Inheritance Tax UK: Thresholds, Rates, and How to Reduce Your Bill

Inheritance Tax (IHT) is charged at 40% on the part of your estate that exceeds the nil-rate band of £325,000. That threshold has been frozen since 2009 and is expected to remain until at least 2028, which means rising property values are pulling more ordinary estates into scope every year.

On top of the nil-rate band, there is a residence nil-rate band of £175,000 if you leave your home to direct descendants (children or grandchildren). For a married couple or civil partners, unused allowances pass to the surviving spouse, so a couple can shelter up to £1,000,000 between them before IHT applies.

What catches most people out is the assumption that giving away assets before death solves the problem cleanly. It does not, unless you understand the 7-year rule. Gifts only become IHT-free if you survive 7 years after making them. Die within that window and taper relief applies on a sliding scale, but the gift can still attract tax.

What you can do without waiting seven years:

- Use the £3,000 annual gift exemption each tax year. - Make regular gifts from surplus income, which are exempt with no limit, provided they are genuinely out of income rather than capital and you maintain your usual standard of living. - Leave at least 10% of your estate to charity, which reduces the IHT rate on the remainder from 40% to 36%.

Pensions are worth flagging separately. Most pension pots sit outside your estate for IHT purposes, which makes them one of the most efficient assets to leave to the next generation. Spend other assets first in retirement if you want to pass wealth on.

Trusts and business property relief are also legitimate tools, but they add complexity and usually warrant proper advice. The starting point for most people is simpler: understand your combined nil-rate band position, get a will in place, and use the annual gift exemption every year rather than leaving it unused.