Inheritance Tax (IHT) has been in the news a lot recently as chancellor Rachel Reeves announced several changes to the way the levy would apply to farmland and, in the future, your pensions.
These unpopular policies created further animosity towards IHT, which has previously been nicknamed Britain’s most-hated tax.
After these recent changes, you might be especially concerned about what your family could pay when you’re gone, inspiring you to find ways to potentially mitigate IHT.
Unfortunately, this could be challenging without a clear understanding of the complex IHT rules. If you have questions about exactly how IHT works, you’re not alone.
According to the 2025 Family and Finances Report published by Schroeders, 77% of those surveyed said they were familiar with IHT. However, 71% admitted they didn’t understand how it worked or what their beneficiaries were likely to pay.
In light of this data, we thought it would be useful to give you a refresher of the basic IHT rules and some ways to potentially reduce your liability.
Your beneficiaries will pay Inheritance Tax on any wealth that exceeds your “nil-rate bands”
IHT is a levy on wealth that you leave to your loved ones when you pass away. The executor of your will must add up the total value of your taxable estate and calculate whether any IHT is due.
If there is a tax liability, the executor of your estate must pay the bill before the remainder of your wealth is divided up among your beneficiaries.
Fortunately, in the 2025/26 tax year, the first £325,000 of your estate is IHT-free. This is known as your “nil-rate band”.
You may also benefit from up to £175,000 “residence nil-rate band” if you pass your main home to a direct descendant such as a child or grandchild.
This means a single person could pass on up to £500,000 without triggering an IHT charge.
Also, you can leave your entire estate to a spouse or civil partner without IHT, and they can claim your unused nil-rate bands.
This could mean you’re able to pass on up to £1 million between you.
Any wealth that exceeds your nil-rate bands is typically subject to 40% IHT.
Pensions may be subject to Inheritance Tax from April 2027
In 2025/26, pensions could be a useful estate planning tool because they are currently exempt from IHT. This means that any wealth left in your pensions when you pass away isn’t considered part of your estate when the executor calculates if any IHT is due.
Unfortunately, in her autumn 2024 Budget, Rachel Reeves announced plans to end this exemption from April 2027.
This could mean that your pensions are subject to IHT in the future and your family could face a higher bill as a result.
The nil-rate bands will remain at their current levels until April 2030
While couples may be able to pass on up to £1 million between them without triggering an IHT charge, you might be more likely to exceed this threshold than you think.
For example, the Office for National Statistics (ONS) reports that the average UK house price in the 12 months to March 2025 was £271,000.
This already uses up a significant amount of your nil-rate bands and depending on where you live and the size of the property, your home could easily be worth far more than this.
Once you add the value of your savings, investments, and possibly pensions, your estate could quite easily exceed the threshold and trigger an IHT charge.
What’s more, the chancellor confirmed that the IHT nil-rate bands would remain at their current levels until April 2030.
Meanwhile, the value of your property could increase, and you may generate growth on your savings and investments too. This could mean that more of your wealth exceeds the nil-rate bands and your family pays more IHT.
Inheritance Tax gifting rules could help you reduce the size of your taxable estate
If you are concerned about the IHT your loved ones could pay when they inherit from your estate, you may want to take advantage of certain gifting rules.
The gifting annual allowance
The first £3,000 you gift each year automatically falls outside your estate for IHT purposes. This is known as your “gifting annual allowance”. It’s an individual allowance too, so a couple could give up to £6,000 between them.
You can also carry forward any unused allowance from the previous tax year.
Also, you can make additional IHT-free gifts for weddings. Each year, you can give:
- £5,000 to a child
- £2,500 to a grandchild
- £1,000 to any other person.
Again, this is an individual allowance so couples could benefit from both amounts.
Making full use of your gifting annual allowance each year could help you reduce the size of your estate and support loved ones at the same time.
Potentially exempt transfers and the “seven-year rule”
Once you’ve used your annual allowance, any further gifts you make are considered potentially exempt transfers (PETs).
These gifts only fall outside your estate if you survive for seven years. This is often referred to as the “seven-year rule”.
If you survive for longer than three years but fewer than seven, “taper relief” applies and some IHT may be due on the gift. The rate your family pays is calculated on a sliding scale.
The following table shows how this works.
| Years survived after giving the gift | Rate of IHT |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7+ | 0% |
Source: UK government
If you plan to make gifts, you may want to seek professional advice first to ensure you understand the taper relief rules and don’t accidentally trigger a tax charge.
Beyond the gifting annual allowance and PETs, there are other gifting rules you might benefit from including:
- The “small gifts” rule
- The “gifts from surplus income” rule.
We can explain the intricacies of the IHT gifting rules to you and help you decide on the most suitable way to pass wealth to your loved ones.
Get in touch
If you need more guidance about IHT, we can answer your questions.
Please get in touch or email us at advice@mlifa.co.uk for more information.
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 or tax planning.
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.
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.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.