Why everyone needs an inheritance tax plan
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Is inheritance tax (IHT) really Britain’s most hated tax?
Some people absolutely loathe it. According to one survey a third of the country now believes IHT is “very unfair”. (Perhaps the only thing taxpayers hate more is the BBC license fee). [1]
For others though, IHT isn’t really on the radar.
Either they’re comfortable that some of what they pass on will be taxed, or they don’t really think their wealth will grow enough to be affected. After all, IHT is payable on less than one in 20 estates.
However, this might not always be the case.
Firstly, HMRC is collecting more IHT than ever. Annual receipts more than doubled in the last 20 years, from £3.3 billion to £8.2 billion for 2024/25.
Not only that, but the nil-rate band, the threshold for when you start paying IHT, has been frozen since 2009 and will be until at least 2030. This freeze means more estates could gradually be brought into scope for IHT. Research from AJ Bell estimates that without the freeze, by 2029/30 a couple could pass on an additional £110,000 tax free.
And finally, the evolving rules on charges and exemptions following last Autumn’s Budget, including removing the IHT exemption for pensions, means the tax is becoming ever-more prevalent and complex.
Even if you think it’s not going to affect you or those you leave your money to, it’s a good idea for everyone to have an inheritance tax plan – or at least consider it.
Let’s recap: who pays what?
The nil-rate band. This is the main IHT exemption. The standard rate of 40% applies to anything over £325,000. If you’re married or in a civil partnership, any assets you pass on to your partner are exempt. Leaving your entire estate to your partner means there are effectively two nil-rate bands available to those who inherit it when you both die – a total allowance of £650,000.
The residential nil-rate band. There’s an additional tax-free allowance of £175,000 for the property you live in. This applies to children (or stepchildren), grandchildren and great grandchildren if you leave the property to them directly in your Will. This allowance is tapered for estates over £2 million, then removed completely for those over £2.35 million.
Charity exemption. There’s no IHT due if you pass all your assets to a charity. Also, if you leave more than 10% of your estate’s net value, the rate of IHT for your whole estate is cut from 40% to 36%.
Agricultural property and business relief. There’s IHT relief on agricultural properties (such as farmland) or passing on some business properties or assets. However, from April 2026, the first £1 million of qualifying assets are exempt from IHT. For anything over this, the relief is cut in half (so effectively you pay 20% IHT).
Pensions. The government wants pensions to be used to fund retirement, not intergenerational tax planning. So, from 2027, pensions are included in the scope of IHT. This could mean IHT tax bills rise substantially.
What you can do in your lifetime
The main way to reduce IHT liabilities for those who inherit your estate is by gifting. Here are the main things to consider:
· Everyone has an annual exemption of £3,000. You can gift this to just one person or divide it between several others (if any portion of this exemption is unused you can carry it forward one year).
· You can make unlimited small gifts payments of £250 per person per year (as long as they’re not already included in your annual exemption).
· You can make a tax-free gift for someone’s wedding or civil partnership. That’s £5,000 for your children, £2,500 for grandchildren or great grandchildren, and £1,000 for anyone else. These are on top of other allowances, but to qualify they must be gifted beforehand (and the wedding or civil partnership must go ahead).
· Gifts to your spouse or civil partner are usually exempt. There are limits though if they’ve been resident in the UK for less than 10 out of the previous 20 tax years.
· You can also make gifts from surplus income. These are potentially without limit. However, you must be able to prove you’ve not cut back on spending or reduced your standard of living to make the payments. Common gifts in this category include school fees or paying into a Junior ISA.
· Always remember the rule of seven. Anything outside these allowances is a potentially exempt transfer. If you die within seven years of the gift, its value is added back onto your estate (there is some ‘taper relief if the gift is made between three and seven years before you die).
IHT is a complex and personal issue
With the level of complexity involved, managing IHT by yourself isn’t advisable. Lifetime giving needs to be clear and well documented and requires a thorough review as well as quantifying the actual numbers involved. In addition, timing is everything; gifting your money too soon might mean you you’re not able to support yourself through any surprise twists and turns (for example, paying for any future residential care). But start too late and you could get caught out by the rule of seven.
Some people are content that their estate will face a tax bill, particularly if they’ve already made lifetime gifts. Others would prefer to avoid IHT altogether if possible. The key is to understand your numbers and make informed decisions, rather than you &/or your family be surprised by a six-figure bill that could have been reduced or avoided with the right planning and guidance.
IHT is always a sensitive issue - it involves having conversations with your family you may not feel ready for yet. This is where I can help - whether it’s explaining the thinking behind your plans, helping children understand what to expect, or simply ensuring everyone’s on the same page. It can make a difficult topic feel less daunting and reduce confusion, stress and risk later on.
If you’d like to talk through your plans or begin creating one, please do get in touch.
[1] Source: YouGov March 2025