Inheritance Tax (IHT) is a tax on the estate — the property, money, and possessions — of someone who has died. Understanding how IHT works is crucial for effective estate planning and protecting your family’s wealth. IHT can significantly reduce the amount passed on to your loved ones, and with the average home in England now worth around £290,000, more ordinary families are being caught by this tax than ever before. In this guide, we’ll break down the basics of Inheritance Tax, explore the available exemptions and reliefs, look at practical planning strategies including trusts, and outline what happens after a death. With this knowledge, you can take meaningful steps to protect your estate and reduce unnecessary tax liabilities.
Understanding the Basics of Inheritance Tax
When someone dies and leaves their estate to family or friends, Inheritance Tax may be due on the value of that estate above a certain threshold. IHT is collected by HMRC and goes into general government revenue. It’s one of the most significant taxes affecting families in England and Wales — and because the threshold hasn’t increased since 2009, it now catches far more people than it was originally designed to. What was once a tax aimed at the genuinely wealthy now routinely affects ordinary homeowners whose only significant asset is the family home.
Who Pays Inheritance Tax?
IHT is paid from the estate itself before anything is distributed to the beneficiaries. The executors (if there’s a will) or administrators (if there’s no will — known as dying intestate) are responsible for calculating what’s owed, reporting to HMRC, and paying the tax from the estate’s funds. In some cases, a will may direct that specific beneficiaries bear the tax on their share, but by default, IHT comes out of the residuary estate before anyone receives their inheritance. It’s worth understanding that creditors and HMRC are always paid first — beneficiaries receive only what’s left after all debts and taxes have been settled.
Current Inheritance Tax Threshold and Rates
Everyone has a tax-free allowance called the nil rate band (NRB), which is currently £325,000 per person. This has been frozen at that level since 6 April 2009 — over 16 years without a single increase — and is confirmed frozen until at least April 2031. Anything above the NRB is taxed at 40%. There is a reduced rate of 36% if you leave 10% or more of your net estate to charity. For many families, the fact that the NRB hasn’t kept pace with rising house prices means they are now liable for IHT when they wouldn’t have been a decade ago. To put this in perspective, if the NRB had risen with inflation since 2009, it would be well over £450,000 today. That frozen threshold is the single biggest reason ordinary families are now caught by a tax that was never intended for them.
Recent Changes and Updates
There is an additional allowance called the Residence Nil Rate Band (RNRB), worth up to £175,000 per person. This is available when you leave a qualifying residential property to direct descendants — your children, grandchildren, or step-children. It is not available if you leave your home to nephews, nieces, siblings, friends, or charities. The RNRB is also frozen until at least April 2031. For a married couple, the combined NRB and RNRB can provide up to £1,000,000 of tax-free allowance (£650,000 NRB + £350,000 RNRB), as unused allowances transfer between spouses. However, the RNRB starts to taper away by £1 for every £2 your estate exceeds £2,000,000 — so larger estates may lose this benefit entirely. Looking further ahead, from April 2026, Business Property Relief and Agricultural Property Relief will be capped at 100% on the first £1 million of combined qualifying property, dropping to 50% relief on any excess. And from April 2027, inherited pensions will become liable for IHT — a significant change that will affect many families who had assumed their pension was safely outside the estate. Always check the latest HMRC guidance or speak to a specialist, as these rules continue to evolve.
Calculating the Value of an Estate
To work out how much IHT is due, the executors first need to establish the total value of the deceased’s estate at the date of death, then deduct any debts, liabilities, and allowable exemptions.
How to Determine the Value of an Estate
The estate includes everything the deceased owned at the date of death, valued at market value. This also includes their share of any jointly owned assets (for example, if property was held as tenants in common rather than joint tenants), the value of any gifts made within seven years of death (known as potentially exempt transfers), and certain trust assets depending on the type of trust. Assets subject to a gift with reservation of benefit — where the deceased gave something away but continued to enjoy it — are also brought back into the estate. Debts such as mortgages, outstanding loans, and reasonable funeral costs are deducted from the total.
Assets Typically Included in Estate Valuation
Common assets that form part of an estate include:
- Property and Land — the family home, buy-to-let properties, holiday homes, and any land owned
- Bank Accounts and Savings — including ISAs (ISAs lose their tax-free wrapper on death, and the full value is included in the estate)
- Investments — stocks, shares, bonds, and investment funds
- Personal Belongings — jewellery, cars, art, antiques, and other valuables
- Pensions — most defined contribution pensions are currently outside the estate for IHT purposes, but from April 2027, inherited pensions will become liable for IHT
- Life Insurance — any policy not written in trust is included in the estate and taxed at 40% above the threshold. Writing a policy into a life insurance trust is typically free to arrange and keeps the payout outside the estate entirely
- Gifts made within seven years of death — these are added back to the estate for IHT calculation purposes
Example of Calculating the Value of an Estate
Let’s say someone owns a home worth £300,000, has £50,000 in savings, and a car worth £10,000. Their total estate is £360,000. They have no debts. After deducting the nil rate band of £325,000, the taxable amount is £35,000. IHT at 40% on £35,000 comes to £14,000. If this person had left their home to their children and qualified for the Residence Nil Rate Band of £175,000, the combined allowance would have been £500,000 — meaning the full £360,000 estate would have been covered, and the IHT bill would have been zero. That’s a £14,000 saving simply by understanding the reliefs available. This is why knowing the rules — and planning to make the most of them — is so important.
Understanding these basics helps you see how Inheritance Tax works in practice and why forward planning can make such a significant difference to what your family actually receives.
Exemptions and Reliefs
Spousal Exemption
Transfers between married couples and civil partners are completely exempt from IHT, regardless of value. If Mr Smith dies and leaves his entire estate to his wife Mrs Smith, there is no IHT to pay at all. Furthermore, any unused nil rate band from Mr Smith’s estate can be transferred to Mrs Smith’s estate when she eventually dies — meaning a couple can pass on up to £650,000 (or £1,000,000 including the RNRB) without any IHT liability. It’s worth noting that this exemption applies to married couples and civil partners only — it does not apply to unmarried partners, regardless of how long they’ve been together. This catches many cohabiting couples off guard, and it’s one of the reasons estate planning advice is so important for people in long-term relationships who haven’t married or entered a civil partnership.
Other Exemptions
There are several other important exemptions and reliefs that can reduce or eliminate an IHT bill:
- Charity Exemption: Any amount left to a registered charity is completely exempt from IHT. Additionally, if you leave 10% or more of your net estate to charity, the IHT rate on the rest drops from 40% to 36%.
- Business Property Relief (BPR): Qualifying business assets can attract 100% relief, meaning they can be passed on free of IHT. This currently applies to unquoted trading businesses and shares. However, from April 2026, BPR will be capped at 100% relief on the first £1 million of combined business and agricultural property, with only 50% relief on the excess.
- Agricultural Property Relief (APR): Similar to BPR but for qualifying agricultural land and buildings. Subject to the same changes from April 2026.
- Annual Gift Exemption: You can give away £3,000 per tax year free of IHT, with one year’s unused allowance carried forward. Small gifts of up to £250 per recipient are also exempt — though you can’t combine the £250 and £3,000 exemptions for the same person in the same tax year.
- Wedding Gifts: Parents can give £5,000, grandparents £2,500, and anyone else £1,000 as a wedding or civil partnership gift, free of IHT.
- Normal Expenditure Out of Income: Regular gifts made from surplus income (not capital) are exempt — but you must keep clear, contemporaneous records to prove the pattern and demonstrate that the gifts didn’t reduce your standard of living.
Real-Life Examples
Jane left her entire estate, worth £500,000, to her husband John. Because of the spousal exemption, John pays no IHT. Jane’s full nil rate band of £325,000 is also preserved and can be transferred to John’s estate when he dies — giving him a combined NRB of £650,000.
Tom had an estate worth £400,000 when he passed away. He left £50,000 to a local charity. Only £350,000 of his estate is now subject to IHT. After deducting his £325,000 nil rate band, just £25,000 is taxable — resulting in an IHT bill of £10,000 instead of what would have been £30,000 without the charitable gift. That’s a £20,000 saving for a £50,000 donation — because the gift itself was exempt and it reduced the taxable portion of the estate.
Sarah owns a small family shop worth £300,000, which qualifies as a trading business. She leaves it to her children, who continue running it. Thanks to Business Property Relief, the business passes to them with no IHT to pay — though they should be aware that if they sell the business within a certain period, the relief may be clawed back.
Understanding these exemptions and reliefs can dramatically reduce an IHT bill, ensuring more of your wealth reaches the people you care about rather than going to the taxman.
Planning for Inheritance Tax
Importance of Early Planning
Early planning is one of the most powerful things you can do to protect your family’s inheritance. As Mike Pugh of MP Estate Planning says, “Plan, don’t panic.” The nil rate band has been frozen at £325,000 since 2009 — and with average house prices in England now around £290,000, a modest home plus some savings can easily push an estate over the threshold. The earlier you start, the more options are available to you, and the greater the potential savings for your family. Once someone has passed away, the planning window closes entirely — so the time to act is always now.
Gifts and Trusts in Inheritance Tax Planning
Making gifts during your lifetime is one of the simplest ways to reduce the value of your estate. Outright gifts to individuals are known as potentially exempt transfers (PETs) — if you survive for seven years after making the gift, it falls completely outside your estate for IHT purposes. It’s important to understand, however, that if you give something away but continue to benefit from it — for example, gifting your home to your children but still living in it rent-free — HMRC treats this as a gift with reservation of benefit (GROB), and the asset remains in your estate regardless of how many years have passed.
Trusts are another powerful planning tool. A trust is a legal arrangement — not a separate legal entity — where trustees hold and manage assets for the benefit of named beneficiaries. England invented trust law over 800 years ago, and trusts remain one of the most effective ways to protect family wealth. Trusts are not just for the wealthy — they’re for the smart. A well-structured trust can protect assets from care fees, divorce, sideways disinheritance, and family disputes, while also providing IHT efficiency. The most commonly used type for family protection is the discretionary trust, where the trustees have full discretion over how and when assets are distributed to beneficiaries — meaning no individual beneficiary has a fixed right to the assets. This is the key protection mechanism: if a beneficiary faces divorce, bankruptcy, or a care fee assessment, the trust assets are not automatically considered theirs.
Transfers into a discretionary trust are not PETs — they are chargeable lifetime transfers (CLTs). There is an immediate charge of 20% on any value above the available nil rate band at the time of transfer. However, for most families placing their home into trust, if the value is within the £325,000 NRB (or £650,000 for a married couple using two separate trusts), there is no entry charge at all. Ongoing charges within a discretionary trust — the 10-year periodic charge and exit charges — are also modest. The maximum periodic charge is 6% of trust property above the NRB, and for most family homes below the threshold, these charges are zero.
The Seven-Year Rule for Gifts
When you make a gift directly to another person, it becomes a potentially exempt transfer (PET). If you survive for seven years, the gift falls completely outside your estate for IHT purposes. If you die within seven years, the gift uses up your nil rate band first, and any excess is taxed at 40%. There is also taper relief, which reduces the tax (not the value of the gift) on a sliding scale: 0–3 years: 40%, 3–4 years: 32%, 4–5 years: 24%, 5–6 years: 16%, 6–7 years: 8%, 7+ years: 0%. It’s important to note that taper relief only applies when the total value of gifts exceeds the £325,000 nil rate band — for smaller gifts, it makes no practical difference because the NRB would have absorbed them entirely. The key message: the earlier you start planning, the more effective these strategies become.
Tips and Strategies
Here are practical steps you can take now to reduce your family’s potential IHT bill:
- Start Now: The earlier you begin planning, the more tools are available. The seven-year clock for gifts only starts when you actually make the gift — and for trusts, the sooner assets are inside the trust, the sooner they are protected.
- Use Your Annual Exemptions: Give away up to £3,000 each tax year, plus £250 to as many individuals as you like (not the same person receiving the £3,000). These are immediately exempt — no need to survive seven years. If you didn’t use last year’s £3,000 allowance, you can carry it forward one year for a combined £6,000.
- Consider a Trust: Placing your family home or other assets into a properly structured trust — such as a Family Home Protection Trust — can protect against care fees, sideways disinheritance, and family disputes. For most families, a straightforward trust can be set up from around £850, which is roughly the equivalent of one week’s care home fees. When you compare that one-time cost to the potential loss of your entire home to care fees (average residential care costs £1,100–£1,300 per week and continues until your assets are depleted to £23,250), the value is clear.
- Write Life Insurance in Trust: A life insurance policy not held in trust forms part of your estate and is taxed at 40% above the threshold. Writing it into a life insurance trust is typically free to arrange and ensures the full payout reaches your family without delay or tax. This is one of the simplest and most effective planning steps anyone can take.
- Keep Records: If you make regular gifts from surplus income, keep detailed records of each gift, the date, the amount, the recipient, and your income and expenditure at the time. The “normal expenditure out of income” exemption is valuable but HMRC will want evidence of an established pattern and proof that the gifts didn’t affect your standard of living.
Seeking Professional Advice
Complexity of Inheritance Tax
Inheritance Tax planning involves a web of interacting rules — nil rate bands, the residence nil rate band, the seven-year rule, trust taxation, gift with reservation of benefit rules, the pre-owned assets tax, and more. Getting it wrong can cost your family tens or even hundreds of thousands of pounds. As Mike Pugh puts it, “The law — like medicine — is broad. You wouldn’t want your GP doing surgery.” IHT and trust planning is a specialist area, and generic advice from a high-street solicitor who handles everything from conveyancing to divorce may not be sufficient. You need someone whose day-to-day work is focused specifically on trusts and inheritance tax planning.
Role of Financial Advisers, Solicitors, and Accountants
Different professionals play different roles in estate planning. A specialist estate planning consultant or solicitor can draft trust deeds, structure your affairs to minimise IHT, and advise on asset protection strategies. A financial adviser can help with investment strategies and life insurance planning. An accountant can assist with trust tax returns (the SA900) and the ongoing administration of estates and trusts. The key is to work with someone who specialises in this area — not a generalist who dabbles in it occasionally. As Mike often says, keeping families wealthy strengthens the country as a whole, and that starts with getting the right specialist advice.
How to Choose the Right Professional
- Check Their Specialism: Do they focus on inheritance tax planning and trusts, or is it just one of many services they offer? A specialist will understand the nuances — such as the difference between a discretionary trust and a bare trust, or the interaction between the RNRB and a property held in trust — that a generalist may overlook.
- Ask About Their Approach: A good adviser will carry out a thorough analysis of your situation before recommending anything. At MP Estate Planning, for example, we use a proprietary 13-point threat analysis (Estate Pro AI) to identify every risk to your estate — from IHT exposure and care fee vulnerability to sideways disinheritance and divorce risk.
- Look at Transparency: Are their fees clearly published? Mike Pugh is the first and only estate planning professional in the UK to actively publish all prices on YouTube — because there should be no surprises. If a firm won’t tell you what something costs until after the consultation, that’s a warning sign.
- Ask for Testimonials and Reviews: Speak to friends or family who have used their services, and check independent reviews. A firm with a strong track record will have no difficulty providing references.
Getting specialist advice early is one of the best investments you can make. The cost of proper planning — from around £850 for a straightforward trust — is modest compared to a 40% IHT bill or the loss of your home to care fees. And once someone has passed away, the planning options disappear entirely. Plan, don’t panic — but do plan.
Dealing with Inheritance Tax after a Death
Reporting an Estate to HMRC
When someone dies, the executors or administrators must report the value of the estate to HMRC. This involves compiling a detailed inventory of everything the deceased owned — property, bank accounts, investments, personal possessions, any gifts made in the seven years before death — and everything they owed. Even if no IHT is due (for example, because the estate falls within the nil rate band or passes entirely to a spouse), reporting is still usually required. It’s also worth noting that the will becomes a public document once the Grant of Probate is issued — anyone can obtain a copy for a small fee from the Probate Registry.
Role of the Executor or Administrator
The executor (named in the will) or administrator (appointed when there is no will) is legally responsible for handling the estate. They must value all assets at market value as at the date of death, settle all debts, report to HMRC using the appropriate IHT forms, pay any IHT due, apply to the Probate Registry for a Grant of Probate (or Letters of Administration if there was no will), and distribute the estate to the beneficiaries according to the will or the intestacy rules. During this process — which typically takes between 3 and 12 months, and often 9 to 18 months where property needs to be sold — all sole-name assets are frozen. Bank accounts cannot be accessed, property cannot be sold, and beneficiaries must wait. This is one of the key reasons people use trusts: assets held in trust bypass the probate process entirely, allowing trustees to act immediately on the settlor’s death without waiting for any court order or grant.
Timeline for Paying Inheritance Tax
IHT is due within six months of the end of the month in which the person died. Interest is charged on late payments. For estates that include property, HMRC may allow IHT on the property element to be paid in annual instalments over up to 10 years — though interest still accrues on the outstanding balance. The practical challenge is that IHT often needs to be paid before the Grant of Probate is issued, meaning executors may need to arrange payment from frozen bank accounts (some banks have a process for releasing funds directly to HMRC) or borrow funds to settle the bill. This creates a genuine cash flow problem for many families — you need to pay the tax to get the grant, but you need the grant to access the assets to pay the tax. It’s a catch-22 that proper planning can prevent.
Penalties for Late Payment or Failure to Report
If IHT is not paid by the deadline, HMRC charges interest on the outstanding amount. There are also penalties for failing to report the estate accurately or on time. These can be significant, especially if HMRC considers that there has been a deliberate understatement of the estate’s value or a failure to include assets such as gifts made within seven years. Accuracy and timeliness are essential — and this is another area where professional help can prevent costly mistakes and give executors confidence that everything has been handled correctly.
Inheritance Tax Helpline and Resources
HMRC Inheritance Tax Helpline
If you have questions about IHT, you can contact the HMRC Inheritance Tax helpline on 0300 123 1072. They can provide general guidance on forms, thresholds, and procedures. However, they cannot give you personalised planning advice or tell you whether a particular strategy is right for your circumstances — for that, you need to speak to a specialist.
Useful Resources
Several resources can help you understand and manage IHT:
- Gov.uk — the official government website has comprehensive guides, forms (including the IHT400 used for reporting estates), and calculators
- Citizens Advice — offers free guidance on wills, probate, and bereavement
- MP Estate Planning — our website and YouTube channel provide detailed, plain-English guides on trusts, IHT planning, care fee protection, and asset protection, with all prices published transparently. Mike Pugh’s videos break down complex topics into practical, actionable advice
Support from Organisations
Organisations like Age UK and Macmillan Cancer Support can offer additional help and guidance, particularly during the difficult time of losing a loved one. They provide practical support with bereavement, benefits, and navigating the administrative processes that follow a death. Cruse Bereavement Support also provides free counselling and guidance to those dealing with grief.
Taking Control of Your Estate Planning Journey
Understanding and planning for Inheritance Tax is one of the most important things you can do to protect your family’s financial future. The nil rate band has been frozen since 2009, house prices continue to rise, and from 2027 inherited pensions will be drawn into the IHT net too. The gap between what ordinary families own and what’s protected is growing every year. By taking action now — whether that’s making use of annual gift exemptions, putting your home into a properly structured trust, or writing your life insurance into trust — you can ensure that more of your hard-earned wealth reaches the people you love. As Mike Pugh says, not losing the family money provides the greatest peace of mind above all else. Trusts are not just for the rich — they’re for the smart. Don’t wait until it’s too late — start your estate planning today. Schedule a free initial consultation with MP Estate Planning to get advice tailored to your specific situation. We’ll walk you through every step in plain English, so you know exactly where you stand and what your options are.