass up to £5 million of qualifying agricultural and business assets at 100% relief. For lifetime transfers the allowance refreshes every seven years, and it will be index-linked from 6 April 2031.
Within the allowance, 100% relief applies to:
- A business, or interest in a business
- Shares in an unlisted company
50% relief applies to:
- Shares quoted on AIM, whatever their value, following the April 2026 changes
- Shares controlling more than 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in their business
- Land, buildings or machinery used in the business, and held in a Trust which it will benefit from
You can only receive this relief if the deceased owned the business or asset for at least two years before their death.
Agricultural Relief
If your estate includes a farm or woodland, you may be able to get Agricultural Relief. Since 6 April 2026 it shares the same £2.5 million allowance as Business Relief: 100% relief within the allowance, and 50% relief above it. Agricultural property is no longer free of IHT regardless of value.
The type of property that qualifies for this is usually land or pasture used to grow crops, or rear animals, intensively. It also includes farm buildings, stud farms and some agricultural shares and securities. Our Tax Planning Report service can identify how to maximise on this, as well as other reliefs.
Gifts
The Annual Exemption is £3,000, which means you can give away a total of £3,000 in gifts every tax year without them being subject to IHT.
You are able to carry over unused Annual Exemption from one tax year to the next – up to £6,000 – but you have to use up the whole allowance in the second year.
You can also give these away without incurring IHT:
- As many gifts as you like of up to £250 per person in a tax year, if you haven’t used another exemption on that person
- Wedding and civil ceremony gifts – up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else
- Gifts to political parties, national museums, universities, the National Trust, registered housing associations, community amateur sports clubs, or charities
- Payments to help with another person’s living costs, e.g. for a minor or an elderly relative
Small, regular gifts out of your income, which don’t affect your standard of living, are not subject to IHT. But, this can be a complex topic and advice is recommended.
Potentially Exempt Transfers
These are gifts of unlimited value – including property – which are exempt from IHT if you live a further seven years after giving them away. If you die within that period the gift fails and becomes chargeable. It is set against your nil rate band first, so tax is only actually payable on the amount above it.
Where tax is payable, a scale called ‘taper relief’ reduces it on gifts made between three and seven years before death. Taper relief reduces the tax on the gift rather than the value of the gift itself, and it only helps once the nil rate band has been used up. Gifts made within three years of death are charged at the full 40%.
How to save Inheritance Tax
There are several other ways to save IHT.
Lifetime Trusts
Gifting part of your estate to a Lifetime Trust from which you are wholly excluded can, over time, reduce the value of your estate. Assets held in trust for your family do not form part of a beneficiary’s own estate either.
Trusts are not a way of avoiding Inheritance Tax, and they carry charges of their own. A gift into most lifetime trusts above the nil rate band attracts an immediate 20% charge, and the trust may then face charges of up to 6% every ten years and on capital leaving it. Any trust we recommend has to earn its place for reasons beyond tax, and we set out the charges before you commit.
Tax Planning
Many tax planning strategies may apply to your estate and save you significant sums on IHT. They include reviewing your Will to make sure it is tax efficient, and making full use of the available exemptions and reliefs. These require professional advice, so we recommend a Tax Planning Report if your estate is likely to be subject to IHT. The greater the amount at stake, the more important this becomes. Planning takes time to work, so the earlier you take advice the more options remain open to you. Don’t leave it too late.
Life Insurance
Although taking out a life insurance policy won’t save IHT, it can make it easier for your family to pay the bill. And, it could protect your home from being sold to pay for it.
You will need to put your policy into a Trust to use it to reduce your IHT. You could dedicate a portion of the payout to the IHT bill, or the entire amount. This can also make the payout quicker than usual, as beneficiaries don’t have to wait until probate is granted before they can receive it.
How we can help
Inheritance Tax can be confusing. Our team can help you make informed decisions, by writing a Tax Planning Report tailored to you and your situation. Let us help you leave as much of your estate as possible to your beneficiaries. Contact us to learn more about this service.
