Inheritance Tax

Probably the most hated tax in the UK and yet inheritance tax will only impact around 6% of estates in 2025 and even when pensions become subject to inheritance tax in 2027/28 tax year it is estimated that less than 10% of estates will pay Inheritance Tax. However with the ever increasing property values, frozen thresholds (the amount that you are able to pass on free of inheritance tax) and the inclusion of unexhausetd pension funds it is good advice for everyone to ensure that they and their loved ones are aware of any potential inheritance tax liabilities and to start planning how to mitigate any liability as early as possible.

Whilst we do have our own views about the politics of Inheritance Tax we alwqys strive to avoid allowing thoes views to influenec our guides. The political argument in favour of inheritance tax is simple – it redistributes wealth. Without it the rich get richer and the poor gets poorer.

But lets start with some good news –

• anything left to a spouse or civil partner is totally exempt from Inheritance Tax – be aware that this does not apply if you are simply cohabiting with a partner, even if you have lived together for many years and / or have children together this exemption will not apply.
• there is no inheritance tax liability on the first £325,000 that you leave to anyone else. So if leave anything over £325,000 to your spouse or civil partner there will be no inheritance tax to pay
• you can increase this tax free amount to £500,000 by passing your home to your children or grandchildren this is beacause there is an additonal allowance of £175,000 called the residence nil rate band (or main residence band) but only if the home is passed to your direct dependants – this includes your children (biological, adopted, fostered or step) and grandchildren but not other family members such as nieces or nephews. This allowance only applies in full to estates worth less than £2million. If the total value of your estate is in excess of £2million see below for how this allowance is tapered. There are a few other considerations in respect of this allowance – see below for details.
• for couples (married or in a civil partnership) the tax free amount can be increased to £1million. This because any unused Inheritance Tax allowance passes to your spouse – so if the first partner (married or civil partner) to pass leaves all of their estate to the surviving spouse this is EXEMPT from Inheritance Tax so none of their allowance is exhausted so their full allowance of £325,000 plus the full main residence band of up to £175,000, so £500,000 in total also passes to the surviving spouse meaning that when the surviving spouse passes their total allowance is £1million (their own £325,000 plus their deceased spouses £325,000 allowance and their main residence nil rate £175,000 plus the deceased spouse £175,000 – if the main residence is left to a direct descendant) 

It is the combination of the above exemptions and allowances that result in the majority of estates having no Inheritance Tax liability. 

In order to ensure that maximum advantage of these exemptions and allowances is taken we suggest following theses simple guidelines.

Identifying the value of the Estate

In simple terms the value of an estate is the total worth of the deceased’s money, property and possesions, on the day that died plus the value of any gifts (cash, possesions eg jewellery or property) that the deceased made in the past 7 years and the value of any trusts that the person had a beneficial interest in.

It is important to note that if the death ocurred prior to the start of the 2027/28 tax year any funds left in a pension does not form part of the estate – meaning it is exempt from Inheritance Tax, however if death occurs after 5th April 2027 then any unused pension funds will form part of the estate.

We have developed a simple calculator to help executors and loved ones to value an estate or to help you to value your estate if you are planning for the future.

If you are planning your own estate we suggest that it would be good practice, to assist with both your own planning and to assist your executors. For executors we have an additional guide to assist you in your duties and to identify who you may need to contact in order to estimate the value of the deceased’s estate. 

Having valued your estate you will now know whether it is going to exceed all of the exemptions and allowances that are available to you.

If it does not – good news – your estate will not incur any Inheritance  Tax.

If it does then you may wish to consider what strategies are legally available to you to minimise the amount of tax payable – read on.

How to Legally reduce your Inheritance Tax bill

If your the value of your estate is in excess of the exemptions and allowances that are available to you then you may wish to consider how to reduce the amount of Inheritance Tax that will be payable.

The first important thing to note is that only you can do this – once you have passed it is too late for any mitigation strategies to have any impact.

Secondly commencing any such strategies that work for you as early as possible will have the maximum impact.

All of the mitigation strategies that we identify are easy to implement and will not usually require any legal advice. However there are more complex situations that will almost certainly require more specialist advice. Here are our top mitigation strategies – in essence spend it or gift it !

• Spend it ! – You can spend as much as you like in order to reduce the value of your estate and therefore the amount of any Inheritance Tax liability. However there are 4 considerations – firstly you may have to pay income or capital gains tax on any pension fund withdrawals or asset disposals. Secondly you will have to ensure that you have sufficient cash or assets to support your lifestyle for the remainder of your life.
• Gift it ! Sounds simple but this involves planning and record keeping in order to keep the taxmans hands off your legacy after you have gone – see our guide to gifting below
• Leave at least 10% of the total value of your estate to a charity or community amateur sports club – this will reduce the Inheritance Tax rate on your entire estate to 36%.  Whilst this strategy will reduce the amount of Inheritance Tax payable it will not increase the amount of legacy that loved ones receive – a 10% donation to charity combined with the lower rate will still be more than just paying the higher rate. So this is really only a strategy for anyone that was planning on leaving a legacy to a charity anyway.

A Guide to Gifting

For Inheritance Tax purposes there are 2 types of gift.

• Your annual gifting allowance – Some gifts do not count towards the value of the estate because they’re exempt from Inheritance Tax
• Gifts that are subject to 7 year rule – Some gifts could count towards the value of your estate, and therefore any Inheritance Tax liability if you die within 7 years of the gift being made.

The main gifting opportunities that are exempt from the value of your esatate and therefore will not incur any Inheritance Tax after your passing are :

• gifts made to spouses or civil partners 
• gifts made to charities, political parties, housing associations, heritage bodies (for example the National Trust) and other exempt organisations.

  Donations or gifts to charity are not subject to IHT. And where a charity donation is equivalent to at least 10% of your estate, any IHT payable elsewhere is reduced to 36%.

• small gifts of £250 or less – you can gift up to £250 per person, for example for birthdays or christmas, to as many people as you want. So, say you have 12 grandchildren, you could gift each of them £250 a year as a birthday present.

  These gifts do not count towards the £3,000 annual gift exemption (described below) – though you can’t combine gifts on the same person. So if you’ve already gifted someone your £3,000 annual exemption, you couldn’t then gift them £250.

• wedding and civil partnership gifts up to a maximum of £5,000 are exempt from Inheritance Tax. If a family member or friend is getting married, you’re able to gift them money tax-free. You can only make a wedding gift to that person once a year, and there’s a limit on how much you can give them: £5,000 to a child, £2,500 to a grandchild and £1,000 to anybody else. You can though make wedding gifts to different people in the same tax year. For example, if you had two children, both who are getting married in the same tax year, you could give each of them up to £5,000 (so up to £10,000 in total). Or if you had multiple friends getting married in the same tax year, you could give each of them up to £1,000. Wedding gifts can be combined with your £3,000 annual exemption (so both allowances can be used on the same person in the same tax year) but not with the £250 small gift allowance.

• you can give away up to £3,000 p.a in total in gifts to anyone – this can be to one person or to any number of people. The first £3,000 you give away each tax year does not form part of your estate. If you don’t use your full annual exemption in any given year, the remainder can be carried forward to the next tax year (but no further). For example, if you didn’t use any of your annual exemption in 2025-26, you could carry over that tax year’s allowance and give away a total of £6,000 tax-free in 2026-27 (so £3,000 from 2025-26 and £3,000 from 2026-27). 
• Perhaps one of the least well known, but potentially most significant transfer of wealth opportunities is to gift regular payments from your excess income – Inheritance Tax is a tax on your assets. And as a regular income (such as that from earnings, pensions and dividends) is not treated as an asset, you can regularly give money away from this income – tax-free – so long as it’s not detrimental to your lifestyle.

  There’s no limit on how much money you can give tax-free, so long as you can afford the payments after meeting all of your own living expenses and you make the payments out of your own regular income. Reasons for giving money out of your regular income can include (though isn’t limited to):

  • Paying rent for your child.
  • Paying into a savings account for a child under 18 (though this could mean you end up paying tax on any savings interest accrued, unless you’re saving into a junior ISA or Premium Bonds).
  • Giving financial support to an elderly relative.
  • Contributing to your child’s living costs and tuition fees at university.

  Giving money in this way can be combined with your £3,000 annual exemption (so it can be used on the same person), but not with the £250 small gift allowance.

  Most importantly any money you give from your regular income must follow an established pattern though – for example, regularly paying the rent of a grandchild – and it can’t compromise your own living standards.

  The rules for this type of IHT exemption are complex. We would always recommend that records are kept of any gifts which are given and which are planned to be exempt from Inheritance Tax – we have provided a gifting worksheet which will help to identify anf such gifts and will be of real assistance to your executor who will have the responsibilty of identifying any gifts given in the past 7 years. so if you plan to give money in this way, it’s a good idea to get independent financial advice.You can afford the payments after meeting your usual living costs.You pay from your regular monthly income.

One note of caution – gifts have to be unconditional – there can be no ‘quid pro quo’ resulting from a gift. If a gift is given with the intention of receiving something in return, they could still be liable for IHT. For example the biggest asset most people have is their home, yet trying to give this to your children won’t work if you continue to live in it (unless you pay market rent to them for it, but then they will pay income tax at their marginal rate on the rental income)

And a second note of caution. Whilst this guide is primarily designed to assist anyone trying to minimise Inheritance Tax liabilities there is another, perhaps, more significant risk to the value of your legacy – future care costs. We have dedicated a whole guide to this but the main issue to note as part of this guide is that a local council, who is responsible for your care, can determine that any gifts made are a deliberate ‘deprivation of assets’ designed to avoid paying care costs in the future – if this raises any concerns please read our care costs guide.

We would always recommend that in order to maximise your gifting exemptions and minimise the risk of any gifts being seen as ‘deprivation of assets’ when it comes to care costs all gifts given should be

• Fully documented – use our gifting worksheet
• Be given for a purpose – whilst it is sadly not black & white our research would suggest that a gift given for a specific purpose is less likely to be seen as a dprivation of assets
• Start gifting well before there is any need for care identified – a long term record of gifting prior to any care being required means that it is less likely that a council will see a gift as a deliberate ‘deprivation of assets’

Seperate to all of the above potential gifting exemptions you can of course gift as much as you want to anyone that you want. But any such gifts will be subject to 7 Year Rule – which effectively means that the value of the gifts will be counted towards the value of your estate for Inheritance Tax purposes if you die within 7 years of the gift being made. This means that the value of any gifts in excess of your £325,000 annual exemption will be taxed at up to 40%. We say up to 40% because there is a sliding scale based on when the gift was given within the past 7 years.

And one final note on gifting – normally any Inheritance  Tax due is deducted from the deceased’s estate and paid to HMRC before the remaining value is paid to the beneficaries. However that obviously cannot happen if Inheritance Tax is due on any gifts given before death. For any such gifts the person who is given the gift is responsible for paying any Inheritance Tax due.

Also it is worth noting Inheritance Tax bills need to be paid by the end of the sixth month after the deceased has died. So lets say that you gifted £20,000 to a grandchild 2 years ago and that was over and above any exemptions that were available to you your grandchild will have to fund an £8,000 inheritance tax bill within 6 months of your death – not easy if they have already spent the £20,000 gift ! This is why we think that planning your gifting strategy as soon as possible is so important – if the value of your estate is likely to incur an Inheritance Tax liability.

Pensions and Inheritance Tax

Under current legislation (December 2025) if there is any money left in your pension pot when you die this can be passed on, free of any Inheritance Tax liability because pensions 

If you’ve got a pension, then often this can be passed on if there’s money left in the pot at the time you die.

Currently, pensions are not subject to IHT, as they do not form part of your estate. And as some people don’t pay income tax on an inherited pension, this means inheriting a pension can be completely tax free in some cases.

However, it’s important to note that these rules are set to change. From the 2027/28 tax year, pensions will start to form part of an estate – meaning pensions will be subject to IHT rules from 6 April 2027.

In reality though, only a small number of pensions will actually be hit with IHT as a result of this change (the number is estimated to be in the 10,000s). The vast majority of pensions will continue to be unaffected by IHT, and many will continue to be inherited tax-free.

The main residence allowance only applies to estates worth less than £2 million. (On estates worth £2 million or more, the main residence allowance decreases by £1 for every £2 above £2 million – so you lose it entirely if your estate is worth £2.35 million or above).

Your home won’t qualify for the main residence allowance if it’s in a ‘discretionary will trust’, even if the trust beneficiaries are your children or grandchildren. 

If your home’s not worth at least £175,000, the main residence allowance will be equivalent to its actual value (so if your home’s worth £150,000, your main residence allowance will be £150,000). Technically, therefore, it’s an allowance of ‘up to’ £175,000.