Eight key things to know about inheritance tax

Although inheritance tax (IHT) is currently only paid by a minority of people, the amounts we’re paying continue to rise. New figures out today reveal that between April 2024 and March 2025, HMRC collected £8.2 billion in IHT receipts, some £0.8 billion higher than the same period last year and a new annual record.

This trend has largely been attributed to a combination of rising property prices and frozen tax allowances, which is pushing more estates into IHT territory. The amounts we can pass on tax-free to loved ones have not risen for many, many years and will remain at their current levels until 2030 at the earliest.

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As such, the Office for Budget Responsibility (OBR) is now expecting IHT to raise a staggering £14.3 billion a year by 2030 – nearly double what we’re paying now.

So, what do you need to know about this much-hated tax and is there anything you can do to cut your bill? Here are eight important things to understand about IHT.

1) When does IHT become a problem?

Everyone can pass on an estate worth up to £325,000 tax free when they die – you’ll hear this referred to as the nil rate band (NRB).

However, many families will be able to pass on much more than that.

For example, if you’re passing on a family home to children or grandchildren, you can also claim a further residential nil rate band (RNRB) worth £175,000, meaning you can possibly leave as much as £500,000 before tax is payable (note, the RNRB reduces by £1 for every £2 an estate exceeds £2 million).

And, if you’re married, those allowances can effectively be doubled to £1 million – thanks to generous tax breaks reserved for those that have tied the knot, which we’ll get to shortly.

On death, your estate will include the value of all your savings and investments, bank accounts, property and possessions – minus any debts. It may also include the value of any gifts that you made towards the end of your life.

2) Will I need to pay IHT on my pension?

Currently, it’s possible to pass pensions on to loved ones IHT-free, meaning many retirees have structured their finances so that they spend taxable assets first and preserve their pensions to pass on to younger generations.

However, that’s all set to change following an announcement in last year’s Autumn Budget. From April 2027, pensions will form part of your estate when you die and become subject to IHT.

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3) How much IHT will my heirs need to pay?

IHT is charged at a rate of 40% on any money you leave in excess of your tax-free allowance.

Let’s take the example of an individual with an estate worth £500,000. If they didn’t own property, or weren’t passing it on to direct descendants, they would have a NRB of £325,000. This would mean 40% IHT would be payable on £175,000, creating a tax bill of £70,000.

Alternatively, for a married couple passing on a £1.5 million estate – which included a family home that was being left to children – IHT would be payable on £500,000, creating a tax bill of £200,000.

In limited circumstances you may be able to pay a lower rate of IHT. For example, if you give away more than the NRB during the last seven years of your life, you may benefit from taper relief and pay a lower rate of IHT on that gift (depending on how many years pass between the date of your gift and your death).

If you leave a significant sum of money to charity in your will, you may also benefit from a lower rate of IHT. For example, if you bequest at least 10% of your net estate to charity (the taxable part), the overall rate of IHT on the rest of your estate will be reduced from 40% to 36%.

4) How quickly do you need to pay IHT?

IHT needs to be paid by the end of the sixth month after the deceased died – if this deadline isn’t met, HMRC will start charging interest on the outstanding tax.

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For this reason, if there are delays with probate, some personal representatives will make payments from their own accounts and then make a claim on the deceased’s estate once everything is settled.

5) What are the benefits of being married?

As much as tax should never be a reason to tie the knot, marriage makes it a whole lot easier to avoid paying IHT.

That’s because each individual in a marriage (or civil partnership) has their own tax-free allowance or NRB, which can be passed on to their partner, when they die. Any wealth that passes from one spouse to another on their death is tax free too, doubling the amounts they can pass on to younger generations.

However, it’s important to note that these perks only apply to couples who were married when they died.

The tax benefits of being married will be lost if you get divorced.

6) What happens if I’m widowed and remarry?

Estate planning becomes a whole lot more complicated in second marriages. If you are widowed, you’ll automatically be entitled to the unused NRB from your spouse, however this would normally be lost, if you decided to remarry.

However, while the law generally only permits the application of two NRBs to an estate, it may still be possible to retain the benefit of a third unused (or potentially fourth) one. This could be achieved by leaving an amount equal to the unused allowance to children in the will (either as a gift or via a discretionary trust).

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This is a complicated area though and it is essential to get professional advice and ensure the arrangements are structured correctly.

7) It’s easy to avoid paying IHT, right?

You might have heard some people call IHT a voluntary tax. That might be a bit of a stretch, but for those who take the time to plan, there may still be ways to cut your tax bill or even avoid it altogether.

The most straightforward way to mitigate IHT is to give away money during your lifetime. This means you get to see your loved ones benefiting from your wealth and they receive the full value of your generosity without losing 40% to HMRC.

However, it’s important you’re aware of the gifting rules – you can’t just give away as much as you like:

• Each year you can give away £3,000 tax free (and can carry forward last year’s £3,000 if unused) and make as many gifts of £250 or less as you like. You can also give £5,000 tax free to your child in the year they get married, £2,500 to a grandchild and £1,000 to anyone else
• You can give away unlimited amounts of spare income – but you will need to provide evidence to show that gifts were regular, paid from income rather than capital, and that your standard of living wasn’t affected by giving that money away
• Any gifts in excess of these rules are considered potentially exempt transfers, which means they only become wholly IHT free if you survive for a further seven years after making the gift.

If you aren’t ready to give large sums away, or want more control, there are other alternatives. For example, some people leave money to beneficiaries via trust arrangements, or it’s possible to take out whole of life insurance policies to pay an inheritance tax bill on your death.

8) Should I take advice?

Although there are many ways to successfully (and legally) avoid paying IHT, it’s important to take care.

For example, you need to avoid giving away money you might need towards the end of your life – especially if a large portion of your wealth is tied up in your home (as that money cannot be easily accessed). According to analysts, Laing & Buisson, the average cost of a residential care home in England is now £54,184 a year, rising to over £71,000 if nursing care is needed.

Even without care costs to contend with, you may live longer than you expect or find that your money doesn’t last as long as you had hoped.

For these reasons it’s important seek professional advice before you take any action. A financial adviser who specialises in estate planning will quickly be able to gauge the extent of your potential tax bill and help you take steps to reduce it, in a way that doesn’t jeopardise your own financial position.