Skip to main content
Gettyimages 1135289130 STIM 1900X450

Inheritance Tax

27 Oct 2023 | 5 minutes to read

Inheritance Tax (IHT) planning is a fundamental part of wealth management. By planning ahead, you can potentially save your family thousands of pounds in IHT when you die and ensure that your wealth is preserved for future generations.

What is IHT?

It’s a tax on the estate of someone who has passed away.

Your estate consists of everything you own. This includes savings, investments, real estate, life insurance payouts, and personal possessions. Debts and liabilities are subtracted from the total value of your assets.

Every person in the UK currently has an IHT allowance of £325,000. This is known as the nil-rate band (NRB).

What this means is that you don’t have to pay any IHT if either:

  • The value of your estate is below this £325,000 NRB, or
  • You leave everything above the £325,000 NRB to your spouse, civil partner, a charity, or a community amateur sports club

If your estate’s value is below the NRB, it still needs to be reported to HM Revenue and Customs (HMRC).

IHT rates

The standard rate is 40%. This is only charged on the part of your estate that is above the £325,000 NRB.

For example, if you leave an estate worth £750,000, the IHT due will be £170,000 (40% of the difference between £750,000 and £325,000).

IHT rules for married couples

If you are married or in a civil partnership, you are allowed to pass on your assets to your partner tax-free in most cases. The surviving partner is then allowed to use both tax-free allowances. Provided the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an IHT allowance of £650,000.

Passing on your home

You can pass on your home to your husband, wife, or civil partner tax-free when you die. However, if you leave your home to another person in your will, it will count towards the value of the estate.

In 2017, an extra allowance was introduced to make it easier to pass on a main residence to direct relatives (i.e. a child or grandchild) without incurring IHT. This allowance is known as the residence nil-rate band (RNRB).

The way the RNRB works is that there is a £175,000 allowance per person (frozen until April 2026) for those who pass on their homes to direct descendants. This is on top of the standard NRB of £325,000.

This means that you can potentially pass on a total of £500,000 tax-free (£1m for a couple) if you leave your home to a direct descendant.

Like the standard NRB, unused elements of the RNRB are transferable to a surviving spouse or civil partner. This can potentially double the amount of RNRB available.

Note that there is a tapered withdrawal of the RNRB if the overall value of your estate exceeds £2m. The withdrawal rate is £1 for every £2 over the £2m threshold.

There are also qualifying conditions that need to be met to claim the RNRB allowance. If you are unsure about how the RNRB works, it’s a good idea to speak to a financial adviser.

Who pays the IHT to HMRC?

If you have a will, it’s usually the executor of the will who arranges to pay your IHT to HMRC. If you don’t have a will, the administrator of your estate will do this.

IHT can be paid from funds within the estate, or from money raised from the sale of the assets.

To sell assets within an estate, however, you need Grant of Probate, and this cannot be granted until the IHT bill is paid. One way to overcome this dilemma is to use an ‘executor’ loan to cover the IHT liability.

In practice, most IHT is paid directly from the deceased person’s bank account to HMRC through the Direct Payment Scheme.

IHT planning: the first steps

Planning for IHT will depend on your personal situation.

However, a good place to start is to estimate the value of your estate and calculate roughly how much IHT may be due when you die. One easy way to do this is by using an IHT calculator.

Once you know the approximate value of your estate, you can then develop a plan to minimise your IHT liabilities.

Writing a will

One of the most important components of an IHT plan is a will.

Without a will, your assets will be distributed according to intestacy rules, meaning that they may be liable to IHT that potentially could have been avoided.

In your will, you can appoint an executor. This is the person that will be responsible for handling your estate in the event of your death.

Reducing your IHT bill

There are a number of ways that you can reduce the size of your taxable estate during your lifetime and subsequently reduce your future IHT liabilities. Here’s a look at six straightforward strategies to reduce your IHT bill.

Gift money while you are still alive

Gifting money while you are still alive is one of the easiest ways to reduce the size of your estate.

Under current rules, you can give away assets or cash worth £3,000 per year as gifts without this money being subject to IHT.

A Potentially Exempt Transfer is another way that you can reduce your IHT bill. Here, gifts of unlimited value are exempt from IHT as long as you survive for a period of seven years after making the gift. If you do not survive for seven years after making the gift, the gift will be subject to IHT.

Gifts that are made out of surplus income can also be free of IHT, as long as the gifts are made regularly and detailed records are maintained.

There’s also no IHT to pay on gifts between spouses or civil partners, as long as they live in the UK on a permanent basis.

Set up a trust

Trusts can also be an effective way of reducing IHT liabilities.

Setting up a Discounted Gift Trust (DGT) is one option to consider. A DGT allows you to invest a sum of money in order to reduce the amount of IHT you pay in the future, while retaining the right to fixed regular payments. A DGT can be a powerful estate planning tool for those who are looking to draw an income from their investments throughout their lifetime and then pass on a lump sum to their beneficiaries.

Bear in mind that the rules surrounding trusts are complicated so it’s a good idea to seek expert advice if you’re looking to use them.

Make use of pensions

Keeping money within a defined contribution pension can be another way to minimise IHT. Unlike other assets, your pension is not part of your taxable estate, meaning it is usually free of IHT. Keeping your wealth within a pension wrapper and passing this on to future generations can be an effective strategy.

If you die before the age of 75, your pension will be passed on tax-free. However, if you die after the age of 75, your beneficiaries will pay tax on the proceeds at their highest income tax rate. Your pension will not be covered by your will, so you will need to ensure that your pension provider knows who your nominated beneficiaries are.

Buy life insurance within a trust

Normally, the payout from a life insurance policy is included within your estate and subject to IHT. However, if the life insurance policy is placed within a trust, the proceeds can be paid directly to your beneficiaries rather than to your estate. This means that the payout will not be considered when IHT is calculated.

Business Relief and Agricultural Relief

Owning an asset that qualifies for Business Relief (BR) or Agricultural Relief (AR) can be another effective IHT planning strategy as these can be exempt from IHT. Provided the asset has been held for at least two years, it may be possible to receive BR or AR of either 50% or 100%.

Leave money to charity

Finally, leaving money to charity can help reduce your IHT bill. If you leave money to charity, it won’t count towards your taxable estate. And if you leave 10% or more of your ‘net estate’ to charity, your estate can pay IHT at a reduced rate of 36%, instead of 40%.

It's never to early to start planning

If you want to pass on as much of your wealth as possible, it’s a good idea to plan ahead for IHT. It’s never too early to start exploring your options. With a careful plan, you can protect your assets from IHT and minimise the potential tax burden on your family. 


Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up, and you may get back less than you invested.


Before you invest, make sure you feel comfortable with the level of risk you take. Investments aim to grow your money, but they might lose it too.