How Inheritance Tax works
Important information - please keep in mind that the value of investments can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future.
Inheritance Tax (IHT) is the tax paid (by the executor of the will, not the beneficiaries) on the value of someone's estate when they pass away. The word 'estate' sounds grand, but it really just refers to the property, money, possession, savings and other investments someone owns, like ISAs, (pensions are often currently excluded from the estate and the tax implications differ - although this is due to change from 6 April 2027). Whether you're receiving an inheritance or passing on your wealth, it helps to understand what the implications of IHT are.
Here's what we'll cover
Current Inheritance Tax rates and thresholds
Remember Inheritance Tax rules can change and are complex, so please don't rely solely on this information for your inheritance tax planning decisions. You may want to seek advice from a tax specialist. Here’s a summary of the UK IHT rules:
- The nil rate band (which is often abbreviated to NRB, is the basic tax-free threshold) is £325,000 per person.
- The main residence nil rate band (or RNRB - which refers to your family home) is £175,000 per person.
- If you own your home (or a share in it) your tax-free threshold can increase to £500,000 (which is the NRB and the RNRB added together) if you leave it to your children (including adopted, foster or stepchildren) or grandchildren and your estate is worth less than £2 million.
- Gifts or bequests to charities and community sports clubs are usually exempt from IHT.
Ways to minimise Inheritance Tax
If you're thinking about passing on your wealth, it's possible to reduce or avoid paying more IHT than is necessary. Some of the ways you could do this include placing assets into a trust or leaving an estate to a civil partner or spouse.
There are also a number of specific gifts or money that can be passed on without any IHT being due - such as helping to pay for a wedding or providing financial support for a child's education. Likewise anyone can give £3,000 in assets or cash each year without any IHT being liable. You can learn more about gifting below.
Relief might also be available on certain types of property, such as farms and business assets. And, if something is gifted seven years before someone dies, that gift is also exempt of IHT (if they die within the seven years, a reduced rate applies - depending on the value of the gift, when it was given and the recipient).
It's worth keeping a record of any gifts, as they may be called into question at a later date. Always be aware that tax rules change, so please double-check what you can and can't do and consider professional advice.
It's usually the executor of the will (if there is one) who arranges to pay any Inheritance Tax. They'll do this either from cash within the estate, or from money raised from the sale of any the estate's assets.
The beneficiaries (those who inherit the estate) do not normally pay tax on things they inherit. However, they may have related taxes to pay if, for example, they get rental income from a house left to them in a will.
If you're at all unsure, you should seek help from a professional.
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Important information: please note that this information and our guidance tools are not a personal recommendation in respect of a particular investment. If you need additional help, please speak to an authorised financial adviser. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals.
