Understanding inheritance tax (IHT) is crucial for effective estate planning, ensuring that your loved ones are not left with an unexpected tax burden. This article aims to explain IHT and provide a clear picture of what you might expect to pay.

Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, the standard IHT rate is 40% on the value of the estate above the tax-free threshold, known as the "nil-rate band." As of the 2024/2025 tax year, this threshold is £325,000.

To calculate how much IHT you will have to pay, the following steps are taken:

  1. Value your estate: This includes all property, cash, investments, vehicles, personal belongings, and any other assets.
  2. Deduct liabilities: Subtract any debts or liabilities, such as mortgages and loans, from the total value of your estate.
  3. Apply the Nil-Rate Band: Deduct the current nil-rate band of £325,000 from the net value of your estate.
  4. Calculate the Tax: Apply the 40% IHT rate to the remaining value.

For Example: If your estate is valued at £500,000 and you have debts totalling £50,000, your net estate is £450,000. Subtracting the nil-rate band (£325,000) leaves £125,000 subject to IHT. At 40%, the IHT bill would be £50,000.

There are several allowances and reliefs can reduce your IHT liability:

  • Residence Nil-Rate Band (RNRB): If you pass your home to your children or grandchildren, you can claim an additional allowance of up to £175,000 (as of the 2024/2025 tax year). This means a married couple could potentially pass on up to £1 million tax-free.
  • Spouse or Civil Partner Exemption: Transfers between spouses or civil partners are exempt from IHT. Upon the death of the second partner, the unused nil-rate band and RNRB from the first partner can be used, effectively doubling the tax-free threshold.
  • Gifts: You can make certain gifts during your lifetime that are exempt from IHT if you survive for seven years after making the gift. Additionally, annual exemptions and small gift allowances can help reduce the taxable estate.
  • Charitable Donations: Leaving at least 10% of your net estate to charity can reduce the IHT rate on the rest of your estate from 40% to 36%.

Steps you can take to Mitigate IHT:

  • Regularly Review Your Estate Plan: Ensure your will is up to date and reflects your wishes.
  • Utilise Exemptions and Reliefs: Make full use of allowances such as the RNRB and gift exemptions.
  • Consider Life Insurance: A life insurance policy can provide funds to cover the IHT bill, preventing your heirs from having to sell assets.
  • Set Up Trusts: Trusts can be an effective way to manage and protect your assets, potentially reducing the IHT liability.

Planning for Inheritance Tax can seem daunting, but with careful planning and professional advice, you can significantly reduce the burden on your beneficiaries. 

Please do not interpret this article as advice, you should always take advice from a finance professional. 


Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.

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