What is inheritance tax (IHT)?

In this article, we'll explain what inheritance tax is, the current allowances available and some of the ways people may look to reduce a potential inheritance tax bill.

Inheritance tax is a tax that may be charged on the value of someone's estate when they die.

An estate includes things such as property, savings, investments and personal belongings. Any inheritance tax due is usually paid from the estate before the remaining assets are passed on to beneficiaries.

The amount of inheritance tax payable depends on the value of your estate and the allowances, exemptions and reliefs that may be available.

In most cases, anything left to a spouse or civil partner is exempt from inheritance tax.

Everyone currently has an inheritance tax allowance, known as the nil-rate band, of £325,000.

There is also an additional residence nil-rate band of up to £175,000 available when a qualifying home is left to direct descendants, such as children or grandchildren.

This means that, subject to eligibility, an individual may be able to pass on up to £500,000 before inheritance tax becomes payable. For married couples and civil partners, any unused allowances can generally be transferred to the surviving partner, potentially allowing up to £1 million to be passed on without an inheritance tax liability.

Any value above the available allowances is generally taxed at 40%.

While the basic principles of inheritance tax remain the same, there are some upcoming rule changes that may be relevant when planning your estate:

Inheritance tax allowances: The amount you can normally leave behind before inheritance tax may apply is expected to stay the same until at least the end of the 2030/31 tax year. This includes the standard inheritance tax allowance of £325,000 and the additional allowance of up to £175,000 that may be available when a family home is passed to children or grandchildren.

Pensions: At the moment, money left in a pension can often be passed on separately from your estate. However, from 6 April 2027, most unused pension savings are expected to be included when calculating the value of an estate for inheritance tax purposes if the pension holder dies on or after that date. This could mean that more people become liable for inheritance tax, or that a larger amount of inheritance tax is due.

Agricultural and business property: From 6 April 2026, some farms, farmland and business assets are expected to continue being passed on free from inheritance tax up to a value of £2.5 million. Above this amount, a reduced inheritance tax exemption is expected to apply, which could mean some inheritance tax becomes payable on part of the value.

These changes won't affect everyone. However, they may be worth considering if you have a large pension, own farmland, or have business assets that you plan to pass on to family members. Reviewing your plans regularly can help make sure they continue to reflect your wishes and make the most of any inheritance tax allowances and exemptions that are available.

There are several ways people may look to reduce the amount of inheritance tax payable on their estate.

• Gifting - Giving money, assets or possessions away during your lifetime can reduce the value of your estate. In some cases, gifts made more than seven years before death fall outside your estate for inheritance tax purposes.
• Trusts - Some people choose to place assets into a trust, which can help control how wealth is passed on and may form part of an inheritance tax planning strategy.
• Making use of available reliefs - Certain business and agricultural assets may qualify for inheritance tax relief, although the amount of relief available will depend on the value of the assets, the circumstances and the rules in place at the time.
• Charitable donations - Leaving part of your estate to charity can reduce the value of your taxable estate and, in some cases, may reduce the rate of inheritance tax that applies.
• Spending your wealth during your lifetime - Many people choose to use their wealth to enjoy retirement, support family members or achieve personal goals. As a result, the value of their estate may be reduced for inheritance tax purposes.
• Life insurance - A life insurance policy written in an appropriate trust arrangement may help provide funds to cover a potential inheritance tax liability, which could reduce the financial impact on your beneficiaries.

Inheritance tax can be complex, but understanding the rules and allowances available can help you make informed decisions about your estate and how your wealth may be passed on in the future.

Taking time to understand how inheritance tax works can help you plan ahead and make the most of any available exemptions, reliefs and allowances.

As tax rules and personal circumstances can change over time, it's important to review your arrangements regularly to ensure they continue to reflect your wishes and objectives.

If you're unsure about how inheritance tax may affect you or your family, speaking to a financial adviser can help you understand your options and identify the most appropriate approach for your individual circumstances.

By gaining a clearer understanding of inheritance tax and planning ahead, you can help ensure your affairs are organised in a way that reflects your wishes and supports the people who matter most to you.

This article is for information purposes only and is not intended as financial, legal or tax advice.

Tax treatment depends on individual circumstances and may be subject to change in the future.

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