Inheritance tax (IHT) planning advice guide
Get advice on inheritance tax (IHT) planning, including how to leave an inheritance to your family and reduce the IHT burden through gifts, trusts and other methods.
You can’t live forever – but you can help your loved ones inherit as much of your wealth as possible.
If your total assets are over the inheritance tax (IHT) threshold, your family may have to pay a bill soon after your death.
But by inheritance tax planning and taking advice ahead of time, you can keep that bill to a minimum.
Estates above £325,000 are subject to IHT at 40%, with exemptions for spouses, civil partners, and specific allowances.
Gifts made seven years before death and smaller annual gifts can reduce the taxable value of your estate.
Trusts and life insurance policies can minimise IHT liability and support beneficiaries effectively.
Creating and updating a will with professional advice ensures optimal use of allowances and efficient estate distribution.
What is inheritance tax?
Inheritance tax is the tax your beneficiaries may have to pay if your estate (that is, everything you own) is above a certain size.
You can leave up to £325,000 to your beneficiaries tax-free – this is known as the IHT nil-rate band.
Everything above that threshold will be taxed, usually at a rate of 40%. For large estates, this can result in a substantial bill.
You can pass wealth above the £325,000 threshold to your spouse or civil partner, a charity or a community amateur sports club with no IHT to pay, although there is no exemption for unmarried partners.
Here's a quick overview of the key thresholds and rates for inheritance tax:
| Detail | Value/description |
|---|---|
| IHT nil-rate band | £325,000 (amount you can leave tax-free) |
| Residence nil-rate band | £175,000 (an additional tax-free allowance if you leave your home to lineal descendants - eg. your children or grandchildren) |
| Tax rate | 40% (on everything above the nil-rate band) |
| Exempt recipients | Spouse or civil partner, a charity, or a community amateur sports club (no IHT to pay) |
Estate planning vs inheritance tax planning: what's the difference?
Estate planning is the wider process of organising your assets, will and beneficiaries, while inheritance tax planning focuses specifically on reducing the tax bill your estate may face.
In practice the two overlap heavily, decisions about gifts, trusts and your will affect both how your estate is distributed and how much IHT is due, so most people address them together with a financial adviser.
What assets are included in inheritance tax?
Property, investments, money and possessions are included in your estate for IHT. Here’s a summary of the rules and any exemptions.
| Type of asset owned on death | Chargeable? | Relief/allowance structure | Effective IHT rate |
|---|---|---|---|
| Most types of asset | Yes | £325,000 nil rate band | 40% |
| Home | Yes | Additional £175,000 residence nil rate band | 40% |
| Pension wealth (defined contribution) | Yes, from April 2027 | No separate allowance | 40% |
| Agricultural and business property | Yes, from April 2026 | 100% relief up to £2.5 million cap | 20% (on value > £2.5m) |
| AIM or EIS shares | Yes, from April 2026 | 50% flat relief | 20% |
Currently, pension wealth is excluded from IHT, but this is due to change in April 2027.
This means any unused money in your pension pot will be added to the value of your other assets when working out your IHT bill.
Businesses and farms have different rules for IHT, which changed in April 2026. Business property relief and agricultural property relief is now capped at £2.5 million.
Qualifying assets worth over this amount will now receive a 50% relief - effectively being charged 20% IHT.
Who pays inheritance tax?
If you have a will, the named executor will arrange the tax payment to HMRC.
If you don’t have a will, the administrator of your estate will do this instead.
The tax payment is usually made from funds within the estate or money raised by selling assets.
After the inheritance tax has been paid, the remaining value of the estate is then distributed.
Challenges and solutions in paying inheritance tax
A common difficulty is that HMRC requires IHT to be paid within six months, but probate (the process of releasing assets from an estate) often takes longer than that. And executors can’t sell assets until the probate process has completed.
Also, probate isn’t usually granted until IHT has been paid, which can feel like a catch-22.
Watch out because HMRC starts to charge interest on any tax owed after six months. It’s a tough rule because six months often isn’t long enough to finish the probate process or even work out the final tax bill.
However, you don’t need to wait for the final figure. It is possible to estimate how much tax is owed and pay the bill based on the estimated amount.
A probate solicitor can advise you on how to calculate the tax bill and pay anything owing, so you avoid any penalties or unnecessary interest.
However, there are many possible solutions to allow executors to settle a bill more easily.
| Options to pay IHT bill | Possible solution |
|---|---|
| Cash in the estate | If there's enough cash in the estate to settle the IHT bill, the executor can arrange a payment directly from the estate to HMRC. |
| Instalments | If some of the estate is in the form of property, is to pay off the tax on the property in instalments over as long as 10 years. |
| Loan | The executor can secure a loan from a bank to pay the IHT bill and repay the sum when probate is granted. |
There are various other circumstances in which it may be challenging to settle the IHT bill upfront.
Speak to a probate solicitor or talk to a financial adviser if you are the executor of an estate and find yourself in this situation.
Is the family home exempt from inheritance tax?
There’s an extra IHT allowance called the residence nil rate band.
Set at £175,000, this tops up your £325,000 allowance if you pass a ‘primary residence’ (i.e. your main or only home) on to your direct descendants, such as children or grandchildren.
You can also pass on wealth to your spouse or civil partner, free from IHT.
Any unused nil rate band or residence nil rate band can be passed to your spouse for their estate to use on their death.
This means a married couple can effectively pass on up to £1 million free from inheritance tax due to the doubling up of allowances.
Residence nil rate band limitations
It’s possible to lose your residence nil-rate band if your estate is worth more than £2 million.
The allowance is reduced by £1 for every £2 the value exceeds £2 million, and estates worth over £2.35 million have no residence nil-rate band available.
The RNRB is frozen at £175,000 until at least 2030 after chancellor, Rachel Reeves, announced this during the 2024 Autumn Budget.
What are my inheritance tax planning options?
If you leave your entire estate to your spouse or civil partner, they won’t have to pay inheritance tax.
There are also exempt beneficiaries, such as charities, who won’t be taxed on anything you leave to them.
If your estate is left to others, your loved ones could end up with an IHT bill.
There are various ways you can reduce the size of your taxable estate during your lifetime, such as by making gifts, setting up trusts, charitable giving and other forms of IHT planning.
Getting tax advice when you make a will could help you use all your allowances and, therefore, reduce your tax bill.
For example, it is possible to lose some of your residence nil-rate band if you don’t leave your house to a direct descendant.
Inheritance tax planning strategies at a glance:
Leave assets to your spouse, civil partner, or a charity - both are IHT-exempt
Make gifts at least seven years before death, or use annual exemptions of up to £3,000
Set up a trust to move assets outside your estate
Use a life insurance policy written in trust to cover any remaining bill
Keep your will up to date to make full use of the residence nil-rate band
Using gifts to reduce your tax bill
Any gift you give seven or more years before your death is exempt from IHT. However, you must be able to demonstrate that they are outright gifts.
If you continue receiving rent from a second property, for instance, it would be called a ‘gift with reservation of benefit’ and could still be included as part of your estate, even after seven years.
The same would apply if you ‘gave away’ your home but continued to live in it rent-free.
Any gift made within seven years of death is counted as part of your estate for IHT purposes.
With smaller gifts, you don’t have to worry about the seven-year rule. You can make up to £3,000 worth of gifts in any tax year, free of IHT.
This allowance carries over to the following year, so if you haven’t used the past year’s allowance, then a married couple could give away up to £12,000.
Other exemptions apply to wedding gifts – parents can give £5,000, grandparents £2,500, and anyone else can gift up to £1,000.
In addition, any gifts worth £250 or under made to individuals are exempt, as long as you haven't used another allowance on the same person.
Another powerful exemption is the so-called gifts out of surplus income rule. This rule allows you to give away gifts each year out of that year’s unused income.
For example, if you have £40,000 pension income but only spend £25,000, you could give away up to £15,000 each tax year and put it outside your estate immediately. If you decide to use this gifting rule, you need to keep careful records of your income and expenses to prove that amounts you gifted were from your excess income.
By planning with the help of an adviser, you can use these allowances to steadily reduce the size of your estate and reduce the taxable amount.
Here's a summary of key gift exemptions:
| Gift type | Exemption rule | Notes |
|---|---|---|
| Potentially exempt transfers | Any gift given seven or more years before your death is exempt from IHT. | If you die within seven years, the gift is counted as part of your estate for IHT purposes. |
| Annual exemption | You can make up to £3,000 worth of gifts in any tax year, free of IHT. | This allowance also carries over to the following year. |
| Small gift exemption | Any gifts worth £250 or under made to individuals are exempt. | This is as long as you haven't used another allowance on the same person in the same tax year. |
| Wedding gifts | Specific allowances apply: - Parents: £5,000 - Grandparents: £2,500 - Anyone else: £1,000. | These exemptions apply per gift-giver per wedding. |
| Gifts out of surplus income | Dependent on your income | To qualify, gifts must come from your income, rather than your capital wealth. |
Using trusts
Making gifts to a trust is similar to making gifts to an individual. There could be tax to pay if you die within seven years of making the gift.
A trust allows you to set money aside to support a beneficiary in a certain way or at a specific time (such as to pay university fees).
Trusts can be placed outside your estate, meaning they can be free of inheritance tax.
You can also set up a life insurance policy to cover an IHT bill.
If the policy pays into a trust outside your estate, the payout will not be taxed and can be used to pay HMRC.
Trusts are a specialist area with complex tax rules, so be sure to consult a financial adviser first and a solicitor when setting them up.
Find out more about trusts and estate planning.
Does a will avoid inheritance tax?
Making a will doesn’t automatically avoid inheritance tax, but it can help reduce your bill. It allows you to structure your estate in a tax-efficient way.
The most important step in inheritance planning is making your will and keeping it up to date.
Making a will with a specialist solicitor could reduce your tax bill by making use of available exemptions, although you could still have IHT to pay.
You also need to appoint a dependable executor, as this is the person responsible for ensuring the IHT bill is paid out of your estate. A solicitor can help you make your will.
There’s a lot to include in your will, so make sure you consider:
Your assets: Look at what assets you have, including any savings, property, pensions, insurance policies, investments and bank accounts.
Your beneficiaries: You should have a good idea of who you want to leave your assets to and if you want to make any charity donations.
Your executors: You’ll need to appoint at least one executor to carry out your wishes and sort out your estate when you die.
Your children: Consider who you would like to take care of your children under 18.
Learn more: how to write a will and why you need to
Get expert inheritance tax financial advice
Planning for inheritance tax can significantly impact how much of your estate is preserved for your loved ones.
By understanding the various strategies available, such as gifts, trusts, and 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.
Let Unbiased match you with a financial adviser for expert financial advice on effective inheritance tax planning and optimising your estate for your loved ones.
If you found this article helpful, you might also find our articles on business property relief and how to protect your property portfolio from IHT informative too.
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