What IHT is (and when it applies)
Inheritance Tax is a UK tax on an estate — broadly, the total value of someone's assets minus liabilities — when they die, and sometimes on certain lifetime transfers. The headline rate is 40% on the portion of the estate above available thresholds, but the real-world outcome depends on exemptions, reliefs, and how assets are owned.
Important: IHT planning is rarely about "one trick". It's about aligning wills, ownership, gifts, and documentation so that (a) your wishes are carried out, and (b) tax isn't paid unnecessarily.
Even if IHT is not a concern, having an up-to-date will and clear beneficiaries can avoid stress, delays, and disputes. Tax planning without legal clarity can backfire.
Key thresholds: NRB and RNRB
Nil‑rate band (NRB): £325,000
The nil‑rate band is the amount of an estate that can generally pass without IHT. For many people, this is the main number they hear. It's not "cash in your bank"; it's the value of your estate.
Residence nil‑rate band (RNRB): £175,000
The residence nil‑rate band can apply when a home (or interest in a home) is passed to direct descendants (for example, children or grandchildren). It has conditions and can be lost or reduced depending on the estate's value and the way the property is left.
In many cases, RNRB is reduced for estates above a certain value (commonly referenced around £2m). If your estate may be near that level, specialist advice can be high value.
Married couples / civil partners: potentially up to £1,000,000
Where conditions are met, unused NRB and unused RNRB can often be transferred to a surviving spouse/civil partner. This is why you'll often see the figure "up to £1m" (two NRBs + two RNRBs) quoted. It's real, but it depends on the estate structure, wills, and the direct descendant requirement for RNRB.
Keep paperwork. Claiming a transferred allowance can require evidence (for example, the first spouse's death certificate and the first spouse's will/estate details). Good admin can save a lot of friction.
The IHT rate: 40% (and when it's lower)
The standard IHT rate is 40% on the portion above available thresholds. Some estates can qualify for a reduced rate (for example, where a portion is left to charity), but don't build your whole plan around a single headline. The details matter.
Gifts and the 7‑year rule (the bit most people misremember)
Lifetime gifts can be powerful, but you need to understand the categories and the timeline. The "7‑year rule" usually refers to gifts that are potentially exempt transfers (PETs). If you survive 7 years after making a PET, it may fall outside your estate for IHT.
Potentially exempt transfers (PETs)
A PET is often a gift to an individual. If you die within 7 years, some or all of the gift may be brought back into the IHT calculation. If you survive 7 years, it's generally outside the estate.
Taper relief (reducing IHT on gifts after 3 years)
If you die between 3 and 7 years after making certain gifts, taper relief can reduce the IHT due on the gift. It does not usually reduce the value of the gift itself; it reduces the tax on that gift on a sliding scale. It's helpful, but it's not a full escape hatch.
If your executors can't evidence dates/amounts of gifts, it can slow administration and increase the risk of mistakes. Keep a simple "gift log".
Gifts with reservation of benefit
A common mistake is "giving away" an asset while still benefiting from it in a way that keeps it effectively in your estate. The classic example is gifting a home but continuing to live in it rent‑free. These rules are complex; get advice before attempting anything property-related.
Trusts (why they exist)
Trusts can be used for control, protection, and in some cases tax planning — for example, where you want to provide for children, manage vulnerability, or handle complex family structures. Trust rules are technical and can create tax charges if handled incorrectly, so they are not a "DIY hack". Still, it's useful to understand why advisers bring them up: they separate legal ownership from benefit and control.
They can be the right tool, but they come with administration, reporting, and potentially tax charges. Use them for a reason, not because someone online said "trusts avoid IHT".
Key reliefs: business, agricultural, and life insurance
Business Property Relief (BPR)
BPR can reduce the value of certain business assets for IHT, sometimes significantly, depending on the qualifying conditions. It's a major part of planning for business owners, but the definition of qualifying assets and the conditions are crucial.
Agricultural Property Relief (APR)
APR can apply to certain agricultural property and reduce IHT. Like BPR, it's rules‑heavy and tied to how the land/property is used and owned.
Life insurance in trust
One practical tool is to use life insurance written in trust to provide funds to pay IHT. This doesn't necessarily reduce the tax itself, but it can prevent heirs from having to sell assets quickly to cover a tax bill. The structure and beneficiaries matter, so it's usually arranged with advice.
IHT planning is partly about tax, and partly about liquidity. Even a well‑planned estate can cause problems if there isn't cash available to settle liabilities on time.
A practical IHT checklist (for normal people)
- Make/refresh your will and keep it accessible.
- List your assets and approximate values (update annually).
- Understand how your home is owned and who inherits it.
- Keep a simple log of gifts (date, amount, recipient).
- Consider whether any BPR/APR reliefs are relevant.
- Check beneficiaries on pensions and life policies.
- Ensure executors know where documents are stored.
IHT administration is time-sensitive and emotionally difficult. Reducing complexity (clear docs, clear beneficiaries) is a gift to your family.