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Most estates don’t get hit by inheritance tax (IHT), but it’s still regularly dubbed Britain’s most hated tax.
It’s charged at 40 per cent on assets above the inheritance tax threshold when people die and has long been the subject of criticism – including a damning report from the Office of Tax Simplification.
Chancellor Rachel Reeves launched an inheritance tax raid on savers in 2024 by making pensions liable for IHT from April 2027.
And in 2025’s Autumn Budget, she announced that the main thresholds will be frozen for an extra year, until April 2031, which will bring more estates into the inheritance tax net.
Below we look at how inheritance tax works – so you can work out whether your family will have to pay it – and explain why it’s so unpopular.
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Inheritance tax: There are many ways to plan ahead and help your loved ones avoid the levy
What is inheritance tax?
Inheritance tax is a tax on death, property and the desire to pass wealth down the generations.
It’s calculated at a rate of 40 per cent of the portion of the estate above the nil rate threshold, but there are nuances to this.
The tax is widely loathed by the public, with polling consistently showing that Britons think it’s unfair.
The reasons for this range from a perception that money gets taxed twice – once when it’s earned and again when it’s passed on – to the 40 per cent rate being seen as too high.
However, you should keep in mind that not every estate will end up paying inheritance tax, because of the threshold at which it starts being charged.
Only the richest 4 per cent of families pay it, although that’s expected to rise to 8 per cent when pensions are drawn into the levy in 2027.
There are also multiple routes for inheritance tax planning, which helps your estate avoid the levy.
That said, the 40 per cent rate is drastically high if you’ve amassed enough assets for your beneficiaries to be liable on some chunk of them.
And the trends are heading in the wrong direction for wealthy taxpayers, especially those who own a home in a price hotspot.
The boom in property values over recent decades, plus frozen thresholds, are dragging many more grieving families into the inheritance tax net. The Treasury is raking in ever bigger sums as a result.
Combine this with the pending inclusion of pensions, and the tax will start hitting more families.
So how much is inheritance tax, what are the relevant thresholds and allowances, and what planning can you do to avoid paying it?
How much is inheritance tax?
The regular inheritance tax rate is 40 per cent, but only on the portion of the estate that’s above the relevant thresholds – known as nil rate bands.
For single people, this is £325,000. For married people or those in a civil partnership, this threshold can be a maximum of £650,000, with the deceased able to transfer unused threshold to the surviving partner.
There’s a further chunky allowance – called the residence nil rate band – which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.
Once an estate reaches £2million, this allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million.
The thresholds are frozen until April 2031, and combined with the new inclusion of unspent pensions from April 2027, it means more people’s estates will be hit.
People inheriting property in the hottest house price spots, often due to work or family ties rather than by choice, are generally on the hook for the biggest sums.
Pension pots, which can run into hundreds of thousands of pounds, will also be a major factor for many families. People are expected to spend or give away more pension cash to avoid it becoming part of their estate.
‘Tax of 40 per cent is typically levied on a deceased person’s assets worth over and above £325,000, which is called the nil rate band,’ explains This is Money’s tax columnist, Heather Rogers.
‘Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.
‘This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.
‘That means children, including adopted, step or fostered, and those children’s linear descendants.
‘Both protected amounts or “bands”, adding up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.’
When do you pay inheritance tax?
Executors or administrators of an estate get just six months, kicking off from the last day of the month after a loved one’s death, to add up their assets, calculate what is owed and hand over any money due to the taxman.
And any tax due must be paid before the executors or administrators are granted probate, which allows them access to and control over a deceased person’s funds.
Rogers explains how you find the money to pay inheritance tax upfront here or pay in instalments – though you will be charged interest.
Common solutions are a specialist loan, or an insurance policy taken out in advance.
Read our guide to working out and paying inheritance tax.
How do you avoid inheritance tax?
Luckily there are many legal ways to dodge the dreaded 40 per cent ‘death tax’ if you want to pass on the maximum sum possible and are prepared to make a financial plan.
But you shouldn’t lose sleep – let alone start working on elaborate avoidance tactics – unless you’re certain you’re rich enough for it to become a problem for your family.
Meanwhile, financial advisers repeatedly remind people that the most cost-effective ways to beat inheritance tax are to enjoy your wealth and spend it – or give it away early.
Here’s a roundup of ways to do it which can be undertaken easily by any ordinary person, or discover ten tips to avoid inheritance tax legally.
You can reduce an inheritance tax bill by:
Making gifts: You can give £3,000 a year, plus make unlimited small gifts of £250, free from inheritance tax.
Wedding gifts are also exempt, although the amount depends on how close you are to the bride or groom. The limits are up to £5,000 for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else.
You can hand unlimited sums to other people if you want, but they will fall under the so-called seven-year rule.
Officially, these are called ‘potentially exempt transfer’ gifts, because if you survive seven years the money automatically becomes free of inheritance tax.
If you die before the seven years are up, inheritance tax is levied on a sliding scale – starting at the full whack of 40 per cent if it’s within the first three years.
Read more about inheritance tax and gifts or look at the tables below for an illustration.
Inheritance tax gift limits haven’t changed since the 1980s
| Years between gift and death | Tax paid |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Making gifts from surplus income: You can also contribute to the living costs of someone else – younger or older relatives, for example – but only if you can prove it’s coming out of spare income.
Such gifts must be made from surplus funds, which means your beneficiaries may have to show HMRC your old bank statements to prove you did not need to spend that money on anything else.
Supporting a cause: You can gift or bequeath money to charities and political parties and it will be excluded from your estate when inheritance tax is calculated.
A political party must have succeeded in getting at least one MP elected to parliament to qualify for this exemption.
There is also a way to reduce your heirs’ inheritance tax rate from 40 per cent to 36 per cent of your taxable estate by giving to charity – although not to a political party.
You can do this by bequeathing at least 10 per cent of your net estate – the part liable for inheritance tax – to charity in your will.