Inheritance Tax and Your Will
HMRC collected over £7 billion in inheritance tax in 2023/24. A well-structured will — combined with the right lifetime planning — can legally and significantly reduce what your estate pays.
What is inheritance tax and who pays it?
Inheritance tax (IHT) is charged on the value of your estate — everything you own at death, minus your debts — above a certain threshold. The rate is 40% on everything above that threshold.
Your estate includes:
- UK property (wherever you are domiciled)
- Bank and investment accounts
- Business interests (unless exempt)
- Life insurance policies not written in trust
- The value of gifts made within seven years of death
- Overseas assets if you are UK-domiciled
Your executors are responsible for calculating and paying IHT before probate is granted — meaning the tax must usually be paid before your beneficiaries receive anything.
The nil-rate band (NRB)
Every individual has a nil-rate band — the amount of their estate that can pass free of IHT.
Current nil-rate band: £325,000.
This threshold has been frozen at £325,000 since 2009 and is now frozen until at least April 2030 under current government policy. With house price and asset inflation over that period, far more estates are now caught by IHT than were originally intended to be.
Everything above £325,000 is taxed at 40% (or 36% if the charitable legacy condition is met — see below).
The residence nil-rate band (RNRB)
A second threshold — the residence nil-rate band — was introduced in 2017 to help people pass their main home to direct descendants.
Current RNRB: £175,000 per person.
To qualify:
- You must own a residential property (or have previously owned one that was sold).
- The property (or its proceeds) must pass to a direct descendant — children, stepchildren, adopted children, or grandchildren.
- Your estate must be worth less than £2 million — above this, the RNRB tapers away at £1 for every £2 over the threshold, disappearing entirely at £2.35 million.
Transferable nil-rate bands between spouses
When the first spouse or civil partner dies, their NRB and RNRB can be transferred to the survivor — even if the first death was decades ago, and even if there was no estate at the time.
This means a married couple or civil partners can potentially pass up to £1,000,000 free of IHT (£650,000 NRB + £350,000 RNRB combined).
Combined with the NRB, a single person can potentially pass up to £500,000 free of IHT.
The spouse and civil partner exemption
Transfers between spouses and civil partners are exempt from IHT — both during lifetime and on death — with no limit on the amount.
However:
- This exemption only applies where both parties are UK-domiciled. If the surviving spouse is non-UK domiciled, the exemption is capped at £325,000 (though the non-domiciled spouse can elect to be treated as UK-domiciled for IHT purposes).
- The exemption is a deferral, not an elimination — the full estate (including what was transferred from the first death) becomes taxable on the second death.
- Leaving everything to your spouse may be the right emotional choice but is not always the optimal tax strategy — professional advice before drafting your will is important.
Charitable legacies — the 10% rule
If your will leaves at least 10% of your net estate (i.e. the estate after deducting the nil-rate band and other reliefs) to registered charities, the IHT rate on the remainder reduces from 40% to 36%.
This can result in the charity receiving a meaningful gift, your beneficiaries receiving more than they would have done, and HMRC receiving less — a genuine win-win-win in the right circumstances.
Business Property Relief (BPR)
Business Property Relief is one of the most generous reliefs in the UK tax code. It allows qualifying business assets to pass free of IHT — at either 100% or 50% relief — provided the conditions are met.
100% BPR applies to:
- A sole trader business or partnership interest
- Unquoted shares in a trading company (including AIM-listed shares)
- Assets used in a qualifying partnership
50% BPR applies to:
- Shares in a quoted (listed) trading company where you control more than 50%
- Land, buildings, or machinery owned personally but used in a qualifying partnership or company
Conditions for BPR:
- The asset must have been owned for at least two years before death.
- The business must be trading — investment businesses (e.g. property letting) do not qualify.
- The asset must not be subject to a binding contract for sale at death.
Important – Proposed Reforms
From April 2026, proposed reforms would cap BPR (and APR combined) at £1 million at 100% relief, with a 50% rate applying above that cap (effective 20% IHT on the excess). Business owners should take urgent professional advice to understand how their estate planning may need to change.
See Guide 3 — Wills for Business Owners for a full treatment of BPR, succession planning, and shareholder agreements.
Agricultural Property Relief (APR)
Agricultural Property Relief operates in a similar way to BPR but applies to agricultural land and property used in farming.
100% APR applies to:
- Owner-occupied agricultural land farmed by the owner
- Agricultural land let on a tenancy beginning on or after 1 September 1995
50% APR applies to:
- Pre-1995 agricultural tenancies in some circumstances
The same proposed £1 million combined cap that applies to BPR from April 2026 also applies to APR (the cap is shared between the two reliefs). Farming families with significant land and building values should review their position as a matter of urgency.
Gifts made during your lifetime
Reducing your estate during your lifetime is one of the most effective IHT strategies — but it must be done correctly and with proper records.
Exempt gifts (no IHT ever, regardless of when made):
- Annual exemption: £3,000 per year (can be carried forward one year if unused — so up to £6,000 in year one if the previous year was unused).
- Small gifts exemption: £250 per person per year (to any number of people, but the full £250 must go to each; cannot be combined with the annual exemption for the same person).
- Wedding/civil partnership gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
- Regular gifts out of surplus income (not capital) — potentially unlimited if genuinely from income surplus to your needs and made habitually.
The 7-year rule and potentially exempt transfers
Larger gifts made to individuals (not into most trusts) become fully exempt from IHT if you survive seven years. If you die within seven years, a sliding scale of taper relief applies:
- 0-3 years survived: 40% IHT rate on gift
- 3-4 years survived: 32% IHT rate on gift
- 4-5 years survived: 24% IHT rate on gift
- 5-6 years survived: 16% IHT rate on gift
- 6-7 years survived: 8% IHT rate on gift
- 7+ years survived: 0% IHT rate on gift
Using trusts to reduce IHT
Certain trust structures can remove assets from your estate for IHT purposes, subject to conditions.
Discretionary trusts: a gift into a discretionary trust is a chargeable lifetime transfer — IHT is payable immediately at 20% on amounts above the NRB if made during lifetime. However, if you survive seven years, no further IHT is due on entry. The trust itself is subject to ten-year anniversary charges and exit charges.
Life interest (or interest in possession) trusts in a will: a life interest trust created in a will for a surviving spouse can qualify for the spouse exemption and defer IHT to the second death — while ensuring the capital eventually passes to your chosen beneficiaries (e.g. children from a first marriage).
Loan trusts and discounted gift trusts: specialist planning structures usually arranged through an FCA-regulated adviser. They allow you to access income from assets while reducing the IHT exposure over time.
Life insurance written in trust
A life insurance policy not written in trust forms part of your estate on death and may be subject to IHT. Written in trust, the proceeds pass directly to the trust beneficiaries outside your estate — immediately and without probate.
Writing a policy in trust is usually free and takes minutes. If you have any life insurance policy that is not in trust, review this urgently with an Independent Financial Adviser.
What your will cannot do
A will does not cover:
- Assets held in joint tenancy — these pass automatically to the surviving joint owner by survivorship, regardless of your will.
- Pension death benefits — pensions are usually outside your estate for IHT (though from 2027, proposed changes may bring unspent pension pots into the IHT charge).
- Life insurance written in trust — passes outside the estate.
- Assets already transferred to someone else during lifetime.
Your will deals with what is legally yours at the time of death. Estate planning is a combination of will planning and lifetime structuring — both matter.
Frequently asked questions
What is the current IHT threshold for 2024/25?
The nil-rate band is £325,000. With the residence nil-rate band of £175,000, a single person can potentially pass up to £500,000 free of IHT. Married couples and civil partners can potentially combine their allowances to pass up to £1,000,000.
Do I have to pay IHT if I leave everything to my spouse?
No — transfers between spouses and civil partners are fully exempt from IHT, provided both parties are UK-domiciled. However, the full estate (including what you transferred) becomes taxable when the surviving spouse dies.
Can I avoid IHT by giving away my house?
Simply transferring your home to your children while continuing to live in it does not remove it from your estate — this is a ‘gift with reservation of benefit’ and HMRC will treat the property as still forming part of your estate. There are legitimate ways to plan around the family home using trusts and other structures, but they require specialist advice.
Are pensions included in my estate for IHT purposes?
Currently, defined contribution pension death benefits are generally outside the estate. However, the government has proposed that from April 2027, unspent pension pots will be included. This is a major change that could significantly increase IHT exposure for many people.
What is the 7-year rule?
Any gift made to an individual (not a trust) is potentially exempt from IHT if you survive for seven years after making it. If you die within seven years, taper relief reduces the amount of IHT payable on a sliding scale.
Does my house always qualify for the residence nil-rate band?
No. The property (or its value if you have downsized or sold) must pass to a direct descendant — children, grandchildren, stepchildren, or adopted children. It does not apply if you leave the property to a sibling, nephew, niece, or friend. The relief also tapers away for estates worth more than £2 million.