Understanding Inheritance Tax. What You Need to Know

Inheritance Tax (IHT) is a tax on the estate, property, money, and possessions of someone who has died.

The rules, thresholds and reliefs are complex, and with property values and pension wealth rising, more families than ever are having to consider IHT when planning their estate.

Current Thresholds & How IHT Is Calculated

• Every individual has a base nil-rate band (NRB) of £325,000, which is the portion of their estate that is tax-free. Estates under this value typically pay no IHT.
• There is also a residence nil-rate band (RNRB) of up to £175,000, which applies if you pass your main residence to your direct descendants, like your children, grandchildren, etc.
• Combined, an individual may therefore pass on up to £500,000 tax-free (NRB + RNRB), if conditions are met.
• For married couples or civil partners, any unused NRB and RNRB from the first spouse to die can typically be transferred to the surviving partner, potentially doubling the tax-free threshold up to ~£1 million.
• Estates above the threshold pay a standard IHT rate of 40% on the portion above the threshold.
• If at least 10% of the estate’s net value is left to charity, the IHT rate on the remainder may be reduced to 36%.

These thresholds have been frozen for many years, while property values, house prices and pension assets have soared, which means a growing number of estates are now subject to IHT.

Key Reliefs, Exemptions & Special Rules

IHT isn’t always a blow. There are many legitimate ways to reduce or avoid it:

• Spouse/Civil Partner Exemption: Anything left to a surviving spouse or civil partner is exempt from IHT.
• Transfer of unused NRB/RNRB: As noted, if the first spouse doesn’t use all their allowances, the survivor can claim them, potentially sheltering up to £1 million combined.
• Gifting & Seven-Year Rule: Gifts made more than 7 years before death under certain conditions may be free of IHT, or taxed on a tapered basis.
• Business Relief and Agricultural Relief: Qualifying business or agricultural property can be passed on with reduced or nil IHT.
• Charitable giving can reduce the IHT charge (the 36% rate instead of 40%) if 10%+ of the net estate goes to charity.

Because of these, many people, especially those with sizeable estates, property, business assets, or complex family arrangements, benefit from professional estate planning.

Why More Families Are Getting Caught by IHT

Several factors make IHT more relevant now than ever:

• Frozen allowances: NRB and RNRB thresholds have been held at the same nominal levels for years, while property, investments and pensions have increased in real value.
• Rising house prices and property wealth: More homeowners now own properties that make their estate value high enough to trigger IHT when combined with other assets.
• Pension wealth & untapped pensions: As people accumulate larger pension pots, the total estate value grows, and IHT can apply on death (unless properly planned). This means inheritance planning should consider pensions as well as property and savings.
• Growing awareness of estate planning: With public discussion about wealth transfers, inheritance, and legacy planning on the rise, many more people are starting to think about IHT before it’s too late.

Because of all this, without planning, more heirs than ever will face taxes or pressure to sell assets to cover IHT.

How to Plan and Minimise IHT. Practical Strategies

1. Combine allowances if married or in a civil partnership

Make sure when the first person dies, the unused NRB and RNRB are carried over, giving the survivor potentially up to £1 million tax-free threshold.

2. Use Lifetime Gifts Wisely

Gifting assets more than seven years before death, when conditions are met, or using annual gifting allowances, can reduce the value of your estate over time, potentially falling below IHT thresholds.

3. Consider Your Primary Residence & Heir Structure

If you plan to leave your home to children or grandchildren, structure the estate to qualify for RNRB. Homes left to non-direct descendants or friends may not qualify.

4. Use Trusts, Business Relief or Agricultural Relief (if relevant)

For business owners or those with farmland/woodland, reliefs or trust structures may offer significant reductions in IHT liability.

5. Charitable Giving

Leaving 10% or more of your net estate to charity can reduce the IHT rate from 40% to 36%.

6. Review Your Estate Regularly. Especially After Major Life Events

Marriage, divorce, property sales or purchases, inheritance, pension changes, can all affect estate value and IHT exposure.

7. Get Professional Advice Early

Given the complexity and long-term implications, working with a qualified financial adviser or wealth manager is often worth it, both for peace of mind and optimal structuring.

If you’re unsure where to start, our guide on how to compare wealth managers can help you find advisers who specialise in estate planning and IHT strategies.

How Inheritance Tax Planning Fits Into Broader Financial & Retirement Goals

IHT planning isn’t just about tax; it’s about legacy, security, and ensuring your loved ones receive the maximum benefit. That’s why it links naturally with:

• Long-term retirement planning (so you don’t end up needing capital during your lifetime)
• Pension planning, to know what’s inside or outside the estate on death
• Estate planning, wills, trusts, and inheritance strategies
• Family and generational wealth planning

If you or your partner is approaching retirement or drawing on pensions, it’s especially important to check how those pensions will be treated for IHT. For many couples, combining retirement planning with inheritance planning makes sense.

For help at that stage, you can explore our Approaching Retirement Hub, and our resources offering guidance on drawdown, pensions, retirement income and estate planning.

Why Taking IHT Planning Matters

• Without planning, beneficiaries may face large 40% tax bills or forced asset sales to meet IHT costs.
• Proactive planning can preserve family wealth and ensure a smoother, more tax-efficient transfer to heirs.
• Combining IHT with retirement, pension, and estate planning helps you and your loved ones avoid surprises or undue financial stress.
• Spouses and civil partners have unique benefits — transferring unused allowances can shelter up to ~£1 million estate value from IHT.

Next Steps If You’re Reading This

1. Add up what you own: property, pensions, savings, investments, business/farm assets, insurance, etc.

2. Estimate your IHT exposure, compare it to current thresholds (NRB + RNRB).

3. Check your will, beneficiaries, spouse allowances & existing reliefs.

4. Consider lifetime gifting or trust structures, especially if your estate value exceeds thresholds.

5. Talk to a qualified wealth manager or financial adviser to structure estate planning, pensions, and legacy planning optimally.

6. Review your plan periodically; life changes, rising property values and pension growth can impact your estate value over time.

To find a qualified adviser who can help you with this process, you might use our Find a Financial Adviser search tool to connect with advisers experienced in IHT, estate planning, retirement and pensions.

Conclusion

Inheritance Tax remains a significant consideration for many UK households, especially as asset values rise and pensions grow. The standard tax-free allowances (NRB + RNRB) are fixed, which increases the likelihood that more estates will cross the threshold over time.

But with sensible planning, using allowances, exemptions, and professional advice, you can shield a large portion of your estate from IHT, preserving wealth for your loved ones.

Estate planning isn’t just about money; it’s about your legacy.