Inheritance Tax – How It Works And How To Plan Ahead

Inheritance tax (often shortened to IHT) can feel like one of the more daunting areas of financial planning. It’s closely linked to personal matters, family relationships and your life’s work you hope to pass on.

IHT hit record highs in 2025/26 and the number of families set to pay the tax is expected to double by 2031. The good news is that, with early planning and a clear understanding of the basics, there are often practical ways to reduce how much is paid, or at least make sure any bill is manageable.

This article explains how inheritance tax works in the UK, when it applies, and some of the most common ways people plan ahead.

What is inheritance tax?

Inheritance tax is a tax on the value of someone’s estate when they die. Your estate is everything you own, minus any debts. This usually includes your home, other property, savings, investments, personal belongings and, in some cases, business interests and certain life insurance payouts.

The estate is valued at the date of death. The executor named in your Will, or the administrator if there is no Will, is responsible for reporting the value to HMRC and paying any inheritance tax due. In most cases, HMRC expects the tax to be paid by the end of the sixth month after the death, although some assets, such as property or business interests, may qualify for payment by instalments.

You can find HMRC’s official overview of inheritance tax on the GOV.UK website, which is a useful reference point if you want the technical detail.

How much is inheritance tax?

The standard rate of inheritance tax is 40%. However, this only applies to the part of the estate that is above certain allowances.

The main allowance is the nil-rate band. This is currently £325,000. If the total value of your estate is below this amount, there is usually no inheritance tax to pay.

There’s also an additional allowance called the residence nil-rate band which is £175,000. This can apply if you leave your main home to your children or grandchildren. In simple terms, it increases the amount you can pass on tax-free, although it comes with conditions and is gradually withdrawn for larger estates.

If you leave at least 10% of your estate to charity, the inheritance tax rate on the rest of your estate can reduce from 40% to 36%. Gifts to UK charities themselves are free from inheritance tax.

Up-to-date thresholds and examples are set out clearly on GOV.UK.

What about married couples and civil partners?

Assets left to a spouse or civil partner are usually exempt from inheritance tax, regardless of value. This means everything can pass to them tax-free on the first death.

Any unused nil-rate band and residence nil-rate band can normally be transferred to the surviving spouse or civil partner. In practice, this can potentially double the allowances available when the second person dies, which is an important part of inheritance tax planning for couples.

Gifts made during your lifetime

Giving money or assets away during your lifetime can reduce the value of your estate, but there are rules to be aware of.

Some gifts are immediately exempt from inheritance tax. These include small annual gifts, wedding or civil partnership gifts within set limits, and regular gifts made out of surplus income. Gifts to your spouse, civil partner or UK charities are also usually exempt.

Other gifts are known as potentially exempt transfers. These only fall outside your estate if you live for seven years after making them. If you die within that period, some or all of the value may be added back into your estate when inheritance tax is calculated.

We take a more detailed look at these exemptions in a previous article on our website: 5 inheritance tax questions answered.

Business assets, farms and investments

Certain types of assets can benefit from specific reliefs.

Business Relief can reduce the value of qualifying business assets, sometimes by up to 100% for inheritance tax purposes. Agricultural Property Relief can apply to qualifying farmland and buildings. These rules are detailed and depend on factors such as how long you have owned the assets and how they are used, so professional advice is usually essential.

Pensions are also important in inheritance tax planning. Many defined contribution pensions sit outside the estate, which means they can often be passed on without inheritance tax. However, income tax may still be payable by those who inherit the pension, depending on your age at death and the rules of the scheme.

But, it’s important to remember, from April 2027, most unused pension death benefits will form part of your estate for IHT purposes.

Using life insurance and trusts

Life insurance is sometimes used to help manage an inheritance tax bill rather than reduce it. A policy written in trust can pay out directly to beneficiaries, outside your estate, providing cash to help cover any tax due. This can reduce the risk that loved ones need to sell assets quickly to raise funds.

Trusts can also play a role in inheritance tax planning. In simple terms, a trust allows you to pass assets to trustees to hold for beneficiaries, often with rules about how and when those assets can be used. Trusts come with their own tax considerations and are not suitable for everyone, but they can help with control, protection and long-term planning.

The importance of a Will and regular reviews

A clear, up-to-date Will is the foundation of good estate planning. Without one, your estate is distributed according to the rules of intestacy, which may not reflect your wishes and can create additional complexity for your family.

Inheritance tax rules, asset values and family circumstances all change over time. Regular reviews help ensure your plans remain relevant. This includes keeping records of gifts, checking pension nominations, reviewing ownership of assets between spouses, and understanding how any business or property reliefs apply.

Bringing it all together

Inheritance tax planning is not just about reducing tax. It’s about making sure the people and causes you care about are looked after, and that your affairs are organised in a way that reduces stress at an already difficult time.

A financial planner can help you understand how the rules apply to your circumstances, explore different options and work alongside your solicitor or tax adviser where needed. By taking a measured, long-term approach, it is often possible to pass on more of your wealth and more of your intentions with confidence.

Get in touch

Heidi Tresadern is Wealth Planning Director at Benchmark Financial Planning, Maidstone. Heidi has over 30 years’ experience and supports all needs from starting out and building wealth, to wealth preservation for future generations and use of assets to fund long term care.

Please visit our contact page to speak with Heidi and the team.

Approved by Best Practice IFA Group on 6th May 2026.

This article is for general information only and is not personal advice. Tax rules can change and depend on individual circumstances. You should consider taking regulated financial advice and appropriate legal or tax advice before making decisions about your estate.

The Financial Conduct Authority does not regulate estate planning, trust planning, tax planning, or Will writing.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. 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.