Inheritance Tax Explained
Inheritance tax (IHT) is a tax that may be charged on the value of a person's estate after they pass away.
An estate typically includes assets such as property, savings, investments, and certain gifts made during a person's lifetime.
In the UK, inheritance tax can apply when the total value of an estate exceeds specific thresholds set by the government.
Understanding how inheritance tax works can help people make more informed decisions about estate planning and how their assets may be passed to family members in the future.
In this article
Quick Summary
This may help you:
- Understand how inheritance tax works in the UK
- Learn the current inheritance tax thresholds
- Identify when inheritance tax may apply
- Understand why some people review estate planning
Before deciding, check:
- The value of your estate
- The available inheritance tax allowances
- How assets may be passed to beneficiaries
Part of the Inheritance Tax series
- Inheritance Tax Explained
- What Is the Inheritance Tax Threshold in the UK?
- How to Reduce Inheritance Tax Legally in the UK
- Who Pays Inheritance Tax in the UK?
- Inheritance Tax on Property Explained (UK)
- Spouse Exemption for Inheritance Tax Explained
- Business Relief for Inheritance Tax Explained
What Is Inheritance Tax?
Inheritance tax is a tax that may be charged on the value of an estate when someone dies.
An estate can include:
- Property and land
- Savings and investments
- Pensions in some circumstances
- Personal possessions
- Certain gifts made during lifetime
If the value of an estate exceeds the available tax-free thresholds, inheritance tax may apply to the portion above those allowances.
In the UK, the standard inheritance tax rate is 40% on the value of the estate above the applicable thresholds.
Inheritance Tax Thresholds
Inheritance tax does not apply to every estate. There are several allowances that determine whether inheritance tax may be due.
Nil Rate Band
The standard inheritance tax allowance is known as the nil rate band. For the 2025/26 tax year, this allowance is £325,000. This means the first £325,000 of an estate may not be subject to inheritance tax.
Residence Nil Rate Band
An additional allowance known as the residence nil rate band may apply when passing a main residence to direct descendants. When combined, these allowances can increase the total tax-free threshold for some estates. However, eligibility depends on individual circumstances and estate values.
For further detail on current thresholds, GOV.UK provides official guidance on inheritance tax, including rates, thresholds and exemptions.
What Counts as Part of an Estate?
When calculating inheritance tax, the value of an estate may include:
- Property and land
- Savings accounts
- Investments and shares
- Valuable possessions
- Certain gifts made within seven years before death
Some assets may fall outside the estate depending on how they are structured, such as certain pension arrangements or trusts. However, the treatment of different assets can vary depending on individual circumstances.
Gifts and the Seven-Year Rule
In some cases, gifts made during a person's lifetime may still be considered when calculating inheritance tax.
This is commonly referred to as the seven-year rule. If a gift is made and the individual passes away within seven years, inheritance tax may still apply depending on the size of the gift and available allowances.
There are also several smaller gifting allowances that may apply each tax year, which can reduce the value of an estate over time.
When People Review Inheritance Tax
Many people begin thinking about inheritance tax planning when:
Property values increase significantly — Rising property prices mean more estates are approaching or exceeding the standard nil rate band threshold.
Total assets grow over time — Accumulated savings, investments and other assets can push an estate above available allowances.
Passing wealth to family members — People who wish to leave assets to children or grandchildren may want to understand the potential tax implications.
Seeking greater certainty — Understanding how an estate may be distributed can help people plan with more confidence.
Understanding the potential impact of inheritance tax can help individuals consider how their financial plans align with their long-term intentions.
Key Considerations
| Factor | Why It Matters |
|---|---|
| Estate value | Inheritance tax may apply if total assets exceed available allowances |
| Property ownership | Property often forms a significant portion of estates |
| Lifetime gifts | Some gifts may still be considered for tax purposes |
| Estate planning | Planning ahead may help people understand potential tax implications |
Frequently Asked Questions
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Financial planning decisions depend on individual circumstances. If you would like clarity on how the topics discussed may apply to your situation, TrustEvo can connect you with a regulated financial adviser.
This article is provided for general information only and does not constitute financial advice. Financial decisions depend on individual circumstances and regulated financial advice may be appropriate in some situations.