Inheritance Tax Rates and Allowances UK
Inheritance Tax is charged at 40% on estates worth over £325,000 when you die, potentially costing your beneficiaries hundreds of thousands of pounds if not properly planned. Understanding IHT thresholds, exemptions, and planning strategies helps protect your family's inheritance from unnecessary tax bills. With the nil-rate band frozen at £325,000 since 2009 and house prices rising dramatically, many more families now face IHT bills that would have been exempt 15 years ago. An estate worth £500,000 faces £70,000 IHT bill, while proper planning could reduce this to £0. Let's explore Inheritance Tax in the UK for 2025.
IHT affects approximately 4-5% of estates, but this percentage is rising as property values increase while thresholds remain frozen. The residence nil-rate band provides additional relief for family homes, while various exemptions and reliefs help reduce tax liability through strategic gifting and planning.
How Much is Inheritance Tax?
Standard Rate: 40% on estate value above £325,000. Estate worth £500,000 pays 40% on £175,000 = £70,000 IHT.
Nil-Rate Band: £325,000 tax-free allowance per person. Married couples can combine allowances for £650,000 total exemption.
Residence Nil-Rate Band: Additional £175,000 allowance if leaving main home to direct descendants (children, grandchildren). Combined with standard allowance = £500,000 per person or £1 million for married couples.
Reduced Rate: 36% if leaving 10%+ of estate to charity. Saves 4% on entire taxable estate.
Gifts Within 7 Years: Gifts made within 7 years of death may be taxed on sliding scale (taper relief). Gifts 0-3 years before death: 40% tax. 3-4 years: 32%. 4-5 years: 24%. 5-6 years: 16%. 6-7 years: 8%. After 7 years: 0%.
What Counts Towards Your Estate?
Property: Full market value of all properties owned (main home, buy-to-let, holiday homes). £400,000 house counts fully towards estate value.
Savings and Investments: All bank accounts, ISAs, stocks, shares, bonds. ISAs are tax-free during life but count towards IHT. £100,000 in savings counts fully.
Pensions: Usually outside estate if beneficiaries nominated. Defined contribution pensions pass tax-free if die before 75, or at beneficiary's income tax rate if after 75. Defined benefit pensions have spouse/dependant provisions.
Life Insurance: Counts towards estate unless written in trust. £200,000 payout adds to estate value. Write in trust to exclude from IHT.
Personal Possessions: Cars, jewelry, art, furniture. Total value included. Classic car worth £50,000 adds to estate.
Business and Agricultural Assets: May qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) at 50-100% reduction if meet conditions.
Inheritance Tax Exemptions
Spouse/Civil Partner Exemption: Unlimited - all assets pass tax-free to surviving spouse. Plus unused nil-rate band transfers. Married couple effectively has £1 million combined allowance.
Annual Exemption: £3,000/year gifts completely exempt. Can carry forward 1 year unused = £6,000 maximum. Gift £3,000 annually to children tax-free immediately.
Small Gifts: £250 per person per year to unlimited people. Cannot combine with annual exemption for same person.
Wedding Gifts: £5,000 to child, £2,500 to grandchild, £1,000 to anyone else. One-time exemption per wedding.
Regular Gifts from Income: Unlimited gifts from surplus income (not capital) immediately exempt if demonstrate regular pattern and don't reduce living standard. £10,000/year from pension income to grandchildren completely exempt.
Charitable Donations: All gifts to UK registered charities completely exempt. Plus reduces IHT rate from 40% to 36% if 10%+ estate left to charity.
How to Reduce Inheritance Tax
🎁 Start Gifting Early
Gift £3,000 annually using exemption. Gift larger amounts 7+ years before death for complete exemption. Gifting £100,000 at age 60 (living to 85) saves £40,000 IHT. Earlier you gift, more certain the saving.
💍 Maximize Allowances
Ensure wills structured to use both spouses' allowances efficiently. Married couple with £1 million estate pays £0 IHT if planned properly (using combined £1 million allowance). Without planning, might waste one allowance.
🏠 Use Residence Nil-Rate Band
Leave main home to children/grandchildren to claim additional £175,000 allowance (£350,000 couple). Saves £70,000 IHT per person. Ensure will specifically bequeaths property to direct descendants, not just "estate" to spouse then children.
📄 Write Life Insurance in Trust
Exclude life insurance payout from estate. £200,000 policy outside estate saves £80,000 IHT. Simple trust deed costs £0-200 to set up, saves tens of thousands.
💰 Spend and Enjoy
You can't take it with you. Spending £100,000 on holidays, hobbies, helping children during life reduces estate by £100,000, saving £40,000 IHT while enjoying yourself and helping family when they need it most.
❤️ Consider Charitable Giving
Leave 10% to charity reduces rate from 40% to 36%. On £600,000 estate (£275k taxable after allowance), leaving £27,500 to charity saves £11,000 in IHT for family while supporting causes.
FAQs
How much can you inherit without paying tax UK?
£325,000 nil-rate band plus £175,000 residence nil-rate band if inheriting main home = £500,000 per person. Married couples combine allowances for £1 million total. Inheritance from spouse completely tax-free unlimited.
When do you pay Inheritance Tax?
IHT due 6 months after death. Executors must pay before distributing estate. Can pay property-related IHT in 10 annual instalments with interest. Late payment incurs penalties and interest charges. Executors personally liable if distribute estate before paying IHT.
Do I pay tax on inheritance from parents?
Beneficiaries don't pay IHT - estate pays before distribution. You receive inheritance after tax paid. If parents' estate under £500,000 each (£1 million combined), likely no IHT. Over this, estate pays 40% on excess before distributing to you.
Is gifting money before death tax-free?
Gifts made 7+ years before death completely tax-free. Within 7 years, subject to taper relief. Annual £3,000 exemption and regular gifts from income immediately exempt. Strategic gifting significantly reduces IHT if done early enough.
Can I avoid Inheritance Tax legally?
Yes, through proper planning: annual gifting (£3,000), larger gifts 7+ years before death, maximizing allowances (£1 million couple), residence nil-rate band, trusts, life insurance in trust, spending during lifetime, charitable donations. Professional advice worthwhile for estates over £500,000.
Conclusion
Inheritance Tax charges 40% on estates over £325,000 (£500,000 with residence nil-rate band, £1 million for couples). Without planning, families pay £40,000-200,000+ unnecessarily. Start gifting early - 7-year rule means £100,000 gifted today could save £40,000 IHT. Use annual £3,000 exemption, write life insurance in trust, maximize spouse allowances, and consider charitable giving for reduced 36% rate. Professional IHT advice costs £500-2,000 but saves tens of thousands. Unlike Capital Gains Tax or Income Tax affecting you directly, IHT robs your family's inheritance - plan now to protect it. 💎
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Jane Smith |
| Am British, live in London (1985–present) |
