Inheritance tax (IHT) is often seen as one of the most unpopular levies in the UK. Charged on your estate when you pass away, it can feel like a significant burden. However, with thoughtful planning and a clear understanding of the rules, it’s possible to minimise or even avoid this tax altogether.
As the inheritance tax threshold continues to affect an increasing number of people, staying informed about the rules and their implications for your estate is essential.
This short guide covers everything you need to know about inheritance tax, including thresholds, exemptions, and strategies to protect your legacy.
What Is the Inheritance Tax Threshold?
In 2025, individuals are taxed at a rate of 40% on any assets exceeding £325,000 – a figure known as the nil-rate band. For those leaving a family home to direct descendants, there’s an additional £175,000 allowance called the main residence nil-rate band. Combined, this means a person can pass on up to £500,000 tax-free.
The “spousal exemption” rules mean spouses can inherit unlimited amounts from each other. As and when the second partner dies, married couples and civil partners can pool their allowances, enabling them to leave up to £1 million tax-free to their heirs.
However, estates valued over £2 million begin to lose the family home allowance at a rate of £1 for every £2 above the threshold.
The 2024 Autumn Budget confirmed these allowances will remain frozen until at least 2030.
How to Calculate Your Inheritance Tax Bill
The calculation can be complex, but the basics are straightforward:
- Determine your estate’s value: Add up the value of all assets, including property, savings, investments, and personal possessions.
- Subtract any debts and allowances: Deduct outstanding debts, the nil-rate band, and the family home allowance (if applicable).
- Apply the tax rate: 40% tax is charged on the remaining amount above the thresholds.
For example, an estate worth £1.5 million with £1 million in allowances would face inheritance tax on £500,000, resulting in a £200,000 bill.
Try the Telegraph’s inheritance tax calculator to work out what your estate could end up paying.
Inheritance Tax Planning Strategies
- Gifting and surviving seven years: Under UK tax rules, gifts made during your lifetime are typically exempt from IHT if you survive for seven years after making them. This is known as the “7-year rule
- Equity Release: Over-55s can use equity release to gift money from their property’s value. However, this strategy is best suited for those with larger estates due to the associated costs and complexities.
- Spend more money! One way to reduce your exposure to Inheritance Tax (IHT) is by enjoying and spending your wealth during your lifetime. However, it’s important to strike the right balance between living well and preserving financial security for the future. Thoughtful spending—such as funding experiences, supporting loved ones through education or housing, or contributing to charitable causes—can bring joy and meaning while effectively reducing the taxable value of your estate
- Investing in AIM Shares: Some shares on the Alternative Investment Market qualify for business relief after two years, making them partially exempt from IHT. Changes in 2026 will reduce this relief, so act wisely.

The Seven-Year Rule Explained
The seven-year rule is key to reducing inheritance tax through gifting. Any gifts made more than seven years before your death are considered outside your estate and therefore exempt from IHT. Gifts made within seven years may still incur tax, but the rate tapers after three years.
It’s important to note that certain small gifts, like wedding gifts or gifts under the annual allowance (£3,000 per year), are immediately exempt.
Gifting your home to your children to reduce IHT
it is very easy to fall foul of the rules and tax experts generally caution against giving away a property purely for tax reasons. As with other financial gifts, you must survive at least seven years from giving away the property for it not to count as part of your estate for the purposes of inheritance tax. But you also need to be aware of the ‘gift with reservation’ benefit rules which mean you must not continue to use the property after it is given away. If you do continue to use it, you must pay the market rental rate. HMRC does check whether a gift has truly been made, so make sure you understand the rules before going ahead.
Gifting out of surplus income
A very under utilized aspect of the tax system is the provision for ‘gifts out of excess income.’ If you can demonstrate that you are making regular gifts from surplus income, you don’t need for your own expenses—you can gift unlimited amounts entirely tax-free. Additionally, any gift, regardless of its size, will be excluded from your estate after seven years, However, it’s important to note that different rules may apply if the gift is made to a trust rather than an individual.
Leaving a Legacy for Your Family
From gifting money early to setting up pensions or Junior ISAs for grandchildren, there are numerous ways to pass on wealth while minimizing taxes. Always ensure your strategies comply with HMRC rules and maximize the benefits for your loved ones.
Recent Legislative Changes Impacting Inheritance Tax
The 2024 Autumn Budget introduced several changes affecting IHT:
- Pensions Included in IHT Calculations: Starting April 2027, pension funds will be considered part of the estate for IHT purposes. This change necessitates a review of retirement planning strategies to mitigate potential tax implications.
- Adjustments to Agricultural Property Relief (APR): From April 2026, APR will be capped at £1 million, with assets above this amount subject to a 20% inheritance tax. This change impacts farmers and landowners, requiring careful estate planning to manage future tax liabilities.
- Transition to a Residence-Based Tax System: Effective April 2025, the UK will shift from a domicile-based to a residence-based system for IHT. Individuals residing in the UK for at least 10 out of the last 20 tax years will be liable for IHT on their worldwide assets, with a “tail provision” extending liability for up to 10 years after leaving the UK.
Strategies to Mitigate Inheritance Tax Liabilities
Given these changes, consider the following strategies to manage and potentially reduce IHT liabilities:
- Utilize Annual Gift Allowances: You can gift up to £3,000 per year without incurring IHT. Additionally, gifts made more than seven years before your death are generally exempt from IHT, known as the “seven-year rule.
- Establish Trusts: Setting up a trust can help manage the distribution of your assets and potentially reduce IHT. Assets placed in a trust may fall outside your estate for IHT purposes after seven years, though this strategy requires careful planning to comply with HMRC regulations.
- Review Pension Arrangements: With pensions becoming part of the IHT calculation from April 2027, reviewing your pension arrangements is crucial. Consider how your pension benefits are structured and explore options to mitigate potential tax liabilities.
- Consider Life Insurance Policies: Placing a life insurance policy in trust can provide funds to cover IHT liabilities, ensuring that your beneficiaries receive the intended inheritance without the burden of tax payments.
- Seek Professional Advice: Given the complexity of IHT rules and recent changes, consulting with a financial advisor or tax specialist is essential to develop a tailored estate plan that aligns with your financial goals and family needs.
There are various ways to distribute your wealth. You might prefer to retain control of your assets for a time, think about the impact on different family members, or ensure the funds are allocated for a specific purpose. Your personal preferences will guide the most suitable approach, whether that involves making regular gifts, setting up a trust during your lifetime, or safeguarding your estate against inheritance tax liabilities.
Final thoughts
Navigating the evolving landscape of Inheritance Tax in the UK requires proactive and informed planning. By understanding current thresholds, recent legislative changes, and available strategies, you can effectively manage your estate to minimize tax liabilities and ensure your assets are distributed according to your wishes. Staying informed and seeking professional advice will be key to adapting to these changes and securing your financial legacy.
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