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Inheritance tax (IHT) is charged at 40% on the value of an estate above certain thresholds. For 2024/25, the standard nil-rate band is £325,000 — meaning anything above this value is subject to the 40% charge. A residence nil-rate band of up to £175,000 can also apply when a home is passed to direct descendants.
For a married couple, these allowances can be combined — potentially sheltering up to £1 million from IHT before any mitigation strategies.
Despite the thresholds, rising property values mean more estates are falling into the IHT net. Understanding the legal reliefs and planning tools available can significantly reduce the tax paid by your estate.
The Basic Thresholds
Nil-rate band: £325,000 per person. This has been frozen at this level since 2009 and is set to remain frozen until 2028.
Residence nil-rate band (RNRB): An additional £175,000 available when a residential property is passed to direct descendants (children, stepchildren, grandchildren). This is tapered for estates above £2 million, reducing by £1 for every £2 above the threshold.
Transferable allowances: When one spouse dies, any unused nil-rate band and RNRB passes to the surviving spouse. A couple who have never used their allowances could shelter up to £1 million (£325,000 + £325,000 + £175,000 + £175,000) from IHT.
Gifts During Your Lifetime
Making gifts during your lifetime reduces the value of your estate — and if you survive long enough, these gifts become fully exempt.
The seven-year rule: Most gifts become exempt from IHT if you survive for seven years after making them. Gifts made 3–7 years before death are subject to “taper relief” — a sliding scale of reduction on the IHT charged:
- 0–3 years: No relief (full 40% applies above threshold)
- 3–4 years: 20% reduction (effective rate 32%)
- 4–5 years: 40% reduction (effective rate 24%)
- 5–6 years: 60% reduction (effective rate 16%)
- 6–7 years: 80% reduction (effective rate 8%)
- Over 7 years: Fully exempt
Annual exemption: Everyone can give away £3,000 per year free from IHT, regardless of the seven-year rule. Unused allowance can be carried forward one year — so if you didn’t use last year’s £3,000, you can give away £6,000 this year.
Small gifts exemption: Gifts of up to £250 per person per year to any number of people are exempt — with no limit on the number of recipients.
Wedding/civil partnership gifts: Parents can give up to £5,000 per child; grandparents £2,500 per grandchild; anyone else up to £1,000 — all exempt.
Regular gifts from income: Gifts made from surplus income (not capital) that are part of a regular pattern are fully exempt from IHT. This is a powerful tool for people with significant income above their expenditure. The gifts must be regular, from income (not savings), and must not reduce your standard of living.
Spousal and Charitable Exemptions
Gifts to a spouse or civil partner are entirely exempt from IHT — both during life and on death.
Gifts to charity are fully exempt. Additionally, if you leave at least 10% of your net estate to charity, the IHT rate on the rest of the estate reduces from 40% to 36%.
Business and Agricultural Property Relief
Business Property Relief (BPR): Business assets (a trading business, shares in an unlisted company, some AIM-listed shares) can qualify for up to 100% relief from IHT after being held for two years. This is a significant relief but requires careful planning and the asset to remain qualifying.
Agricultural Property Relief (APR): Agricultural land and property used for farming can qualify for 50–100% IHT relief.
Note: the 2024 Autumn Budget announced changes to APR and BPR from April 2026 — specifically, a cap on the 100% rate for assets above £1 million. Seek current advice if these reliefs are relevant to your estate.
Pensions and IHT
Defined contribution pensions (SIPPs, workplace DC pensions) have historically sat outside the estate for IHT purposes — meaning pension pots could pass to beneficiaries without IHT. The 2024 Autumn Budget announced changes that would bring unspent pension pots within the IHT net from April 2027 — this is a significant change that may affect estate planning for those with large pension pots.
Until April 2027 (and subject to the changes taking effect), pensions remain a tax-efficient way to pass wealth — particularly because beneficiaries also inherit them income-tax-free if the holder dies before 75.
Trusts
Placing assets into certain types of trusts can remove them from your estate (after the seven-year rule, in most cases). Trusts are complex and have their own tax rules — they require specialist legal and tax advice. Discretionary trusts are commonly used in IHT planning.
Getting the Right Advice
IHT planning is an area where professional advice — from a solicitor with estate planning expertise or an independent financial adviser — typically pays for itself many times over. The interaction between thresholds, gifts, reliefs, and beneficiary arrangements is complex, and the rules change.
Summary
Inheritance tax is reducible through legal planning — the earlier you start, the more options are available:
- Understand your thresholds — a married couple can shelter up to £1 million without any planning beyond using both allowances
- Use lifetime gifts — the annual £3,000 exemption, small gifts, and the regular gifts from income exemption are all immediately effective
- Consider the seven-year clock — larger gifts are more valuable the earlier they’re made
- Charitable giving reduces both the estate and the IHT rate — leaving 10% to charity reduces the rate to 36%
- Review pension and business asset planning — both have significant IHT implications that are changing under recent legislation
Next read: What is capital gains tax UK and when do you pay it? | https://moneyunpacked.com/what-is-capital-gains-tax-uk-and-when-do-you-pay-it/