Inheritance Tax: Thresholds, Rates and How to Reduce It

Inheritance tax (IHT) is a tax on the estate of someone who has died. It is paid out of the estate before anything is distributed to beneficiaries. Many people worry about inheritance tax, but with good planning — including a well-drafted will — it is often possible to reduce or even eliminate the amount payable. This guide explains how inheritance tax works in the UK and what you can do about it.

How much is inheritance tax?

The standard rate of inheritance tax is 40%. However, this only applies to the value of your estate that exceeds certain thresholds. There is also a reduced rate of 36% if you leave at least 10% of your net estate to charity — one of several reasons why charitable gifts in wills can be a smart move.

Inheritance tax thresholds

Everyone has a tax-free allowance called the nil rate band, which is currently £325,000. This means the first £325,000 of your estate is not taxed.

If you leave your home to your children or grandchildren, you may also qualify for the residence nil rate band, which is worth up to an additional £175,000. This means a single person could potentially pass on up to £500,000 without any inheritance tax being due.

Transferable allowances for couples

Married couples and civil partners can transfer any unused nil rate band to the surviving partner. This means a couple could potentially have a combined allowance of up to £1,000,000 before inheritance tax applies. This transfer is not automatic — it needs to be claimed when the second partner dies, and having a properly drafted will makes this process much smoother.

Key exemptions

Several important exemptions can reduce the taxable value of your estate:

• Spouse or civil partner transfers: Everything you leave to your spouse or civil partner is completely exempt from inheritance tax, with no upper limit.
• Annual gift allowance: You can give away up to £3,000 per tax year without it counting towards your estate. If you did not use the previous year's allowance, you can carry it forward for one year (giving a maximum of £6,000).
• Small gifts: You can make gifts of up to £250 to any number of individuals per tax year, as long as you have not also used your annual allowance on the same person.
• Wedding gifts: You can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else as a wedding or civil partnership gift.
• Gifts from surplus income: Regular gifts made from your income (not capital) that do not affect your standard of living are exempt.

Taper relief on gifts

If you make a gift worth more than £325,000 and die within seven years, inheritance tax may be payable on that gift. However, taper relief reduces the amount of tax due depending on how long before your death the gift was made. Gifts made three to seven years before death are taxed at a reduced rate, and gifts made more than seven years before death are completely exempt.

Business and agricultural relief

If you own a qualifying business or agricultural property, you may be entitled to relief of 50% or even 100% of the value. This can significantly reduce or eliminate the inheritance tax on these assets. The rules are detailed, so professional advice is recommended.

How to reduce inheritance tax through your will

A well-drafted will is one of the most effective tools for managing inheritance tax. Strategies include:

• Making use of both partners' nil rate bands through appropriate will structures
• Leaving charitable gifts to qualify for the reduced 36% rate
• Setting up trusts to manage how and when assets are distributed
• Ensuring the residence nil rate band is available by leaving your home to direct descendants

Who pays the inheritance tax?

The executor of your will is responsible for calculating and paying any inheritance tax due. It must normally be paid within six months of death, although there are instalment options for certain assets like property. The tax is paid from the estate funds before anything is distributed to beneficiaries.

Why you need a will to manage IHT

Without a will, your estate is distributed according to intestacy rules, which may not make the most tax-efficient use of the available allowances. A properly planned will ensures that the right exemptions and reliefs are claimed, potentially saving your family tens of thousands of pounds. If you are unsure whether you need a will, our guide on whether you need to make a will is a good starting point.

Please note: The thresholds and allowances mentioned in this guide are correct as of 2024/25. The nil rate band and residence nil rate band are frozen until at least 2028. Always check gov.uk for the latest figures.