UK Inheritance Tax & estate planning, explained

Inheritance Tax (IHT) is a UK tax on the value of what you own when you die (your "estate"), and on some gifts made before death. It isn't paid by your beneficiaries directly — it's paid by your estate (via your executors) before the remaining assets are distributed, and it reduces what's left to inherit.

Every estate gets a tax-free nil-rate band (NRB) of £325,000, frozen at that level since 2009 and currently due to stay frozen until at least April 2030. If you own a home and leave it to children, grandchildren or other direct descendants, you may also get a residence nil-rate band (RNRB) of up to £175,000 on top. The RNRB tapers away for larger estates — it reduces by £1 for every £2 an estate is worth over £2 million, and can be reduced to zero for very large estates. Unused NRB and RNRB can typically be transferred to a surviving spouse or civil partner, effectively doubling both bands for the second death.

The standard rate is 40% on the portion of your estate above your combined NRB and RNRB. There is no tax at all on anything within those bands.

Yes — if you leave at least 10% of your "baseline" estate (broadly, the taxable estate after deducting reliefs and the nil-rate bands) to charity, the rate on the rest drops from 40% to 36%.

Yes, transfers between UK-domiciled or long-term-resident spouses and civil partners are entirely exempt from Inheritance Tax, with no upper limit. This only applies to a legally married spouse or registered civil partner — it does not apply to an unmarried partner, however long the relationship.

The unlimited spouse exemption can be restricted where one spouse doesn't meet the UK's residence test for Inheritance Tax (see "long-term resident" below) — historically there was a fixed cap in this situation, and the rules were also updated as part of the 2025 shift from domicile to residence. If this applies to you, it's worth checking your specific position with a solicitor rather than assuming the general unlimited exemption applies.

Yes, gifts to UK-registered charities (during life or in your will) are entirely exempt from Inheritance Tax, and can also unlock the reduced 36% rate on the rest of your estate if they reach the 10% threshold above.

A gift to an individual (not into most trusts) is a "Potentially Exempt Transfer" (PET). If you survive 7 years from the date of the gift, it falls out of your estate entirely and no tax is due on it. If you die within 7 years, it's brought back into your estate for tax purposes, using the nil-rate band available at your death.

Taper relief is commonly misunderstood — it does not reduce the value of the gift itself, only the rate of tax charged on it, and only if tax is actually due (i.e. the gift, combined with the rest of your estate, exceeds the nil-rate band). It applies on a sliding scale: 0% relief (full 40%) if you die within 3 years, then 20% off (yrs 3–4), 40% off (yrs 4–5), 60% off (yrs 5–6), 80% off (yrs 6–7), and 100% relief (no tax at all) once you've survived a full 7 years.

You can give away £3,000 a year completely tax-free (the "annual exemption") — if you didn't use last year's allowance, you can carry it forward one year, giving a possible £6,000 in one go. Separately, you can give up to £250 to as many individual people as you like each year, as long as they haven't also received part of your £3,000 allowance. Wedding or civil partnership gifts are also exempt up to £5,000 from a parent, £2,500 from a grandparent or great-grandparent, or £1,000 from anyone else.

If you make regular gifts out of your genuine surplus income (not capital), and the gifts don't reduce your normal standard of living, they can be immediately exempt from Inheritance Tax with no 7-year wait at all. This is one of the most under-used exemptions, but it needs a clear, documented pattern of regular giving to be defensible with HMRC — a one-off large gift doesn't qualify.

If you give something away but keep some benefit from it — the classic example is gifting your house to your children but continuing to live in it rent-free — HMRC treats it as if you'd never given it away at all, and it stays fully in your taxable estate regardless of how many years pass. To make a gift like this work, you generally need to give up all benefit (e.g. pay a full market rent if you keep living there).

Business Relief (BR) can remove qualifying trading business assets from Inheritance Tax entirely. From 6 April 2026, this is changing: Business Relief and Agricultural Relief are combined into a single £1 million allowance of 100% relief per person; value above that only gets 50% relief (an effective 20% rate). Shares on the Alternative Investment Market (AIM) are affected even more — they lose 100% relief altogether and only get 50% relief, regardless of the £1m allowance.

Agricultural Relief (APR) can remove the agricultural value of qualifying farmland and farmhouses from Inheritance Tax, provided the land is actively farmed. From 6 April 2026 it shares the same combined £1 million 100%-relief allowance with Business Relief described above — larger farms and estates should plan around this cap rather than assuming unlimited 100% relief will continue.

Under the current rules, most defined-contribution pension pots sit outside your estate for Inheritance Tax purposes and pass to whoever you've nominated (via an "expression of wish" with your provider), separate from your will. Because of this, many people deliberately spend down other assets first in retirement and leave pensions untouched for as long as possible.

From 6 April 2027, most unused pension funds and death benefits are due to be brought within the value of your estate for Inheritance Tax. This is a significant upcoming change to the "spend other assets first, leave the pension" strategy above — plans built around today's pension treatment should be revisited as that date approaches.

Yes — an ISA wrapper only shields investment growth from Income Tax and Capital Gains Tax during your lifetime. The full value is still part of your taxable estate on death, with one narrow exception: some AIM-listed shares held inside an ISA can separately qualify for Business Relief, in which case that specific relief applies, not any special "ISA exemption". A surviving spouse or civil partner can also inherit an equivalent additional ISA allowance (the "Additional Permitted Subscription"), but that's about preserving the ISA wrapper for them, not about avoiding Inheritance Tax.

A trust is a legal arrangement where assets are held by trustees for the benefit of named beneficiaries, separately from your personal estate. People use trusts to control when and how beneficiaries receive assets (e.g. not until a certain age), to provide for someone who can't manage money themselves, or as part of a wider Inheritance Tax strategy — but putting assets into most trusts is itself a taxable event and doesn't automatically avoid tax.

Most trusts used for estate planning fall under the "relevant property regime": there can be an entry charge when assets go in above the nil-rate band, then a periodic charge of up to 6% every 10 years the trust exists, and an exit charge when assets leave the trust. This makes trusts a genuine planning tool, not a simple way to sidestep tax — the ongoing charges need to be weighed against the benefit.

No. Unmarried partners get no automatic Inheritance Tax spouse exemption, however long the relationship, and have no automatic right to inherit anything at all if there's no valid will (see intestacy below). If you're not married or in a civil partnership and want your partner provided for, a will is essential, not optional.

Without a valid will, your estate is distributed under fixed statutory intestacy rules, which vary between England & Wales, Scotland, and Northern Ireland. Broadly, a surviving spouse or civil partner and children have priority, in a fixed order and fixed shares set by law — not necessarily what you'd have chosen, and an unmarried partner typically receives nothing automatically. The exact figures involved are periodically updated by the government, so if this applies to you, it's worth checking the current rules for your specific nation rather than relying on a remembered figure.

Yes. Under the Inheritance (Provision for Family and Dependants) Act 1975, certain people — a spouse or civil partner, a former spouse who hasn't remarried, a child, someone treated as a child of the family, or someone who was financially dependent on you — can apply to the court for reasonable financial provision if they feel your will (or the intestacy rules) doesn't adequately provide for them. This is a completely separate issue from Inheritance Tax, and is one of the most common ways a will ends up contested.

A Deed of Variation lets your beneficiaries agree, within 2 years of your death, to redirect some or all of their inheritance — for example, passing it straight to their own children, or to charity — and have it treated for tax purposes as if you'd left it that way originally. It's a decision your family makes after your death, not something you can set up in advance, but it's worth knowing your executors and beneficiaries have this option.

An executor is the person (or people) you name in your will to carry out its instructions after you die — applying for probate, collecting in and valuing the estate, paying any debts and Inheritance Tax due, and then distributing what's left to your beneficiaries. It's a real job with real responsibility (and personal legal liability if it's done wrong), not just an honorary title, so choose someone willing and able to take it on — not just whoever feels like the "obvious" choice.

An executor must be 18 or over by the time they need to act (they can be named younger, but can't apply for probate until then), and there's no rule against also being a beneficiary — in fact a spouse or adult child acting as both is very common. You can name as many executors as you like in your will, but only up to 4 can be named on the actual grant of probate at once, so most people name 1–4 primary executors plus, ideally, at least one reserve in case a primary executor can't or won't act (through death, incapacity, or simply declining the role). Naming just one, with no backup, is a common and avoidable gap.

Your executors (or administrators, if there's no will) are responsible for paying any Inheritance Tax due, out of the estate, before most of the assets can be distributed. It's generally due within 6 months of the end of the month in which you died — after that, HMRC starts charging interest, even if probate is still being sorted out.

This is a genuinely common problem — much of an estate's value is often tied up in a house or business that can't easily be sold before probate is granted. Options include: some banks will release estate funds directly to HMRC before probate under a "Direct Payment Scheme"; tax on property, businesses and some other illiquid assets can often be paid in instalments over up to 10 years instead of as one lump sum; and life insurance written in trust can provide cash specifically earmarked for this purpose, since a trust payout doesn't have to wait for probate.

Less than it used to be. From 6 April 2025, the UK moved from a domicile-based system to a residence-based one for Inheritance Tax: broadly, whether your worldwide estate is exposed to UK IHT now depends on whether you're a "long-term UK resident" (roughly, resident in the UK for at least 10 of the last 20 tax years), rather than the older concept of domicile. If your circumstances involve time spent outside the UK, this is a real, fairly recent change worth checking against your specific situation.

Legacy Protector is a planning tool to help you understand your position and organise your information — it is not legal or financial advice, and the figures and rules above can change. For anything you intend to act on (writing or signing a will, setting up a trust, restructuring a business or property, or anything involving significant sums), speak to a qualified solicitor and, where relevant, a financial adviser or accountant who specialises in estate planning.