A beginner’s guide to UK inheritance tax 

You might not like to think about a time when you’re no longer around. However, creating an estate plan puts you in control of how your wealth is passed on. It also allows you to make sure your estate is managed as tax-efficiently as possible, so that your loved ones receive as much of their inheritance as they can.

And yet, research published by FTAdviser shows that 71% of UK adults don’t understand how inheritance tax (IHT) works.

Here’s a simple guide to help you understand the current IHT rules based on the questions we’re asked most often by our clients. We’ll also take a brief look at an important change that’s due to take effect in 2027.

What is inheritance tax and who pays it?

IHT is a tax on a person’s money, property and possessions (known as their “estate”) when they die.

Not all estates trigger an IHT charge. Government figures show that fewer than one in 20 (less than 5%) of UK deaths resulted in an IHT bill in the 2022/23 tax year (the most recent data available).

Your beneficiaries will only have to pay IHT if the value of your estate exceeds the “nil-rate band”, which is £325,000 (2026/27). If you leave your main home to your children or grandchildren, you might be able to pass on an additional £175,000 (the “residence nil-rate band”) free from IHT.

However, the government has frozen these IHT thresholds until April 2031. This means that as the price of property and other assets rise, your IHT liability could increase. Indeed, the government website shows that IHT receipts for the 2025/26 tax year reached a record £8.5 billion, up from just £3.5 billion 20 years ago.

IHT is not usually due if you leave everything to a spouse, civil partner, charity or community amateur sports club. Moreover, any unused IHT-free allowance from your estate can be passed to your surviving partner, potentially allowing them to pass on up to £1 million tax-efficiently.

How much is inheritance tax?

IHT is only charged on the portion of your estate that exceeds the available nil-rate bands. For example, if your estate is worth £800,000 and you’re entitled to the nil-rate band and the residence nil-rate band (totalling £500,000), your beneficiaries will only pay IHT on £300,000.

The standard rate is 40%. However, this might be reduced if:

• You leave at least 10% of the net value of your estate to charity – IHT will be charged at 36%
• Your estate includes a farm or business – If business or agricultural relief applies, you could benefit from 100% relief from IHT on the first £2.5 million of qualifying assets (£5 million for a married couple or civil partners). Any qualifying assets that exceed this threshold, including AIM shares, will attract just 50% relief, creating an effective 20% IHT rate.

How and when is inheritance tax paid?

If you leave a will, your chosen executors will usually pay any IHT due from your estate or from funds raised by selling some of your assets. If there’s no will, the probate court will appoint an administrator to assume the legal responsibility of paying the IHT bill.

Any gifts you made within seven years of your death might incur IHT, which is usually paid by the recipient of the gift.

Whoever is responsible for paying the IHT charge must apply – either online or by post – for a payment reference number from HMRC at least three weeks before doing so.

IHT is usually then paid through the Direct Payment Scheme (DPS), which takes money directly from the deceased person’s bank account. If you have life insurance, your beneficiaries could use all or part of the payout to cover any IHT due.

HMRC enforces strict deadlines for payment. IHT must be paid by the end of the sixth month after death; otherwise, interest begins to accrue. If your estate includes certain assets that take time to sell, like a property or business, your beneficiaries may be allowed to pay in instalments over 10 years, with the first payment due by the six-month deadline. However, it’s important to note that interest will be added to the outstanding balance.

How can I reduce a potential inheritance tax bill for my family?

You might not be able to completely avoid an IHT charge on your estate, but you might be able to reduce a potential bill by making the most of available exemptions and allowances.

Here are a few IHT planning strategies to consider:

• Gifting during your lifetime – The Annual Exemption allows you to gift up to £3,000 (2026/27) in a single tax year without it counting towards your estate. You can also give as many “small gifts” of up to £250 each IHT-free, provided you don’t use multiple allowances on the same person. Some wedding or civil partnership gifts are fully exempt, depending on the amount and who the recipient is. Visit the government website for a full overview of IHT gifting rules or speak to your financial planner.
• Passing on some of your wealth early in your retirement – Most gifts that fall outside the IHT exemptions and allowances are classed as potentially exempt transfers (PETs). This means that if you die within seven years of making a gift, the recipients are likely to face an IHT charge. The rate payable depends on how long you lived after giving the gift, ranging from 32% for gifts made three to four years before death to 0% if you survive for more than seven years. As such, passing on some of your wealth earlier in life could reduce a potential IHT bill for your loved ones.
• Leaving your estate to your spouse or civil partner – The spouse exemption allows you to pass on unlimited assets to your spouse or civil partner without triggering an IHT charge. And remember that any unused allowances can also be transferred to the surviving partner.
• Donating to a cause that matters to you – Gifts to charities, community amateur sports clubs and qualifying political parties are exempt from IHT.

IHT planning can be complex, and there is no one-size-fits-all approach, so it’s important to consult your financial planner before making any decisions. They will take your broader financial plan into account and advise you on the most appropriate strategies for your specific circumstances, goals and wishes.

I’ve heard that inheritance tax is being reformed in 2027: What’s changing?

You’ve no doubt seen the countless news headlines about the government’s plans to reform IHT, which HMRC recently confirmed following the enactment of the Finance Act 2026.

From April 2027, most unused pensions and death benefits will no longer be exempt from IHT. This change could bring many estates into the scope of IHT for the first time or lead to an increased liability.

If you’re concerned about how this might affect your estate plan or would like more general advice on how to pass your wealth on as tax-efficiently as possible, we can help. Your financial planner will listen to your concerns and wishes, talk you through your options in jargon-free language and create a bespoke estate plan that gives you confidence and control.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.