Inheritance Tax UK 2025: Rates, Thresholds & Planning Guide
Keeping It in the Family
Let's face it, talking about death and taxes isn't anyone's idea of a good time. But if you care about what happens to your hard-earned assets after you're gone, it's a conversation worth having. Especially now, with the UK's inheritance tax (IHT) landscape undergoing some significant changes.
Here's a sobering thought: without proper planning, up to 40% of everything you've worked for could end up with the taxman rather than your loved ones. The good news? With some forward thinking and the right strategies, you can legally and dramatically reduce, or even eliminate, inheritance tax on your estate. You'll find a handy IHT calculator further down this page, updated for 2025.
What Is Inheritance Tax?
Inheritance tax is essentially the government's final bill; a tax on the value of your estate when you die. Your estate includes everything you own: your home, savings, investments, personal possessions, even that vintage wine collection you've been saving for a special occasion. There's no occasion more special than avoiding a 40% tax bill, so you might want to crack it open now.
In the UK, IHT is charged at 40% on the value of your estate above certain thresholds. Yes, you read that right: 40%. That means for every £100,000 over the threshold, £40,000 goes to HMRC. It's enough to make anyone reach for that special wine right now.
The tax typically needs to be paid within six months of death, often before probate is granted. This timing can force families to sell assets quickly, sometimes at below-market prices, just to pay the tax bill. It's not just about the money; it's about the added stress during an already difficult time.
Current IHT Rates and Thresholds for 2025
Understanding the thresholds is crucial for planning. The system might seem complex at first, but once you grasp the basics, it becomes much clearer.
The Basic Nil-Rate Band
Everyone gets a basic inheritance tax-free allowance, called the nil-rate band (NRB). Currently set at £325,000, this threshold hasn't changed since 2009 and is frozen until at least 2028. Everything above this amount is taxed at 40%, unless you qualify for the reduced rate of 36% by leaving at least 10% of your net estate to charity.
The Residence Nil-Rate Band (RNRB)
If you leave your main residence to direct descendants, you get an additional allowance worth £175,000. Combined with the basic nil-rate band, this brings your total potential tax-free allowance to £500,000. However, this only applies when you're leaving your main home to children, grandchildren, or their spouses. It's also worth noting that the RNRB tapers away for estates worth over £2 million, reducing by £1 for every £2 over the threshold.
For Married Couples and Civil Partners
Here's where it gets interesting. Married couples and civil partners can combine their allowances, effectively doubling their tax-free threshold. The basic nil-rate band becomes £650,000 (£325,000 × 2), and with the residence nil-rate band included, a couple can potentially pass on up to £1 million completely tax-free to their children. Additionally, transfers between spouses during lifetime or on death are unlimited and exempt from IHT.
This means a married couple with a modest home and lifetime savings can often avoid IHT entirely. However, with average UK house prices and a lifetime of savings and investments, many ordinary families still face significant IHT bills.
The 36% Reduced Rate
An interesting quirk of the system rewards charitable giving. Leave 10% or more of your net estate to charity, and the IHT rate on the rest drops from 40% to 36%. While it's not a huge saving, if you're charitably inclined anyway, it can actually result in your family receiving more as a percentage while also supporting causes you care about.
Who Pays IHT and When?
Understanding who's responsible for IHT and when it's due can prevent nasty surprises during an already difficult time.
The executor or administrator of your estate is responsible for paying IHT from the estate's funds. However, the complexity arises in certain situations. Sometimes beneficiaries might need to pay, particularly for gifts with reservation of benefit, assets held in certain trusts, or failed potentially exempt transfers (PETs).
The timing is particularly crucial. IHT must be paid by the end of the sixth month after death, with interest charges applying on late payments at a current rate of 7.75%. While you can pay in instalments over 10 years for certain assets like property and businesses, some IHT often needs paying before probate is granted.
This creates a frustrating catch-22 situation. You often need to pay at least some IHT before you can access the deceased's assets. While banks may release funds directly to HMRC using the Direct Payment Scheme, this doesn't always cover the full bill. Families sometimes need to borrow money or sell assets quickly to meet the deadline, often at unfavourable prices.
Complete Guide to IHT Exemptions and Reliefs
The UK tax system provides numerous exemptions and reliefs. The key is knowing about them and planning accordingly. Let's explore these valuable allowances that could save your family thousands.
Lifetime Exemptions
The annual exemption allows you to give away £3,000 per year completely free of IHT. What many people don't realise is that you can carry forward one year's unused allowance, meaning couples can potentially give away £12,000 in a single year if they haven't used the previous year's allowance.
Small gifts of up to £250 per person per year are also exempt. You can make these gifts to as many people as you like, though you cannot combine this with the annual exemption for the same recipient. It's perfect for birthday and Christmas presents to friends and extended family.
Wedding and civil partnership gifts have their own generous exemptions. Parents can give £5,000, grandparents £2,500, and anyone else can give £1,000. These must be made on or shortly before the ceremony to qualify.
One of the most valuable but underused exemptions is normal expenditure from income. If you can demonstrate that gifts are regular, made from surplus income (not capital), and don't affect your standard of living, there's no upper limit on what you can give away. This requires careful documentation but can be incredibly powerful for those with significant surplus income.
Death Exemptions
The spouse or civil partner exemption provides unlimited transfers between UK-domiciled spouses, both during lifetime and on death. If the recipient spouse is non-UK domiciled, there's a £325,000 limit, though they can elect to be treated as UK domiciled.
All gifts to registered charities are completely exempt, including those to museums, universities, and national institutions. Political party donations also qualify if made to parties with at least two MPs, or one MP and 150,000+ votes in the last general election.
Business and Agricultural Reliefs
Business Property Relief (BPR) can provide up to 100% relief on qualifying business assets, including shares in unlisted companies. Business property and listed shares qualify for 50% relief. Assets must typically be owned for at least two years, and major changes are coming in 2026 that will significantly impact this relief.
Agricultural Property Relief (APR) works similarly, providing up to 100% relief on agricultural property that's been occupied for agricultural purposes. The ownership requirement is two years if you farm it yourself, or seven years if it's let to someone else. Like BPR, this relief faces major reforms in 2026.
How to Calculate IHT: Real-World Examples
Let's walk through some examples to show how IHT actually works in practice. These scenarios will help you understand how the various allowances and thresholds interact.
Example 1: Single Person, No Property
Consider Sarah, who has savings and investments worth £450,000 but doesn't own property. Her calculation is straightforward. From her estate value of £450,000, we subtract the nil-rate band of £325,000, leaving £125,000 subject to tax. At 40%, the IHT bill would be £50,000, leaving £400,000 for her beneficiaries.
Example 2: Single Person with Property to Children
David owns a house worth £400,000 and has other assets of £250,000, giving a total estate of £650,000. He's leaving everything to his children. His calculation benefits from both allowances. After subtracting the nil-rate band of £325,000 and the residence nil-rate band of £175,000, he has £150,000 subject to tax. The IHT bill would be £60,000.
Example 3: Married Couple with Million-Pound Estate
Let's consider John and Mary, with a combined estate of £1.2 million, including a £700,000 house and £500,000 in other assets. When the first spouse dies, there's no IHT due to the spouse exemption. On the second death, the calculation uses both nil-rate bands (£650,000) and both residence nil-rate bands (£350,000), leaving £200,000 taxable. The IHT bill would be £80,000, demonstrating how marriage can provide significant tax advantages.
Example 4: Complex Estate with Gifts
This scenario shows how lifetime gifts affect IHT. Robert has an estate worth £800,000. Four years ago, he gave his daughter £200,000, and two years ago, he gave his son £50,000. He used his annual exemptions for other gifts.
The calculation becomes more complex. His estate of £800,000 must be added to his failed potentially exempt transfers of £244,000 (after deducting annual exemptions). With a total of £1,044,000 for IHT purposes and only £325,000 nil-rate band available, the taxable amount is £719,000.
The IHT breaks down as follows: the gift to his daughter benefits from taper relief at 20%, resulting in £54,400 tax. The gift to his son, being within three years, attracts the full 40% rate: £20,000. The remaining estate generates £179,600 in tax. The total IHT bill is £254,000, significantly higher than if he hadn't made the gifts that failed the seven-year rule.
Key Changes: What's New in 2025 and Beyond
The inheritance tax landscape is shifting significantly. Understanding these changes is crucial for effective planning.
From Domicile to Residence-Based Taxation (April 2025)
The old domicile system, with its somewhat nebulous concept of permanent home, is being replaced by a clearer residence-based approach. From April 2025, if you've been UK resident for 10 or more years, your worldwide assets become subject to IHT. Perhaps more significantly, if you leave the UK, you'll remain within the IHT net for 10 years after departure.
This change primarily affects long-term residents who previously claimed non-domiciled status to shelter overseas assets. Many will need to review their offshore structures and consider whether maintaining them still makes sense.
Agricultural and Business Property Relief Changes (April 2026)
These reforms represent one of the most significant changes to IHT in recent years. From April 2026, the first £1 million of combined agricultural and business assets will continue to receive full relief. However, anything above this threshold will only receive 50% relief, effectively creating a 20% IHT rate on these assets.
For family farms and businesses that have relied on these reliefs to pass assets through generations, this change is seismic. A family farm worth £3 million, previously completely exempt, will now face a £400,000 tax bill. The government argues this targets wealthy landowners while protecting family farms, but many argue the threshold is too low given current land and business values.
Inherited Pensions in IHT Net (April 2027)
Perhaps the most far-reaching change affects pension planning. From April 2027, unused pension funds will be included in the estate for IHT purposes. This fundamentally alters retirement planning strategies, as pensions have long been viewed as an efficient way to pass wealth tax-free to the next generation.
The impact extends beyond simple tax calculations. Many people have maximised pension contributions partly for IHT planning purposes. With this change, the balance between lifetime spending and preserving wealth shifts significantly.
Legal Strategies to Reduce Your IHT Bill
Here's where careful planning can save your family hundreds of thousands of pounds. These strategies are all legal and above board; they simply require forethought and proper implementation.
1. Lifetime Gifting Strategy
The seven-year rule remains one of the most powerful IHT planning tools. Make gifts during your lifetime and survive seven years, and they're completely free of IHT. However, the strategy requires careful consideration.
Taper relief softens the blow if you don't quite make the seven years. Gifts made between three and four years before death benefit from a 20% reduction in IHT, scaling up to an 80% reduction for gifts made between six and seven years before death. This graduated relief can significantly reduce the tax burden even if you don't survive the full seven years.
Smart gifting requires more than just writing cheques. Start early, as time is your greatest asset. Document everything meticulously, as HMRC will scrutinise gifts carefully. Use your annual exemptions first before making larger gifts. Consider setting up regular giving from income if you have surplus funds. Most importantly, be aware of the reservation of benefit rules; you must genuinely give up all benefit from gifted assets.
2. Trust Planning
Despite recent restrictions, trusts remain powerful IHT planning tools when used correctly. Each type serves different purposes and comes with its own tax implications.
Bare trusts offer simplicity, particularly for gifts to minors. They count as potentially exempt transfers with no ongoing IHT charges, making them efficient for straightforward gifting to grandchildren.
Discretionary trusts provide maximum flexibility over beneficiaries but come with a 20% entry charge on amounts above the nil-rate band, plus potential 10-year anniversary charges and exit charges. Despite these costs, they remain popular for protecting family wealth across generations.
Life interest trusts can provide income to one beneficiary while preserving capital for others. They're particularly useful in second marriages, ensuring a surviving spouse is provided for while protecting children's inheritance.
3. Life Insurance Solutions
Life insurance written in trust provides a tax-efficient way to cover IHT liabilities. The key is ensuring the policy is written in trust from outset; this keeps the proceeds outside your estate.
Whole-of-life policies guarantee a payout whenever death occurs, making them ideal for covering a known IHT liability. While premiums can be expensive, they may qualify as normal expenditure from income if you can afford them from surplus income.
4. Property Strategies
Your home likely represents your largest asset and biggest IHT exposure. Several strategies can help mitigate this.
Downsizing or rightsizing releases capital for gifting while potentially preserving your residence nil-rate band through downsizing addition rules. The key is planning the timing carefully to maximise both the tax benefits and your quality of life.
Equity release can reduce your estate value while providing lifetime income or capital. However, this is a complex area requiring careful consideration of the long-term costs and impact on your beneficiaries.
5. Investment Planning
Certain investments offer IHT advantages that can form part of a balanced estate planning strategy.
AIM portfolios invested in qualifying companies can benefit from Business Property Relief after a two-year holding period. While these investments carry higher risk due to the nature of smaller companies, the potential for 100% IHT relief makes them attractive for some investors.
Enterprise Investment Scheme (EIS) investments also qualify for IHT relief after two years, alongside other significant tax benefits. Again, the higher risk nature of these investments means they're not suitable for everyone.
6. Charitable Giving Strategy
The interaction between charitable giving and IHT can create win-win scenarios. By leaving 10% of your net estate to charity, you reduce the IHT rate from 40% to 36% on the remainder.
Counterintuitively, this can sometimes leave more for your family. On a taxable estate of £1 million, leaving nothing to charity results in £400,000 IHT, leaving £600,000 for family. Leave £100,000 to charity, and the IHT on the remaining £900,000 at 36% is £324,000, leaving £576,000 for family. The family receives slightly less, but a charity benefits significantly, and the taxman receives less.
7. Business Structures
For those with substantial assets or complex family situations, sophisticated structures can provide both control and tax efficiency.
Family investment companies allow gradual wealth transfer while maintaining control. They're particularly useful for property portfolios or investment assets, though they require careful structuring and ongoing management.
Common IHT Planning Mistakes to Avoid
Learning from others' expensive errors can save your family significant sums and stress.
Gifts with reservation of benefit catch many people out. The classic example is parents "giving" their house to children but continuing to live there rent-free. HMRC sees through this, treating the property as still owned by the parents. The solution is straightforward: either pay market rent or genuinely move out.
Inadequate documentation causes numerous problems when HMRC investigates. Every gift should be properly documented with evidence of the donor's intention, the recipient's acceptance, and proof that the donor has given up all benefit.
Poor timing of gifts often stems from leaving planning too late. Making large gifts when health is already declining reduces the chance of surviving seven years. The solution is simple: start your gifting programme early and gradually.
Ignoring liquidity needs creates practical problems for executors. An estate rich in property but poor in cash forces fire sales to pay IHT. Life insurance or maintaining some liquid assets can prevent this.
Your IHT Planning Timeline
Different life stages require different strategies. Here's a practical timeline for effective planning.
In your 40s, focus on starting your lifetime gifting programme and considering trust planning for children. Review pension contributions with the upcoming changes in mind and consider life insurance to cover potential IHT liabilities.
Your 50s should see an acceleration of gifting if possible, along with reviews of any business structures. This is often a good time to consider property strategies and update your will for maximum IHT efficiency.
By your 60s, maximising lifetime exemptions becomes crucial. Evaluate downsizing options and review any trust arrangements. This is also an excellent time to consider charitable legacies if you're so inclined.
In your 70s and beyond, focus shifts to exempt transfers and ensuring liquidity for IHT payment. Regular will reviews become even more important, as does maintaining clear documentation of all planning undertaken.
Taking Action: Your IHT Planning Checklist
Here's your practical roadmap to effective IHT planning:
Start this month by calculating your current estate value and checking your will is IHT-efficient. Begin recording all gifts and review any life insurance arrangements. Don't forget to check pension death benefit nominations.
Over the next three months, use this year's annual exemption and consider your larger gifting strategy. Get a professional estate valuation if needed, review property ownership structures, and explore trust options if appropriate.
This year, focus on implementing chosen strategies, setting up necessary trusts, and arranging life insurance in trust. Document all planning decisions and ensure family members understand your plans.
Ongoing management requires annual strategy reviews, updates for law changes, monitoring of gift survival periods, adjustments for estate growth, and maintaining impeccable records.
To help you, I've created the IHT calculator at the bottom of this page, which allows for Nil-Rate bands, including allowance for Residence, Gifts and if you are Single, Married or Widowed. It won't cover every scenario, but should help you understand your liability with a few simple inputs. Have fun!
Final Thoughts: It's About More Than Tax
Yes, inheritance tax planning is about keeping more of your wealth in the family and less in government coffers. But it's about more than that. It's about removing financial stress during grief, enabling your wishes to be fulfilled, protecting family businesses and homes, supporting causes you care about, and leaving a legacy, not a liability.
The most expensive words in inheritance tax planning are "I'll sort it out later." With rates at 40% and thresholds frozen while asset values rise, "later" could cost your family hundreds of thousands of pounds.
The good news is that with understanding and action, you can legitimately and significantly reduce your IHT liability. Whether through lifetime gifting, trust planning, charitable legacies, or a combination of strategies, the power is in your hands.
Don't let the complexity overwhelm you. Start simple: calculate your potential liability, use your exemptions, and get appropriate advice. Your family's financial future, and their memory of your thoughtfulness, depends on it.
After all, you've spent a lifetime building your wealth. Spend a little time now ensuring it goes where you want it to go.