Inheritance Tax Planning: The Complete UK Guide

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax on the estate of someone who has died. It is charged at 40% on the value of the estate that exceeds the tax-free threshold — known as the nil-rate band — which is currently set at £325,000. An additional allowance of up to £175,000 may be available through the residence nil-rate band if you pass your home to direct descendants such as children or grandchildren.

The UK government collected over £7.5 billion in IHT receipts in 2023/24, and that figure continues to rise. As property values increase and the nil-rate band remains frozen, more and more families are finding themselves drawn into the IHT net — often unexpectedly. What was once considered a tax on the very wealthy now affects a significant number of ordinary homeowners, particularly in London and the South East.

The good news is that with thoughtful, early planning, it is possible to significantly reduce — or in some cases eliminate — your family's inheritance tax liability. This guide explains how.

Current IHT Thresholds and Rates (2024/25)

For the 2024/25 tax year, the key inheritance tax thresholds are as follows:

Use our free IHT calculator to estimate your potential liability based on these current thresholds.

Who Pays Inheritance Tax?

IHT is paid by the executors of the estate (or personal representatives if there is no will), from the estate's assets, before any distribution to beneficiaries. Your beneficiaries do not receive a separate IHT bill — the tax is settled from the estate itself.

However, this creates a practical challenge: executors must pay the IHT before they can obtain a grant of probate, but they often cannot access the deceased's bank accounts or sell property without that same grant. This “probate catch-22” can leave families scrambling for funds at one of the most difficult times in their lives.

Some banks offer the Direct Payment Scheme, allowing executors to pay IHT directly from the deceased's accounts. Alternatively, executors can apply to pay in instalments for certain assets like property, or arrange short-term borrowing to bridge the gap.

The Nil-Rate Band Explained

The nil-rate band (NRB) is the amount below which no inheritance tax is charged. It is currently set at £325,000 per person. Any value of your estate above this threshold is taxed at 40%.

Crucially, any unused NRB from a deceased spouse or civil partner can be transferred to the surviving partner. This means a surviving spouse can potentially have a combined NRB of £650,000. The transfer is not automatic — it must be claimed by the executors of the second estate, and it is based on the proportion of unused allowance, not a fixed amount.

For example, if the first spouse used £162,500 of their NRB (50%), the surviving spouse can claim an additional 50% of the NRB at the time of their death. If the NRB is still £325,000, this adds £162,500 to their allowance.

Certain transfers are fully exempt from IHT and do not use up any of your nil-rate band, including gifts between spouses and civil partners, gifts to UK charities, and gifts to qualifying political parties.

The Residence Nil-Rate Band (RNRB)

Introduced in April 2017, the residence nil-rate band provides an additional £175,000 allowance when a home (or a share of it) is passed to direct descendants — children, stepchildren, adopted children, foster children, or their lineal descendants such as grandchildren.

Like the standard NRB, the RNRB is transferable between spouses and civil partners. This means a couple can potentially pass on up to £1 million free of IHT (£325,000 + £175,000 each).

However, the RNRB comes with important conditions. It only applies if you leave your home to direct descendants — not to siblings, nieces, nephews, or friends. If you have no children, or choose to leave your property to someone other than a direct descendant, you cannot benefit from this allowance.

There is also a taper: for estates worth more than £2 million, the RNRB is reduced by £1 for every £2 over the threshold. This means the RNRB is completely eliminated for estates above £2.35 million (for an individual) or £2.7 million (for a couple with two RNRB allowances).

If you have downsized or sold your home after 8 July 2015, a “downsizing addition” may allow you to claim a proportion of the RNRB, provided the remaining estate is left to direct descendants.

IHT Planning Strategies

There is no single solution to inheritance tax — the most effective approach typically combines several strategies tailored to your personal circumstances, family situation, and financial goals. Below are the most commonly used and HMRC-approved methods of reducing your IHT liability.

Gifting and the 7-Year Rule

Gifting is one of the simplest and most powerful IHT planning tools. Gifts to individuals are classified as potentially exempt transfers (PETs). If you survive for 7 years after making a gift, it falls entirely outside your estate and is fully exempt from IHT.

In addition to PETs, there are several annual exemptions available to everyone:

• Annual exemption: £3,000 per year (can carry forward one year's unused allowance)
• Small gifts: £250 per person per year, to any number of people
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Normal expenditure out of income: Regular gifts from surplus income are exempt with no upper limit

Trusts

Trusts allow you to transfer assets out of your estate while maintaining a degree of control over how and when beneficiaries receive them. The main types of trust used in IHT planning include:

• Bare trusts: Assets are held for a named beneficiary who has an absolute right to the capital and income. The gift into a bare trust is treated as a PET.
• Discretionary trusts: Trustees have discretion over how income and capital are distributed among beneficiaries. Transfers in are chargeable lifetime transfers (CLTs) — IHT is charged at 20% on amounts over the NRB, with a 10-year periodic charge.
• Interest in possession (IPDI) trusts: A beneficiary has an immediate right to the income generated by the trust assets, while the capital passes to other beneficiaries (remaindermen) on their death.

Trusts are particularly useful for protecting assets from remarriage, managing wealth for younger beneficiaries, or providing for a surviving spouse while ensuring children ultimately inherit.

Family Investment Companies

A Family Investment Company (FIC) is a private limited company used to hold and manage family investments. Parents typically hold voting shares (retaining control) while children or grandchildren hold non-voting growth shares. As the value of the company grows, the growth accrues to the next generation's shares, gradually shifting wealth out of the parents' estate.

FICs offer significant flexibility around income distribution and control, making them particularly popular among families with substantial investment portfolios. They do require careful structuring and ongoing administration, so professional advice is essential.

Business Property Relief (BPR)

Business Property Relief can reduce the taxable value of qualifying business assets by 50% or 100% for IHT purposes. Assets qualifying for 100% relief include interests in unincorporated businesses, shares in unlisted companies, and shares traded on the Alternative Investment Market (AIM). Assets qualifying for 50% relief include controlling holdings in listed companies and land or buildings used in a business you control.

BPR-qualifying AIM shares have been a popular IHT planning tool because they can be held in a normal portfolio while providing IHT relief. However, they carry investment risk and the qualifying conditions can change, so they should be seen as one part of a broader plan. Read our guide on VCT tax relief for another tax-efficient investment option.

Agricultural Property Relief (APR)

Agricultural Property Relief provides up to 100% relief from IHT on the agricultural value of qualifying farmland and farm buildings. To qualify, the property must have been occupied for agricultural purposes for at least 2 years (if farmed by the owner) or 7 years (if let to a tenant). Like BPR, the £1 million cap from April 2026 will affect higher-value agricultural estates.

Life Insurance in Trust

A whole-of-life insurance policy, written in trust, can provide your family with the funds to pay an IHT bill without having to sell assets under time pressure. Because the policy is held in trust, the payout goes directly to the trustees (for the benefit of your beneficiaries) and does not form part of your taxable estate. This is one of the most straightforward ways to ensure your family is not forced into a cash-poor, asset-rich situation at the worst possible time.

Charitable Giving

Gifts to UK-registered charities are completely exempt from IHT. Additionally, if you leave at least 10% of your net estate to charity, the IHT rate on the remainder is reduced from 40% to 36%. While a 4% reduction may sound modest, for larger estates this can result in a very significant saving — and in some cases, the cost to your non-charitable beneficiaries may be neutral or even positive.

Pensions

Defined contribution pension pots are currently outside the scope of IHT, making them one of the most tax-efficient vehicles for intergenerational wealth transfer. Many advisors recommend spending other assets first in retirement and preserving pension wealth where possible.

However, the government announced in the Autumn Budget 2024 that from April 2027, unused pension funds will be brought into the IHT net. This is a major change that will require many individuals to revisit their estate planning. Read more in our pension tax guide.

The IHT Payment Deadline

Inheritance tax must be paid within 6 months from the end of the month in which the person died. After this deadline, HMRC charges interest on the outstanding balance.

For certain assets — including land, property, and some qualifying shares — executors can elect to pay IHT in 10 equal annual instalments. Interest is charged on the outstanding balance, but this option can prevent a forced sale of property to meet the tax bill. The instalment option ends if the asset is sold.

It is also possible to pay IHT from the deceased's bank accounts before probate is granted using HMRC's Direct Payment Scheme. Most major UK banks participate in this scheme. If you need help navigating this process, find a qualified tax advisor through our free matching service.

Paying IHT When You're Asset Rich but Cash Poor

One of the most common challenges executors face is raising the cash to pay an IHT bill when the estate is primarily made up of illiquid assets — property, art, business interests, or other valuables. Selling a family home or cherished assets under time pressure rarely produces the best outcome.

There are several options for bridging this liquidity gap:

• Asset-backed finance — borrowing against property, investments, or other assets to fund the tax bill
• Luxury asset finance — using high-value items such as art, jewellery, or classic cars as security for a loan
• Tax bill financing — specialist lenders who provide short-term funding specifically for tax liabilities
• The HMRC instalment option for qualifying property and certain other assets

If you anticipate a significant IHT bill on a property-heavy or asset-rich estate, read our dedicated guide on cash poor, asset rich solutions for a full breakdown of your options.