Inheritance tax in the UK: the complete guide - My Local Will Writer
Inheritance tax is a tax on the estate of someone who has died. If your estate is worth more than the threshold, HMRC takes a cut before anything passes to your beneficiaries. The standard rate is 40%, which is why getting your will and estate planning right matters so much.
Frozen thresholds, rising property prices and recent changes to agricultural and business relief mean more estates are being caught every year. Inheritance tax planning is no longer something only very wealthy families need to think about.
One of the most common things clients tell us is that they assumed inheritance tax would not affect them. A family home, modest savings and a pension can push an estate over the threshold more quickly than most people expect.
This guide explains how inheritance tax works, what the current thresholds are, what reliefs are available and how your will fits into the picture.
How does inheritance tax work?
Inheritance tax, often shortened to IHT, is charged on the value of an estate after someone dies.
Your estate can include your home and any other property, savings and bank accounts, investments, vehicles, jewellery, art and valuable possessions, business assets, and some gifts made in the seven years before death.
Before inheritance tax is calculated, debts and certain costs are deducted. This includes mortgages, loans, funeral costs and other liabilities.
Everything below your available tax-free threshold passes without inheritance tax. Anything above it is taxed at 40%. So if your estate is £100,000 over the available threshold, the tax bill is £40,000.
Inheritance tax is usually paid from the estate before probate is granted. This can create a real cash flow problem for executors. In some cases they need to find tens of thousands of pounds before they can access the estate to pay it. HMRC does allow inheritance tax on property to be paid in instalments in some circumstances, which can ease the pressure.
Do I have to pay inheritance tax?
Inheritance tax is due if the value of your estate is above your available tax-free allowances. The key factors are how much your estate is worth, whether you own a home and who it passes to, whether you are married or in a civil partnership, and whether any reliefs or exemptions apply.
If your estate is below the inheritance tax threshold, inheritance tax is not due. If it is above, your executors will need to report the estate to HMRC and arrange payment from estate funds.
Even if inheritance tax is not an issue, it is still worth making a will. A will controls who inherits, who deals with your estate and how your wishes are carried out.
What is the inheritance tax threshold?
The main inheritance tax threshold is called the nil-rate band.
The nil-rate band is currently £325,000. This means an estate worth up to £325,000 can pass without inheritance tax. The threshold has been frozen at this level since 2009 and is set to remain frozen until at least 2030.
If your estate is worth £500,000 and you only have the standard nil-rate band available, the first £325,000 is tax-free. The remaining £175,000 is taxed at 40%, resulting in an inheritance tax bill of £70,000.
This is why the frozen threshold matters. A family may not feel especially wealthy, but a house, savings and other assets can push an estate over the limit quite quickly. With property values continuing to rise, that is happening to more families each year.
What is the residence nil-rate band?
The residence nil-rate band is an extra inheritance tax allowance linked to your home.
It can be worth up to £175,000. It applies when your estate includes a main home, or the proceeds from a home sold after July 2015, and that home passes to a direct descendant.
A direct descendant can include a child, grandchild, stepchild, adopted child or foster child.
When the standard nil-rate band and residence nil-rate band are used together, one person may have a combined inheritance tax allowance of up to £500,000.
For married couples and civil partners, the allowances can often be transferred. This means a couple may be able to pass on up to £1 million before inheritance tax is due, provided the estate qualifies for the full allowances.
There is one important limit. The residence nil-rate band starts to reduce when an estate is worth more than £2 million, falling by £1 for every £2 above that level.
Can married couples combine inheritance tax allowances?
Yes. Married couples and civil partners can combine their inheritance tax allowances.
Transfers between spouses and civil partners are exempt from inheritance tax. If one spouse leaves everything to the other, there is no inheritance tax to pay on the first death.
Any unused nil-rate band can also be transferred to the surviving spouse or civil partner. If the first person to die leaves everything to their spouse and uses none of their nil-rate band, the survivor has a combined nil-rate band of £650,000. If the residence nil-rate band also applies, the combined allowance rises to £1 million.
This is one of the biggest differences between married couples and unmarried couples. The spouse exemption does not apply to unmarried partners. If you live with your partner but are not married or in a civil partnership, your estate will be treated very differently on death. Your partner may receive nothing under intestacy rules if you die without a will. Clients often come to us having assumed their long-term partner would automatically inherit. Under the law as it stands, that is not the case.
Inheritance tax on property
Property is often the main reason families become affected by inheritance tax.
Your home is included in your estate at its market value at the date of death. If you own a house, savings and other assets, the total estate value can exceed the inheritance tax threshold even if you do not think of yourself as wealthy.
The residence nil-rate band can help, but only if the conditions are met. The home needs to pass to a direct descendant.
How your property is owned also matters. If you own a property as joint tenants, your share passes automatically to the surviving owner when you die, outside your will. If you own as tenants in common, your share can pass under your will, giving you more control over where it goes.
In our experience, many clients are not sure how their property is held when they first speak to us. It is worth checking before you finalise your will. The answer can have a significant effect on who inherits and how your estate is taxed.
This is especially important for blended families, unmarried couples and anyone who wants to protect a share of their home for children from a previous relationship.
The seven-year rule for gifts
Gifts can reduce the value of your estate, but the timing matters.
Most gifts made during your lifetime are known as potentially exempt transfers. If you survive for seven years after making the gift, it falls outside your estate for inheritance tax purposes entirely.
If you die within seven years, the gift may still be counted as part of your estate. The full 40% rate applies if you die within three years of making the gift. After that, taper relief reduces the tax due, depending on how many years have passed.
Good records matter. Your executors may need to tell HMRC about gifts made before death, sometimes going back several years. Keep a note of what you gave, who received it, when it was made, the value and whether it was part of a regular pattern of giving.
What reliefs reduce inheritance tax?
Several reliefs and exemptions can reduce an inheritance tax bill.
Annual gift exemption
You can give away up to £3,000 each tax year without it being added to your estate for inheritance tax. If you did not use the exemption in the previous tax year, you can carry it forward for one year, giving you a one-off allowance of £6,000.
Small gifts
You can make small gifts of up to £250 per person each tax year, as long as you have not used another exemption for the same person.
Gifts to charity
Gifts to UK registered charities are exempt from inheritance tax. If you leave at least 10% of your net estate to charity, the inheritance tax rate on the rest of your estate reduces from 40% to 36%.
Agricultural property relief
Agricultural property relief can reduce the inheritance tax value of qualifying agricultural land and property. From April 2026, full 100% relief is capped at £1 million, with 50% relief applying above that level. You can read more in our guide to agricultural and business property relief changes in 2026.
Business property relief
Business property relief can reduce the inheritance tax value of certain business assets, including shares in some unlisted companies. The same £1 million cap applies from April 2026.
Pensions
Pensions have generally sat outside the estate for inheritance tax purposes, making them a useful tool for passing wealth to the next generation. From April 2027, unused pension funds will be brought into the estate under the government’s proposed reforms. If pensions form a significant part of your estate, the change is worth factoring into your planning now.
How does your will affect inheritance tax?
A will does not eliminate inheritance tax, but it can help your estate use the rules properly.
A well-drafted will can help you leave assets to a spouse or civil partner in a tax-efficient way, make use of charitable gifts, protect children from a previous relationship, set out what should happen to your share of a property, use trusts where appropriate and avoid relying on intestacy rules.
Without a will, your estate passes under intestacy rules. These may not match your wishes and are rarely tax-efficient. An unmarried partner does not automatically inherit under intestacy and does not benefit from the spouse or civil partner exemption. Your partner could be left without the protection you intended, while your estate faces an inheritance tax bill that better planning could have reduced.
Can a trust reduce inheritance tax?
Trusts can form part of inheritance tax planning, but they need to be used carefully. A trust can allow assets to be managed for specific people, such as children or vulnerable beneficiaries, and in some cases can support longer-term estate planning. However, trusts have their own tax rules and are not a simple shortcut around inheritance tax.
If your estate is likely to exceed the threshold, or if you have a more complex family situation, it is worth considering whether a trust should be part of your will.
How to check your inheritance tax position
You do not need the exact value of every asset you own to start planning. A rough estate review is often enough to see whether inheritance tax is likely to be an issue.
Start by adding up the estimated value of your home, any other property or land, savings, investments, business interests, valuable possessions and any life insurance policies not written in trust.
Then subtract mortgage balances, loans, credit cards, other debts and estimated funeral costs.
Once you have a rough figure, compare it with your available inheritance tax allowances. You can also use our inheritance tax calculator to get a clearer estimate.
When should you review your will?
Review your will whenever your personal or financial situation changes. Buying a home, getting married or divorced, having children, receiving an inheritance, starting or selling a business, or moving in with a partner are all triggers. Any significant change in property value or in the inheritance tax rules is also worth acting on.
Even without a major change, reviewing your will every few years is sensible. It keeps your wishes clear and your estate planning current.
Make sure your will is doing its job
If anything in this guide has made you question whether your estate is structured the way you intended, that is worth acting on. A will written before you bought a property, got married or had children may no longer reflect your situation and it may not be making the most of the allowances available to you.
A will is the foundation of good inheritance tax planning. My Local Will Writer works by phone, and most wills are completed within a few weeks. Every will is checked by a solicitor before it is finalised. If you do not have a will, or your current one is out of date, you can get a quote online in a few minutes.