When we talk about tax, it helps to first step back and ask: what is the government trying to achieve?
In the case of Inheritance Tax (IHT), the aim is to prevent wealth from being handed down unchecked through generations. It’s a tool for redistribution - ensuring that at least some of that wealth is returned to the system to fund public services and reduce economic inequality.
Why Is Everyone Talking About Inheritance Tax?
Inheritance Tax has been grabbing headlines lately, but it’s important to know that currently only around 6% of estates in the UK end up paying it. For most people, it still isn’t a major concern, yet.
However, that landscape is shifting. House prices have increased dramatically in recent years, and the tax-free threshold for Inheritance Tax (known as the nil-rate band) has been frozen at £325,000 since 2009. It’s set to remain frozen until at least April 2030. With more estates creeping above the threshold, more families are finding themselves affected.
To give you a sense of scale, more than £8 billion was paid in IHT in the 2024-25 tax year.
Another big change is on the horizon. From 2027/28, pensions will start forming part of your estate for IHT purposes. This could see the proportion of estates affected rise from 6% to around 8%, meaning more people will need to think seriously about planning ahead.
The Basics: How Inheritance Tax Works
Let’s break it down into three parts: what’s exempt, what’s taxable, and how the thresholds work.
1. What’s Exempt?
Anything you leave to your spouse or civil partner is completely exempt from Inheritance Tax.
Gifts to charities are also tax-free. If you leave 10% or more of your estate to charity, the tax rate on the rest of your estate drops from 40% to 36%.
Note: These exemptions don’t apply if you’re cohabiting but not married or in a civil partnership.
2. What’s Taxable?
Inheritance Tax is calculated based on the total value of your estate when you die. This includes:
Property
Cash savings
Investments
Valuables such as jewellery
Business interests
Less any outstanding debts.
3. How the Thresholds Work
Everyone gets a tax-free allowance of £325,000 (the nil-rate band).
If you leave your main home to children or grandchildren, you get an additional £175,000 allowance (Residence Nil Rate Band).
Combined, many individuals can pass on up to £500,000 tax-free. And for married couples or civil partners, this can be doubled to £1 million. However, if your estate is worth over £2 million, you gradually start to lose the residence band. It’s reduced by £1 for every £2 above the £2 million threshold.
Anything above the thresholds is usually taxed at 40%.
Reducing Inheritance Tax: Smart Planning
The good news is that there are a number of ways to reduce your IHT liability during your lifetime.
Gifts
Gifting assets is one of the most common and straightforward strategies.
Tax-free gifts include:
£3,000 annual exemption: You can give away up to £3,000 per year without it being added to your estate.
Small gifts allowance: Unlimited gifts of up to £250 per person per year (if not using another allowance).
Wedding gifts: Up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for anyone else.
Gifts from income: Birthday or Christmas presents from your regular income are exempt.
Gifts to a spouse or civil partner: Always exempt.
Larger Gifts & the 7-Year Rule
Larger gifts can also be tax-free if you live long enough after making them. These are called Potentially Exempt Transfers (PETs).
If you live 7 years, the gift becomes fully exempt.
If you die within 7 years, IHT may still apply, with taper relief reducing the rate of tax you pay based on how long you survive:
Important: This relief applies to the tax, not the gift amount.
Gifting With Caution
Watch out for the "gift with reservation of benefit" rule. If you give something away but still use it, for example, you gift your house to your children but continue living in it rent-free, HMRC will treat it as still part of your estate for IHT purposes, unless you pay full market rent.
Capital Gains Tax Considerations
While gifts can help with IHT, they can trigger Capital Gains Tax (CGT) if the asset has appreciated in value. This is common with things like rental properties or shares.
The main home is usually protected by Private Residence Relief, so there’s no CGT when you gift it - but again, advice is essential.
Final Thoughts
Inheritance Tax might not impact everyone right now, but with rising property prices, frozen thresholds, and upcoming changes to pension rules, more families are being drawn into its scope.
The key is early, informed planning. With the right strategies - and the right support - you can manage your estate in a way that protects more of your legacy for the next generation.
If you’d like to discuss your situation or want a second opinion on your current plans, get in touch. Riverview Portfolio and Property Tax Advice is here to help, and you can also contact me directly via our website or social media channels.
📞 01249 816 810
📧 jessica@property-tax-advice.co.uk
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