Understanding Inheritance Tax in the UK (2025)

David and Christine thought their £480,000 estate would pass entirely to their two children. They owned their home outright, had modest savings, and David's pension pot. What they didn't realize was that without proper planning, their children would face a £62,000 inheritance tax bill—money that would need to be paid within six months of their deaths, potentially forcing the sale of the family home.

They're not alone. In 2022/23, UK families paid £6.7 billion in inheritance tax, and HMRC opened 3,961 IHT investigations—a 41% increase from the previous year. With tax thresholds frozen until 2030 and house prices continuing to rise, more ordinary families are being caught in the IHT net.

But here's the truth: while only 4.62% of UK estates currently pay inheritance tax, that number is climbing. More importantly, with proper planning and a legally valid will, many families can significantly reduce—or even eliminate—their IHT liability.

This guide explains everything you need to know about UK inheritance tax in 2025: what it is, who pays it, current thresholds and exemptions, and practical strategies to protect more of your estate for the people you love.

What Is Inheritance Tax in the UK?

Inheritance tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. The standard IHT rate is 40% and is charged on the portion of your estate above the tax-free threshold of £325,000.

It's crucial to understand that IHT is charged only on the amount exceeding your available allowances, not on your entire estate. If your estate is worth £400,000 and you have a £325,000 allowance, you'll only pay IHT on £75,000—that's a tax bill of £30,000, not £160,000.

The executors of the estate are responsible for calculating and paying inheritance tax to HMRC. Payment is due within six months of death, and probate cannot be granted until IHT is paid. This timing can create significant pressure on families who may need to sell assets quickly or arrange bridging loans to meet the deadline.

According to HMRC statistics, 31,500 estates paid inheritance tax in 2022/23, representing 4.62% of all UK deaths. While this means fewer than 1 in 20 estates currently pay IHT, the number is steadily rising. The Office for Budget Responsibility forecasts that inheritance tax will raise £9.1 billion in 2025/26, increasing to more than £14 billion by the end of the decade.

There is one important exception to the standard 40% rate: if you leave 10% or more of your net estate to qualifying UK charities, the IHT rate reduces to 36%. This can actually result in more money going to both your beneficiaries and charity than under the standard approach—we'll explore this strategy later.

Understanding that IHT only affects a small percentage of estates—but that percentage is growing—helps put your own situation in perspective. The key question isn't just "Will my estate pay IHT?" but "Am I taking the steps available to minimize it?"

UK Inheritance Tax Thresholds in 2025

The standard nil rate band (NRB) remains frozen at £325,000 for 2025/26. This threshold has been unchanged since 2009 and will remain frozen until April 2030. This prolonged freeze, combined with rising property values, is the primary reason more middle-income families now face IHT liability.

In addition to the standard nil rate band, there's the residence nil rate band (RNRB) of £175,000. This additional allowance only applies if you leave your main residence to direct descendants—children, stepchildren, adopted children, grandchildren, or great-grandchildren.

Here's how the combined thresholds work in different scenarios:

Individual Thresholds:

Single person, no property to descendants: £325,000
Single person, home to descendants: £500,000 (£325,000 + £175,000)

Married Couples and Civil Partners:

Couple, no property to descendants: £650,000 (both NRBs transferred)
Couple, home to descendants: £1,000,000 (both NRBs + both RNRBs transferred)

When the first spouse or civil partner dies, any unused portion of their nil rate band and residence nil rate band can be transferred to the surviving spouse. This is why married couples can potentially shield up to £1 million from inheritance tax.

Emma owns a £400,000 home and has £50,000 in savings. Her total estate is £450,000. If she leaves everything to her daughter, she can use the £325,000 nil rate band plus £175,000 residence nil rate band (£500,000 total). Her estate pays no inheritance tax.

James and Sarah are married. James dies first, leaving everything to Sarah (no IHT due to spouse exemption). When Sarah dies, her estate is worth £900,000, all left to their son including the family home. She can use her own £500,000 allowance plus James's transferred £500,000 allowance (£1 million total). No inheritance tax is due.

There's an important catch for very large estates: the residence nil rate band tapers away for estates worth more than £2 million. The RNRB reduces by £1 for every £2 your estate exceeds £2 million.

Richard has an estate worth £2.5 million including his home. The RNRB taper kicks in because his estate exceeds £2 million. His residence nil rate band is reduced by £1 for every £2 over: (£2.5m - £2m = £500k excess ÷ 2 = £250k reduction). His RNRB is reduced from £175,000 to zero. He only has the standard £325,000 allowance. IHT is charged on £2,175,000 at 40% = £870,000 tax bill.

The threshold freeze until 2030 is a form of "fiscal drag"—as property values and savings grow with inflation, more estates exceed the frozen thresholds. This policy is forecast to increase the number of taxpaying estates by thousands each year, meaning the proportion of UK deaths subject to inheritance tax will continue rising.

Understanding your available thresholds is the first step in determining whether your estate faces an IHT liability. But knowing what assets and transfers are completely exempt from IHT can dramatically change your planning approach.

Inheritance Tax Exemptions and Reliefs

Several categories of assets and transfers are completely exempt from inheritance tax, regardless of their value. Understanding these exemptions is crucial for effective estate planning.

Spouse and Civil Partner Exemption: Transfers between spouses or civil partners who are both UK-domiciled are completely exempt from IHT, with no limit. This is why the first death in a married couple typically triggers no IHT—everything can pass to the surviving spouse tax-free, with any unused allowances transferred for future use.

Charity Exemption: Gifts to registered UK charities are entirely exempt from inheritance tax, with no maximum. Additionally, if you leave 10% or more of your net estate to charity, the IHT rate on the remaining estate drops from 40% to 36%.

Business Property Relief (BPR): Certain business assets can qualify for 50% or 100% relief, potentially eliminating IHT on their value. However, significant changes are coming from April 2026 (detailed later in this article).

Agricultural Property Relief (APR): Qualifying agricultural land and property can receive 50% or 100% relief. Like BPR, major reforms take effect in April 2026.

Direct Descendants: The £175,000 residence nil rate band only applies when you leave your main home to direct descendants. This includes biological children, stepchildren, adopted children, legally fostered children, grandchildren, and great-grandchildren. It does not apply to nieces, nephews, siblings, friends, or unmarried partners.

If you leave your home in trust (rather than outright to descendants) or to non-descendants, you lose the residence nil rate band entirely. This can cost your estate up to £175,000 in additional allowances (or £350,000 for married couples).

Pension Pots: Currently, unspent pension funds generally pass outside your estate and are exempt from IHT. However, this is changing dramatically from April 2027, when pensions will count toward your estate for inheritance tax purposes.

Aisha owns a business valued at £800,000 that currently qualifies for 100% business property relief under the rules before April 2026. Even though her total estate is £1.2 million, the business value is completely exempt from IHT. Only the remaining £400,000 is assessed, and she can use her £325,000 nil rate band, resulting in IHT only on £75,000 (tax bill: £30,000 instead of a potential £350,000 without the relief).

Political party donations to qualifying parties and certain investments like AIM shares and Enterprise Investment Scheme holdings can also provide relief or exemption under specific conditions. These tend to be more specialized strategies that require professional advice.

The most powerful exemption for most families is simply ensuring your will is structured to make full use of the spouse exemption (for married couples) and the residence nil rate band (by leaving your home to children or grandchildren). But beyond exemptions, there are specific allowances for making gifts during your lifetime that can reduce your estate over time.

Lifetime Gifting and the 7-Year Rule

Making gifts during your lifetime is one of the most effective ways to reduce your estate value and minimize future inheritance tax. However, there are specific rules and allowances you need to understand.

Annual Exemption: You can give away £3,000 per tax year (6 April to 5 April) completely free of IHT. If you didn't use this allowance last year, you can carry forward one year's unused amount, making a total of £6,000 in a single year. This exemption refreshes annually, so using it consistently can remove significant value from your estate over time.

Small Gifts Exemption: You can make gifts of up to £250 to as many different people as you like each tax year, IHT-free. However, you can't combine this with your annual exemption for the same person—it's one or the other.

Wedding and Civil Partnership Gifts: You can make tax-free gifts in contemplation of a wedding or civil partnership: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

Regular Gifts from Income: If you make regular gifts out of your surplus income (not your capital), these can be completely exempt from IHT with no monetary limit. The key requirements are that the gifts must be regular (not one-off), come from income (like pension payments or rental income), and leave you with enough to maintain your normal standard of living. You must keep thorough records to demonstrate these gifts qualify.

Beyond these specific exemptions, you can make larger gifts called Potentially Exempt Transfers (PETs). These gifts become completely exempt if you survive for seven years after making them. If you die within seven years, they may be subject to IHT.

The 7-year rule works on a sliding scale called taper relief. Gifts made within three years of death are taxed at the full 40% rate. Gifts made 3-7 years before death benefit from taper relief:

0-3 years before death: 40% IHT (0% taper relief)
3-4 years before death: 32% IHT (20% taper relief)
4-5 years before death: 24% IHT (40% taper relief)
5-6 years before death: 16% IHT (60% taper relief)
6-7 years before death: 8% IHT (80% taper relief)
7+ years before death: 0% IHT (completely exempt)

Crucially, taper relief only applies if the total gifts you made in the seven years before death exceed the £325,000 nil rate band. The relief reduces the tax due, not the value of the gift.

Margaret gifts £50,000 to her daughter in January 2023. She also uses her £3,000 annual exemption for 2022/23 and carries forward the unused £3,000 from 2021/22. The potentially exempt transfer is £44,000 (£50,000 - £6,000). If Margaret lives beyond January 2030, the gift becomes completely exempt from IHT. If she dies before then, the gift will be assessed as part of her estate.

Peter gives his son £100,000 in 2024. He dies in 2026 (within three years). The gift is subject to IHT at 40%. However, Peter's nil rate band of £325,000 first applies to this gift. Assuming he made no other gifts, the £100,000 is covered by his nil rate band, so no IHT is due on the gift itself—but it reduces the nil rate band available to his estate by £100,000. His estate can now only use £225,000 of the nil rate band, potentially increasing the IHT his estate must pay.

"Gifts with reservation of benefit" don't qualify as true gifts. If you gift your home to your children but continue living there rent-free, HMRC treats this as if you still own the property. To make such a gift valid, you'd need to pay market-rate rent to the new owners or move out entirely.

Making strategic gifts can be powerful, but timing matters. The earlier you start, the more opportunities you have to make gifts that fall outside the seven-year window. But all of these strategies require one fundamental tool: a legally valid will that documents your intentions and ensures your estate plan works as intended.

Why a Valid Will Is Essential for IHT Planning

You cannot implement any inheritance tax reduction strategy without a properly executed will. It's the non-negotiable foundation of every estate plan, regardless of how simple or complex your circumstances.

Without a will, intestacy rules determine who inherits your estate. These rigid legal rules make no allowance for IHT planning, personal wishes, or optimal tax efficiency. You lose control over who gets what, when, and how.

A valid will lets you:

Utilize All Available Exemptions: You can specify that your estate should leave property to direct descendants, ensuring you qualify for the £175,000 residence nil rate band. Without this direction, intestacy rules might distribute assets in ways that forfeit this allowance.

Transfer Unused Allowances: For married couples, a will can ensure that the spouse exemption is used properly and that any unused nil rate band and residence nil rate band are preserved for transfer to the surviving partner.

Make Charitable Bequests: If you want to leave 10% or more to charity to reduce your IHT rate from 40% to 36%, this must be documented in your will. You can't make this election under intestacy.

Establish Trusts: More sophisticated IHT planning often involves trusts created within your will. These can provide for beneficiaries while potentially reducing IHT liability, but they require careful drafting.

Give Executors Clear Instructions: Your executors need to know your intentions regarding asset distribution, IHT-efficient strategies you've implemented, and records of lifetime gifts. A clear will provides the roadmap they need to minimize IHT efficiently.

According to the statistics, only 4.62% of estates pay IHT, but many more could reduce their bills with proper will-based planning. Without a will, even estates that could be entirely IHT-free end up paying unnecessary tax.

Sophie and Tom are unmarried partners who own a £600,000 home as tenants in common (50/50). Sophie dies without a will. Under intestacy rules, her £300,000 share goes to her parents (not to Tom, because unmarried partners have no automatic inheritance rights). Her estate can't use the residence nil rate band because she didn't leave her share to a direct descendant—her parents aren't her descendants. Tom eventually inherits from her elderly parents when they die, but Sophie's estate has paid unnecessary IHT, and her parents have now increased their own estate values, potentially creating a second IHT liability when they die. Three generations affected by the lack of one will.

The domino effect of not having a will extends beyond just your estate. When your beneficiaries receive less than they should have because of poor planning, their estates grow more slowly. When unmarried partners inherit nothing and assets pass to distant relatives instead, everyone's IHT exposure increases unnecessarily.

Creating a will isn't just about distributing your possessions—it's about architecting your estate to work with the tax system rather than against it. Every other strategy in this guide depends on having this foundation in place. Once you have a will, you can implement specific approaches to minimize your IHT liability even further.

Practical Strategies to Reduce Inheritance Tax

With a valid will in place as your foundation, there are several proven strategies you can use to reduce your estate's inheritance tax liability. These strategies work for straightforward estates and don't require complex financial products or specialist advice.

Strategy 1: Use Annual Gifting Allowances Consistently

Your £3,000 annual exemption doesn't roll over indefinitely—you can only carry forward one unused year. This means if you don't use it, you lose it. Over 20 years, consistent use of this allowance removes £60,000 from your estate completely tax-free. For married couples both making gifts, that's £120,000 over 20 years.

Strategy 2: Start the 7-Year Clock Early

The earlier you make large gifts, the more time you have for them to become fully exempt. If you're 55 and make a substantial gift to your children for a house deposit, you have a realistic expectation of surviving seven years for it to fall entirely outside your estate. Waiting until you're 75 dramatically reduces the likelihood.

Strategy 3: Leave 10% or More to Charity

This strategy is counterintuitive but mathematically beneficial. When you leave 10% or more of your net estate (after deducting your nil rate band and RNRB) to charity, your IHT rate drops from 40% to 36%.

Helen has an estate worth £825,000. After her £500,000 combined allowance (£325,000 + £175,000), £325,000 is taxable at 40% = £130,000 IHT. Her family receives £695,000 (£825,000 - £130,000).

If Helen leaves £32,500 (10% of the taxable amount) to Cancer Research UK, her IHT rate drops to 36% on the remaining £292,500 = £105,300. Her family receives £687,200, and charity receives £32,500—a combined total of £719,700. By including charity, the total going to beneficiaries and charity is £24,700 more than the standard approach. Everyone benefits.

Strategy 4: Take Out Life Insurance in Trust

If your estate will face an IHT bill, life insurance held in trust can provide liquidity to pay the tax without forcing the sale of assets. Because the insurance is held in trust, the payout doesn't form part of your estate and isn't subject to IHT itself. This requires setting up the trust when you take out the policy.

Strategy 5: Spend and Enjoy Your Money

This isn't facetious—it's practical. If you have more than enough to live comfortably, spending money on experiences, helping family members while you're alive to see the benefit, or donating to causes you care about all reduce your estate value. There's no inheritance tax saving better than not having the money in your estate in the first place.

Strategy 6: Review and Update Your Will Regularly

Laws change, family circumstances change, and asset values change. A will written in 2010 when your house was worth £250,000 might be inadequate now that it's worth £500,000. Regular reviews—at least every five years and after major life events—ensure your IHT planning remains effective.

Strategy 7: Keep Thorough Records of All Gifts

Your executors will need to account for all gifts made in the seven years before death. Keep a simple log with dates, amounts, recipients, and which exemptions you're claiming. This documentation is essential if HMRC investigates your estate.

When Professional Advice Is Needed:

More complex strategies like discretionary trusts, business property structuring, or offshore planning require specialist advice from a solicitor or tax adviser. If your estate includes business assets, agricultural property, significant investments, or exceeds £2 million, professional guidance can be invaluable.

But for the majority of straightforward estates—a home, savings, pensions, and personal possessions—the strategies above can be implemented without expensive professional fees. The key is taking action rather than waiting for "someday" to arrive.

Understanding what to do is important, but it's equally important to know what mistakes to avoid. Even well-intentioned attempts at IHT planning can backfire if you're not aware of the common pitfalls.

Common Inheritance Tax Mistakes to Avoid

With HMRC IHT investigations up 41% to 3,961 in 2024/25, the tax authority is scrutinizing estate planning more closely than ever. Avoiding these common mistakes protects your family from additional tax, penalties, and stress.

Mistake 1: Not Making a Will at All

This is the foundational error that makes every other mistake possible. Intestacy equals maximum IHT exposure because you forfeit all control over distributions, exemptions, and reliefs. Learn what happens if you die without a will.

Mistake 2: Delaying IHT Planning Until It's Too Late

The 7-year rule requires time to work. If you wait until you're 70 to start making significant gifts, you have fewer remaining years for gifts to fall outside your estate. The average UK life expectancy means starting in your 50s or early 60s gives you multiple full seven-year cycles.

Mistake 3: Not Using Annual Exemptions

Failing to use your £3,000 annual exemption every year wastes a valuable allowance. Over 30 years, that's £90,000+ removed from your estate tax-free. For couples, it's £180,000+. These amounts can make the difference between paying IHT and avoiding it entirely.

Mistake 4: Ignoring the Residence Nil Rate Band Requirements

Writing a will that leaves your home to someone other than direct descendants—or setting up a trust that doesn't qualify—costs your estate up to £175,000 in allowances. Make sure your will specifically leaves your main residence to children, stepchildren, or grandchildren if you want to claim the RNRB.

Mistake 5: Making Gifts with Reservation of Benefit

Gifting your home to your children but continuing to live there rent-free doesn't reduce your estate for IHT purposes. HMRC treats this as if you still own the property. If you want the gift to count, you must either move out or pay market-rate rent.

Mistake 6: Not Keeping Records of Gifts

Without documentation, your executors can't prove to HMRC which gifts qualify for exemptions, when they were made, or whether the 7-year rule applies. Keep a simple gift log with dates, amounts, recipients, and which exemption applies.

Robert gifted his daughter £200,000 in 2022 for a house deposit but didn't document it properly or tell his executor. He died in 2027. His executor wasn't aware of the gift, didn't account for it in the IHT calculation, and the estate was later investigated by HMRC. The gift was discovered, penalties were applied for underpayment, and the family faced additional stress and costs that proper record-keeping would have avoided.

Mistake 7: Assuming Pensions Are Always Exempt

Currently, pensions usually pass outside your estate, but from April 2027, they'll count toward your estate for IHT purposes. If you're planning on the assumption that your £400,000 pension won't be taxed, your calculations need updating for the new rules.

Mistake 8: Not Reviewing After Life Changes

Marriage, divorce, children, house purchases, and receiving inheritances all change your IHT position. A will that was optimal when you were single and renting is inadequate when you're married homeowners with children.

Mistake 9: Forgetting About IHT on Lifetime Gifts

Making large gifts close to death can trigger IHT even if you thought you were reducing your estate. Any gifts made within seven years still count, and if the total exceeds your nil rate band, IHT becomes due on them.

Mistake 10: Not Planning for IHT Liquidity

Even if you know your estate will face a £50,000 IHT bill, if all your assets are tied up in property and you have little cash, your executors may be forced to sell the family home quickly or take expensive bridging loans. Planning for liquidity—through savings, life insurance, or other accessible assets—eases this burden.

The cost of these mistakes isn't just financial. HMRC investigations add months of delays to probate, cause significant stress for grieving families, and can result in penalties and interest on top of the tax due. Taking time to avoid these pitfalls protects both your wealth and your family's wellbeing.

If you're dealing with IHT as an executor or beneficiary right now, understanding the calculation and payment process is essential.

How to Calculate and Pay Inheritance Tax

Executors and administrators have the legal responsibility to calculate and pay any inheritance tax due on an estate. The process can feel daunting, but breaking it down into steps makes it manageable.

Step 1: Value All Assets

The estate includes everything owned by the deceased at the date of death:

Property (main residence, buy-to-let, overseas property)
Bank accounts and savings
Investments (stocks, bonds, ISAs, premium bonds)
Life insurance policies (if not held in trust)
Pensions (from April 2027)
Personal possessions (vehicles, jewelry, furniture, collectibles)
Business assets

Assets are valued at market value on the date of death, not what was originally paid for them.

Step 2: Deduct Allowable Expenses

From the total asset value, you can deduct:

Outstanding mortgages and secured loans
Unpaid bills and credit card debts
Funeral expenses (reasonable costs)
Costs of administering the estate

This gives you the net estate value.

Step 3: Calculate Available Allowances

Determine what allowances apply:

Nil rate band: £325,000 (plus any transferred from deceased spouse)
Residence nil rate band: £175,000 (if main home left to direct descendants, plus any transferred amount)
Taper reduction: If estate exceeds £2 million, RNRB reduces by £1 for every £2 over

Step 4: Apply Exemptions

Deduct any exempt transfers:

Amounts left to spouse/civil partner (unlimited)
Amounts left to charity (unlimited)
Business property relief (if qualifying assets)
Agricultural property relief (if qualifying property)

Step 5: Calculate the Tax

Apply the IHT rate to the remaining taxable estate:

Standard rate: 40%
Reduced rate: 36% (if 10%+ of net estate left to charity)

Step 6: Complete the Required Forms

For estates above the threshold, you'll need to complete IHT400 (the full Inheritance Tax account). For smaller estates that don't exceed the threshold, you may only need IHT205. These forms are submitted to HMRC along with supporting documentation.

Step 7: Pay the Tax

IHT must be paid within six months of death. If it's not paid by then, HMRC charges interest on the outstanding amount. Payment can be made by:

Using estate funds (if sufficient liquid assets exist)
Taking a loan against the estate
Selling estate assets
Paying in installments (for property only, over 10 years, though interest applies)

Estate valuation for John's estate:

Assets:

Main residence: £450,000
Savings and investments: £180,000
Personal possessions: £20,000
Total: £650,000

Deductions:

Outstanding mortgage: £50,000
Funeral costs: £5,000
Total deductions: £55,000

Net estate: £595,000

John's available allowances:

Nil rate band: £325,000
Residence nil rate band: £175,000 (home left to daughter)
Total allowance: £500,000

Taxable estate: £595,000 - £500,000 = £95,000

IHT due: £95,000 × 40% = £38,000

Payment deadline: 6 months from date of death. John's daughter (executor) arranges a loan against the estate to pay HMRC, then sells the house and repays the loan before distributing the remaining inheritance.

For complex estates or if you're unsure about valuations, probate specialists or solicitors can help with the calculation and submission process. The fees are usually deductible from the estate as administration costs.

The process requires attention to detail and thorough documentation, but it's a manageable task for most estates. However, with significant changes coming to IHT rules in 2026 and 2027, it's important to understand what's on the horizon.

Major IHT Changes Coming in 2026-2027

Two significant changes to UK inheritance tax rules are taking effect in the next few years. These reforms will affect specific groups of estate holders and require advance planning.

April 2026: Business and Agricultural Property Relief Reforms

From 6 April 2026, business property relief (BPR) and agricultural property relief (APR) will be fundamentally restructured.

The New £1 Million Allowance:

A combined £1 million allowance will provide 100% relief for qualifying business and agricultural assets. This allowance applies to the total value of BPR and APR assets combined—not £1 million for each category.

Relief Above £1 Million:

Assets exceeding the £1 million allowance will receive only 50% relief instead of the current 100%. This means the excess will be taxable at an effective 20% IHT rate (50% relief on the standard 40% rate).

How It Works:

The £1 million allowance can cover purely business assets, purely agricultural assets, or a combination of both. For example, £400,000 of agricultural property and £600,000 of business property would fully use the allowance.

Important Features:

Tax on qualifying assets can be paid in interest-free installments over 10 years
The allowance refreshes every seven years for lifetime gifts (every ten years for trusts)
The £1 million threshold will be indexed to CPI from April 2030

Impact:

Reforms to agricultural property relief are expected to affect approximately 500 farm estates each year, with business property relief changes affecting around 1,000 business estates annually. Most smaller family businesses and farms will remain fully covered by the £1 million allowance.

Robert owns a farm valued at £2.5 million. Under current rules (before April 2026), 100% agricultural property relief means his estate pays no IHT on the farm.

From April 2026: The first £1 million receives 100% relief (£0 IHT). The remaining £1.5 million receives 50% relief, leaving £750,000 taxable. Assuming he also has £500,000 in other allowances (NRB + RNRB), £250,000 is taxable at 40% = £100,000 IHT bill.

Robert's family will need to plan for this liquidity requirement, potentially through life insurance, savings, or arrangements to pay the tax in installments.

April 2027: Pensions Subject to Inheritance Tax

From 6 April 2027, most unused pension funds and death benefits will count toward your estate for IHT purposes.

Current Rules:

Under current law, unspent pension pots generally pass outside your estate and are exempt from IHT. This has made pensions one of the most tax-efficient vehicles for passing wealth to the next generation.

New Rules:

Unused pension funds will be added to your estate value when calculating IHT liability. Your pension provider will report the pension value to your personal representatives, who will include it in the estate calculation.

Impact:

The government estimates this change will affect around 8% of estates, with approximately 10,500 estates facing IHT liability where previously they would not, and 38,500 estates paying more IHT than under current rules. The average IHT liability is expected to increase by around £34,000 when pension assets are included.

Deepak has a £400,000 pension pot and a £300,000 estate (home and savings).

Currently: His estate is below the £500,000 threshold (£325,000 + £175,000 RNRB), and his pension passes IHT-free to his nominated beneficiary. Zero IHT.

From April 2027: His pension is added to his estate, creating a combined £700,000 estate. After his £500,000 in allowances, £200,000 is taxable at 40% = £80,000 IHT. His beneficiaries receive £620,000 instead of £700,000.

Action Required:

If you have significant pension savings, review your overall estate plan before April 2027. Consider whether to:

Draw down more pension during retirement (reducing what's left at death)
Review your death benefit nominations
Adjust your will to account for the pension being included
Consider other IHT planning strategies to offset the increased liability

Both of these changes represent significant shifts in UK inheritance tax policy. While they primarily affect wealthier estates (those with business/agricultural assets over £1 million or large pension pots), they demonstrate that IHT rules are not static. Regular review of your estate plan ensures you're prepared for legislative changes.

Now that you understand inheritance tax comprehensively—what it is, how it's calculated, current thresholds, exemptions, strategies to reduce it, and upcoming changes—let's focus on what you should do next.

Your Next Steps: Taking Control of Your Estate Plan

Inheritance tax planning doesn't have to be overwhelming. Breaking it down into clear, actionable steps makes the process manageable and ensures you're protecting your family's inheritance.

Step 1: Calculate Your Estate Value

Make a simple list of everything you own: property value, savings, investments, pensions, life insurance, vehicles, and valuable possessions. Don't forget to include any assets you hold overseas. Subtract any outstanding mortgages, loans, and debts. This gives you a rough estate value.

Step 2: Estimate Your IHT Liability

Using the thresholds outlined in this guide, calculate whether your estate exceeds the available allowances. Remember to account for the residence nil rate band if you'll be leaving your home to children or grandchildren, and include any transferable allowances if you're married or in a civil partnership.

Step 3: Create or Update Your Will

This is the essential foundation. Without a will, none of the strategies in this guide can be implemented effectively. Creating a legally valid will ensures you control who inherits, allows you to claim all available exemptions, and gives your executors clear direction.

Step 4: Start Using Annual Gifting Allowances

Don't let your £3,000 annual exemption go to waste. Make it a habit to use this allowance every year, either to one person or split among multiple recipients. If you're married, both partners have separate allowances.

Step 5: Review Your Plan Annually

Set a reminder to review your estate value, will, and IHT position every year or after major life events: marriage, divorce, births, deaths, property purchases, or receiving an inheritance. Regular reviews keep your plan current and effective.

Step 6: Consider Professional Advice for Complex Situations

Most people with straightforward estates can handle their own IHT planning with a quality online will service. However, you should seek professional legal advice if you have:

Complex assets (business interests, agricultural property, overseas assets)
An estate exceeding £2 million (where RNRB taper applies)
Plans to set up trusts
Non-UK domicile status
Blended families with children from previous relationships
Significant assets but complex family dynamics

Step 7: Keep Thorough Records

Maintain a simple log of all gifts, including dates, amounts, recipients, and which exemptions apply. Store this with your will so your executors can accurately account for lifetime transfers if needed.

When to DIY vs When to Get Professional Help

DIY appropriate for:

Straightforward estates under £1 million
Clear beneficiaries and no disputes expected
No business or agricultural assets
UK-domiciled with UK assets only
Simple family structure

Professional advice needed for:

Estates over £2 million (complex IHT calculations and RNRB taper)
Business property relief or agricultural property relief claims
Setting up trusts (discretionary, life interest, or protective trusts)
International assets or non-UK domicile
Second marriages with children from previous relationships
Potential disputes among beneficiaries
Disabled beneficiaries requiring specialist provision

For most people, an affordable online will service handles 90% of the work. You can always consult a specialist for the remaining 10% if needed.

Inheritance tax can feel overwhelming, but the truth is that with a valid will and basic planning, most families can significantly reduce or eliminate their IHT liability. The key is starting now rather than waiting.

Every year you delay is a year you could have used your £3,000 annual exemption, a year closer to making the 7-year rule work in your favor, and a year of potential house price growth pushing your estate closer to the threshold. With thresholds frozen until 2030 and major changes coming in 2026 and 2027, there's never been a more important time to take control of your estate plan.

The single most important action you can take today is creating or updating your will. It costs less than a family meal out, takes about 15 minutes online, and gives you the control to minimize IHT while protecting the people you love.

Key Takeaways: Protecting Your Estate from Inheritance Tax

Understand Your Position: Only 4.62% of UK estates currently pay inheritance tax, but with thresholds frozen until 2030, more families are being affected each year. Calculate your estate value and determine if you're at risk. Include property, savings, investments, and (from April 2027) pensions in your calculation.

Know Your Allowances: You have a £325,000 nil rate band, potentially plus £175,000 residence nil rate band if leaving your home to children or grandchildren. Married couples and civil partners can combine these allowances for up to £1 million IHT-free. Remember that the RNRB tapers away for estates over £2 million.

Use Your Exemptions: Take advantage of your £3,000 annual gifting exemption consistently—it adds up to significant estate reduction over time. Make larger gifts early in life to benefit from the 7-year rule. Consider leaving 10% or more to charity to reduce your IHT rate from 40% to 36%, which can actually increase the total amount going to beneficiaries and charity combined.

Start With a Will: Every IHT planning strategy requires a legally valid will as the foundation. Without one, intestacy rules apply, and you lose control over exemptions, reliefs, and beneficiaries. A will lets you qualify for the residence nil rate band, make charitable bequests, transfer unused allowances to your spouse, and give your executors clear instructions for IHT-efficient estate administration.

Act Now, Not Later: Major changes are coming in April 2026 (business and agricultural property relief restructuring) and April 2027 (pensions becoming part of your estate). The earlier you start gifting and planning, the more time the 7-year rule has to work in your favor. With HMRC investigations up 41% and IHT receipts forecast to reach £9.1 billion in 2025/26, proper planning and documentation are more important than ever.

Your estate represents a lifetime of work, sacrifice, and careful planning. Every pound of unnecessary inheritance tax is money that could have gone to your children, your grandchildren, or causes you care about. The difference between paying tens of thousands in IHT and protecting your legacy comes down to taking action now—and that action starts with a will.

Ready to take control of your estate plan? Create your legally valid will with WUHLD in about 15 minutes—entirely online, no appointments needed.

For just £49.99 (compared to £650+ for a solicitor), you'll get:

Your complete, legally binding will
A 12-page Testator Guide explaining how to sign and store your will correctly
A Witness Guide for your witnesses to follow the legal requirements
A Complete Asset Inventory document to help your executors understand your estate

You can preview your complete will free before paying anything—no credit card required, no subscriptions, no hidden fees. See exactly what you're getting before committing a penny.

Start protecting your family's inheritance today. Every day you wait is a day you could be using your gifting allowances and implementing IHT-efficient strategies.

Preview Your Will Free – No Payment Required

Legal Disclaimer: This article provides general information about UK inheritance tax and does not constitute legal or financial advice. Inheritance tax rules are complex and subject to change. For advice specific to your individual circumstances, please consult a qualified solicitor or financial adviser. WUHLD's online will service is suitable for straightforward UK estates; complex situations involving trusts, business assets, or significant IHT planning may require professional legal advice.

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