Inheritance Tax (IHT)

Inheritance Tax is a complex tax that can cause more heartache than most other UK taxes.

If you plan to pass on assets or money after you die, your heirs could face an Inheritance Tax bill of up to 40% of your estate. There is a reduced rate of 36% if you leave 10% or more of your net estate to charity.

Your estate is the value of everything you own, less debts you must repay, at the date you pass away.

The following are examples of assets that will be part of your estate:

• Your home and its contents
• Any vehicles
• Jewellery
• Antiques
• Bank and building society accounts
• Cash and savings in the bank
• Investments (for example, shares)
• Businesses you own
• Pay-outs from life insurance policies not held in Trust
• Gifted property that you have continued to benefit from (these are known as ‘gifts with reservation of benefit’)

Settled out of your estate

Any money you owe, for example a mortgage, and any funeral expenses will be taken from the value of your estate before Inheritance Tax is calculated provided those debts are settled out of your estate.

In extreme cases your heirs could be forced to take out loans or sell property to pay the tax. So it is important to take the time to understand the overall position your heirs will be in and planning ahead to minimise the amount of Inheritance Tax due.

Nil-Rate Band Exemption

There is usually no tax to pay if the net value of your estate is less than £325,000 (correct as at 2024/25 tax year). This is called the “Nil-Rate Band”.

If you are married or in a registered civil partnership, any Nil-Rate Band that is not used by the first to die can be transferred to the survivor to a maximum of £650,000.

However, you Nil-Rate Band may be reduced by the value of any gifts to individuals or Trust made within 7 years of the date of death.

Residence Nil-Rate Band

If you own your own home, you may be able to also take advantage of the ‘Residence Nil-Rate Band’.

This is additional to the Nil-Rate Band and is currently worth up to £175,000 (2024/25 tax year) if you pass on a main residence to a direct descendant such as children or grandchildren.

The rules around the Residence Nil-Rate Band are complex and dependent on your personal situation. Professional legal advice should be sought. For further information please see our Residence Nil Rate Band article.

Like the Nil-Rate Band, any unused Residence Nil-Rate Band can be added to a surviving spouse or registered civil partner’s at the time of their death.

Maximum Nil-Rate Bands

The maximum total tax-free Inheritance Tax allowance for an individual is currently £500,000 (2024/25 tax year) – that is £325,000 Nil-Rate Band, plus £175,000 additional Residence Nil-Rate Band allowance.

Where this is wholly passed to a surviving spouse or civil partner this equates to an estate of £1,000,000 before Inheritance Tax becomes payable.

Very valuable reliefs and you should consult with your legal adviser to ensure that you are maximising your allowances.