What is inheritance tax and who pays it?
Inheritance tax (IHT) is charged on the value of your estate — everything you own at death, minus your debts — above a certain threshold. The rate is 40% on everything above that threshold.
Your estate includes:
Your executors are responsible for calculating and paying IHT before probate is granted — meaning the tax must usually be paid before your beneficiaries receive anything.
NOTE
IHT is often described as a “voluntary tax” by advisers — not because you can choose not to pay it, but because with proper planning there are entirely legal ways to reduce it substantially. Your will is one of the most powerful tools available.
The nil-rate band (NRB)
Every individual has a nil-rate band — the amount of their estate that can pass free of IHT.
Current nil-rate band: £325,000.
This threshold has been frozen at £325,000 since 2009 and is now frozen until at least April 2030 under current government policy. With house price and asset inflation over that period, far more estates are now caught by IHT than were originally intended to be.
Everything above £325,000 is taxed at 40% (or 36% if the charitable legacy condition is met — see below).
The residence nil-rate band (RNRB)
A second threshold — the residence nil-rate band — was introduced in 2017 to help people pass their main home to direct descendants.
Current RNRB: £175,000 per person.
To qualify:
Transferable nil-rate bands between spouses
When the first spouse or civil partner dies, their NRB and RNRB can be transferred to the survivor — even if the first death was decades ago, and even if there was no estate at the time.
This means a married couple or civil partners can potentially pass up to £1,000,000 free of IHT (£650,000 NRB + £350,000 RNRB combined).
Combined with the NRB, a single person can potentially pass up to £500,000 free of IHT.
NOTE
The transfer of nil-rate band is not automatic — the executors of the second estate must claim it on the IHT return. Ensure your executors know to make this claim and have access to the first spouse’s death certificate and evidence of the first estate’s position.
The spouse and civil partner exemption
Transfers between spouses and civil partners are exempt from IHT — both during lifetime and on death — with no limit on the amount.
However:
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Charitable legacies — the 10% rule
If your will leaves at least 10% of your net estate (i.e. the estate after deducting the nil-rate band and other reliefs) to registered charities, the IHT rate on the remainder reduces from 40% to 36%.
This can result in the charity receiving a meaningful gift, your beneficiaries receiving more than they would have done, and HMRC receiving less — a genuine win-win-win in the right circumstances.
EXAMPLE
James has a taxable estate of £1,000,000 (after NRB). Without a charitable gift, his estate pays IHT of £400,000. If he leaves £100,000 (10%) to charity, the remaining £900,000 is taxed at 36% = £324,000 in IHT. The charity receives £100,000. His non-charitable beneficiaries receive £576,000 — compared with £600,000 without the charitable gift. They are £24,000 worse off, but the charity receives £100,000 and HMRC receives £76,000 less.
Business Property Relief (BPR)
Business Property Relief is one of the most generous reliefs in the UK tax code. It allows qualifying business assets to pass free of IHT — at either 100% or 50% relief — provided the conditions are met.
100% BPR applies to:
50% BPR applies to:
Conditions for BPR:
Important – Proposed Reforms
From April 2026, proposed reforms would cap BPR (and APR combined) at £1 million at 100% relief, with a 50% rate applying above that cap (effective 20% IHT on the excess). Business owners should take urgent professional advice to understand how their estate planning may need to change.
See Guide 3 — Wills for Business Owners for a full treatment of BPR, succession planning, and shareholder agreements.
Agricultural Property Relief (APR)
Agricultural Property Relief operates in a similar way to BPR but applies to agricultural land and property used in farming.
100% APR applies to:
50% APR applies to:
The same proposed £1 million combined cap that applies to BPR from April 2026 also applies to APR (the cap is shared between the two reliefs). Farming families with significant land and building values should review their position as a matter of urgency.
Gifts made during your lifetime
Reducing your estate during your lifetime is one of the most effective IHT strategies — but it must be done correctly and with proper records.
Exempt gifts (no IHT ever, regardless of when made):
The 7-year rule and potentially exempt transfers
Larger gifts made to individuals (not into most trusts) become fully exempt from IHT if you survive seven years. If you die within seven years, a sliding scale of taper relief applies:
|
Years survived |
IHT rate on gift |
|---|---|
|
0-3 years |
40% |
|
3-4 years |
32% |
|
4-5 years |
24% |
|
5-6 years |
16% |
|
6-7 years |
8% |
|
7+ years |
0% |
Watch out
Taper relief reduces the IHT rate on the gift — it does not reduce the value of the gift used to assess whether the nil-rate band has been used up. Gifts within seven years are added back into the estate in chronological order and use up the NRB first.
Using trusts to reduce IHT
Certain trust structures can remove assets from your estate for IHT purposes, subject to conditions.
Discretionary trusts: a gift into a discretionary trust is a chargeable lifetime transfer — IHT is payable immediately at 20% on amounts above the NRB if made during lifetime. However, if you survive seven years, no further IHT is due on entry. The trust itself is subject to ten-year anniversary charges and exit charges.
Life interest (or interest in possession) trusts in a will: a life interest trust created in a will for a surviving spouse can qualify for the spouse exemption and defer IHT to the second death — while ensuring the capital eventually passes to your chosen beneficiaries (e.g. children from a first marriage).
Loan trusts and discounted gift trusts: specialist planning structures usually arranged through an FCA-regulated adviser. They allow you to access income from assets while reducing the IHT exposure over time.
Life insurance written in trust
A life insurance policy not written in trust forms part of your estate on death and may be subject to IHT. Written in trust, the proceeds pass directly to the trust beneficiaries outside your estate — immediately and without probate.
Writing a policy in trust is usually free and takes minutes. If you have any life insurance policy that is not in trust, review this urgently with an Independent Financial Adviser.
What your will cannot do
A will does not cover:
- Assets held in joint tenancy — these pass automatically to the surviving joint owner by survivorship, regardless of your will.
- Pension death benefits — pensions are usually outside your estate for IHT (though from 2027, proposed changes may bring unspent pension pots into the IHT charge).
- Life insurance written in trust — passes outside the estate.
- Assets already transferred to someone else during lifetime.
Your will deals with what is legally yours at the time of death. Estate planning is a combination of will planning and lifetime structuring — both matter.