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    Inheritance Tax Guide

    Estate planning – too important to put on hold

    Home > News > Inheritance Tax Guide

    Inheritance tax affects thousands of families each year. Changes to inheritance tax in the recent Budget could cause twice as many deaths to trigger an inheritance tax charge from 2027 onwards.

    Inheritance tax (IHT) planning can be complicated, with individuals effected looking to make use of their allowances, exemptions and reliefs in order to leave their estate to their loved ones – rather than the tax man. We hope our guide helps you understand your inheritance tax liability and take control of your legacy.

     

    Download our inheritance tax guide
    What is inheritance tax?

    Inheritance tax is the tax on your estate when you die, which may include gifts made during your life, and can reduce the amount that will pass to your beneficiaries. If your estate is valued at less than £325,000 (known as the Nil Rate Band), there’s normally no IHT to pay. Only the part of your estate above this threshold will be subject to IHT (currently 40%) – but of course, there are reliefs and exceptions (20% on some Lifetime Transfers, and 36% with charitable giving).

    Find our more about our inheritance tax advice

    Who has to pay inheritance tax?

    Inheritance tax is paid by the executor on behalf of the deceased. Anyone who has also received gifts from them may also be liable to tax, depending on whether the gifts were exempt from IHT and considering the tapering ‘7 year’ rule. (We have a guide on probate to support Executors as they carry out their duties.)

    We will discuss the exemptions, reliefs and allowances that can reduce your IHT liability in our guide. But before we consider these complex rules, calculating your IHT liability starts with the following questions, and will exempt many households:

    Beware inflation and frozen allowances

    Inheritance tax rules allow families to pass on assets worth £1 million (including their family home) without paying any inheritance tax. However, with the Nil Rate Band frozen until 2030, and rising property prices, more households are expected to trigger an inheritance tax bill.

    What is included in the estate?

    Your estate plan needs to include anything you own that is of monetary value. This includes:

    • Your main residence and any additional properties or land.
    • Money in bank accounts, ISAs and stocks and shares
    • Household items
    • Foreign assets
    • Money owed (for example, salary or refunds from household bills)
    • Vehicles including cars, boats and caravans
    • Payments triggered by death, such as a life insurance policy or a lump sum death benefit from a pension
    • “Digital” assets such as family photos, social media profiles and music collections, which can be treated as treasured possessions
    • From 2027 any unused pension funds will also be included in inheritance tax calculations.

    Joint assets should also be included, which can vary depending on where you are in the UK, and the nature of the ownership – either joint tenants or tenants in common (or joint owners and common owners in Scotland). There are also rules around gifts that have been made, so it is best to discuss this with your Financial Planner.

     

    New rules for non-domesticated individuals IHT

    IHT rules for non-domiciled individuals is changing. From 6 April 2025, the current rules for non-UK domiciled individuals will end. The current taxpayers’ domicile status will be replaced by a system based on tax residence.

     

    For those with complex planning needs, we would always recommend speaking to a financial adviser

     

    How to work out what your estate is worth?

    To value your estate for inheritance tax, you’ll need to calculate the value of your assets and then subtract any liabilities (debts, loans and mortgages for example.) You’ll also need a record of any gifts made in the last seven years, as gifting rules will affect whether your beneficiaries will need to pay any IHT on these gifts.

    Remember, rules around inheritance tax can change – as well as the value of your estate. House prices can be particularly volatile and will need to be considered when calculating what your estate is worth.

     

    What is exempt from inheritance tax?

    Our inheritance tax guide offers a brief description of the different rules available to reduce your IHT liability. In addition to the Nil Rate and Transferable Nil Rate Bands we have already discussed, how much inheritance tax you will need to pay will depend on:

    • Main Residence Nil Rate Band – An additional Nil Rate Band used against the value of your home when left to a direct descendant.
    • Gifts to charities – Gifts of 10% of your total estate will reduce your IHT tax rate to 36%.
    • Gifting rules – Gifting rules are complex. We recommend visiting our guide to gifting rules to find out more about Small Gifts and gifts above your Annual Exemption.
    • Business and Agricultural reliefs – Changes to these reliefs were announced in the October 2024 Budget. More information about these changes can be found in our guide.

    Get inheritance tax advice from Wren Sterling

    Set up an appointment to seek advice on dealing with inheritance tax

    Many people choose not to do their Inheritance Tax planning alone. Our financial advisers can help you decide how you want your legacy to be distribute and arrange your financial affairs to minimise your outgoings in respect of tax and care fees.

    Your adviser can guide you through the plethora of exemptions and allowances which can be used to minimise, and calculate how much inheritance tax you’ll need to pay, if not expunge the potential liability. You could also benefit from ongoing advice to keep up with regulatory updates and changes to your circumstances or value of your estate.

    Get in touch to discuss your options today

    Inheritance tax FAQ

    • What is the seven-year gifting rule?

      What is the seven-year gifting rule?

      There are a number of ways you can give financial gifts to friends and family without creating additional inheritance tax liability. However, it’s important not to give away too much and be unable to maintain your standard of living. The Seven year gifting rule allows you to make large financial gifts, but general gifting rules allow for:

      • The Gifting Annual Exemption – You can give away £3,000 each tax year without inheritance tax liability. Gifts above this threshold will be taxed as per the 7 year rule.
      • Small gifts – You can make gifts of up to £250 to as many people as you wish in any tax year, provided you do not give more than £250 to any one person.

      The 7 year rule means that no tax is due on gifts if you live for seven years after giving them.

      You’ll need to keep a list of the gifts you’ve made, when and how much these gifts were. Gifts made within 7 years of death will eat into your Nil Rate Band reducing the £325,000 allowance.

      If you do pass away within seven years and have made gifts in excess of £325,000, the ‘Taper Allowance’ might mean the Inheritance Tax charged on the gift is less than 40%.

    • What is the inheritance tax Nil Rate band?

      What is the inheritance tax Nil Rate band?

      Inheritance tax is the tax on your estate when you die, which may include gifts made during your life, and can reduce the amount that will pass to your beneficiaries. If your estate is valued at less than £325,000 (known as the Nil Rate Band), there’s normally no IHT to pay. Only the part of your estate above this threshold will be subject to IHT (currently 40%) – but of course, there are reliefs and exemptions.

    • Does inheritance tax change for married couples?

      Does inheritance tax change for married couples?

      If you are married or have a civil partner you can leave your entire estate to them free of inheritance tax. Your Nil Rate Band can be transferred to the surviving spouse, and used when you pass on your estate to your family and friends. This is known as the ‘Transferable Nil Rate Band’. This is not automatic, and must be claimed by the representative of the second spouse on their death.

    • How can I value my estate?

      How can I value my estate?

      To value your estate for inheritance tax, you’ll need to calculate the value of your assets and then subtract any liabilities (debts, loans and mortgages for example.) You’ll also need a record of any gifts made in the last seven years, as gifting rules will affect whether your beneficiaries will need to pay any IHT on these gifts.

    Please note that this article does not constitute financial advice, and is provided here for educational purposes.
    Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you are unlikely to be protected if something goes wrong.
    The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
    The Financial Conduct Authority does not regulate estate planning or tax advice.

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