British Inheritance Tax: What It Is, How It Works, and How to Plan

British inheritance tax can significantly impact the wealth you leave behind for your loved ones. Understanding how this tax works is crucial for anyone with property, savings, or other valuable assets in the UK. Without proper planning, your estate could face a tax bill of up to 40%—leaving less for your family.

In this guide, we’ll explain everything you need to know about British inheritance tax: how it’s calculated, who pays it, what the thresholds are, and most importantly—how to reduce your liability legally. We’ll also cover strategies such as gifting, trusts, and allowances that can help protect your estate.

If you’re ready to protect your family’s future and reduce inheritance tax, book a free consultation with our estate planning specialists today.

What Is British Inheritance Tax?

British inheritance tax (IHT) is a tax charged on the estate of someone who has died, including their property, money, and possessions. It applies to individuals domiciled in the UK and, in some cases, to overseas assets.

As of 2024, the standard inheritance tax rate in the UK is:

• 40% on the value of the estate above the tax-free threshold
• 36% if at least 10% of the estate is left to charity

Although inheritance tax only applies to about 4% of estates, those who are affected often pay substantial amounts—sometimes hundreds of thousands of pounds. Effective planning can make a massive difference.

Who Pays Inheritance Tax in the UK?

The tax is usually paid out of the estate before assets are distributed to the beneficiaries. The responsibility for managing this falls to the executor of the will or the administrator if there is no will. In some cases, people who receive gifts before the person’s death may also be liable for inheritance tax.

It’s essential to understand how your estate is valued and how tax is assessed. Without planning, your loved ones could face delays in receiving their inheritance due to probate and IHT calculations.

British Inheritance Tax Thresholds and Allowances

Every individual has a tax-free allowance known as the nil-rate band (NRB). This is the amount you can pass on without incurring inheritance tax:

• £325,000 per person is the current NRB
• Couples can combine allowances to pass on £650,000 tax-free

There is also a Residence Nil-Rate Band (RNRB), which applies when passing your home to children or grandchildren:

• Additional £175,000 tax-free allowance per person
• Combined, married couples can potentially pass on £1 million tax-free

If your estate exceeds these thresholds, inheritance tax will apply on the surplus.

How British Inheritance Tax Is Calculated

Let’s say your estate is worth £750,000 and you’re leaving it all to your children. If you’re a single person and your total allowance is £500,000 (including RNRB), the remaining £250,000 would be taxed at 40%. That’s a bill of £100,000.

However, this amount can be reduced through proper planning, charitable giving, or using certain exemptions and reliefs.

Ways to Reduce British Inheritance Tax

There are several legal strategies to reduce inheritance tax liability:

1. Make Use of Tax-Free Gifts

Giving assets away during your lifetime can reduce the size of your estate. Some gifts are immediately exempt from IHT:

• Annual exemption: You can give away up to £3,000 each tax year
• Small gifts: Up to £250 per person per year
• Gifts on marriage: £1,000–£5,000 depending on your relationship to the recipient

Larger gifts may become exempt if you live for seven years after making them. This is known as the 7-year rule.

2. Set Up a Trust

Trusts allow you to transfer assets while keeping some control over how they are used. Assets placed in a trust may fall outside of your estate for inheritance tax purposes.

Common trust types include:

• Discretionary trusts
• Life interest trusts
• Property protection trusts

To find out whether a trust is right for your situation, visit our page on will writing and trust planning.

3. Leave Money to Charity

If you leave 10% or more of your estate to charity, the inheritance tax rate on the remainder is reduced from 40% to 36%. This can be a smart way to support causes you care about while reducing your tax bill.

4. Use Life Insurance in a Trust

Taking out a life insurance policy written in trust ensures that the payout is not counted as part of your estate. It can be used to cover IHT liabilities and ease the burden on your beneficiaries.

What Assets Are Subject to Inheritance Tax?

Inheritance tax is calculated on your entire estate. This includes:

• Your home and any other property
• Cash, savings, and investments
• Life insurance (unless written in trust)
• Vehicles, jewellery, art, and valuables

Some assets are exempt, such as pensions and jointly held property (depending on how it’s owned). However, understanding how assets are valued and taxed is key to effective estate planning.

Who Is Exempt from Inheritance Tax?

The following gifts and transfers are generally exempt from IHT:

• Transfers between spouses or civil partners (UK domiciled)
• Gifts to UK-registered charities
• Gifts that fall within your annual exemptions

There are also reliefs for business owners and farmers. For example, Business Property Relief (BPR) and Agricultural Property Relief (APR) may reduce the taxable value of business or farmland by up to 100%.

Planning for British Inheritance Tax: Where to Start

Here are three steps you can take today to start managing your inheritance tax risk:

1. Get a professional estate valuation to understand your exposure
2. Write or update your will to reflect your wishes and use the right structures
3. Talk to a specialist about trusts, gifting, and life insurance strategies

You can book a free consultation with MP Estate Planning to explore your options and protect your estate.

Common Questions About British Inheritance Tax

Is British inheritance tax applied on overseas assets?

If you’re domiciled in the UK, yes. Inheritance tax can apply to your worldwide assets. Non-domiciled individuals may only be taxed on UK-based assets.

Do children pay inheritance tax on property?

Yes—unless the estate falls below the threshold or trusts and allowances are used to reduce the taxable value. The RNRB helps protect the family home when passed to direct descendants.

How do I avoid inheritance tax on my house?

You can use trusts, make lifetime gifts, or plan your will to make use of the RNRB. Early planning is essential.

How long does it take to pay inheritance tax?

IHT is due within 6 months of the person’s death. After that, HMRC may charge interest. Executors usually pay it before distributing the estate.

Conclusion: Get Ahead of British Inheritance Tax

British inheritance tax is complex—but with the right advice and action, you can significantly reduce the amount your estate may owe. From using your allowances and making lifetime gifts to setting up trusts and charitable donations, there are many ways to preserve your family’s wealth.

Don’t wait until it’s too late. Book a free consultation today to create a strategy tailored to your unique situation. For full-service guidance, see our transparent pricing page.

With the right plan, you can pass on more to those who matter—and less to the taxman.