Inheritance Tax in England & Wales: A Complete Guide for Families

In England and Wales, inheritance tax (IHT) is charged at 40% on the value of your estate above £325,000. Rising property prices mean far more families are now affected than a decade ago. The good news: with the right planning, many families can significantly reduce — or eliminate — their IHT liability. This guide explains how the tax works, what the current thresholds are, and the main strategies for reducing your bill.

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax on the estate of someone who has passed away, including:

• Property
• Money in bank accounts
• Investments
• Personal possessions

In England and Wales, IHT is charged at 40% on the value of the estate above a certain threshold (called the nil-rate band). For the current inheritance tax rules and thresholds, see the official GOV.UK guidance.

Current Thresholds (England & Wales)

As of the current rules:

Any estate value above these thresholds is subject to 40% inheritance tax.

Who Pays Inheritance Tax?

IHT is usually paid by the executor of the will from the estate before assets are distributed.

• If the estate is below the thresholds, no tax is due.
• In some cases, inheritance tax may also apply to gifts made during a person's lifetime if they die within seven years of giving the gift.

Gifts and IHT Planning

Gifting assets before death can reduce IHT liability, but there are rules:

• Potentially Exempt Transfers (PETs): Gifts made more than 7 years before death are usually exempt.
• Annual exemption: You can give up to £3,000 per year free of IHT.
• Small gifts exemption: Up to £250 per recipient per year.

Strategic gifting can significantly reduce the taxable estate and minimise the inheritance tax payable.

Exemptions and Reliefs

Certain assets and transfers are exempt from IHT, such as:

• Gifts to spouses or civil partners
• Charitable donations (leaving at least 10% of your estate to charity reduces the IHT rate to 36%)
• Business property relief (for qualifying businesses)
• Agricultural property relief (for qualifying farmland)

Planning around these exemptions can help reduce the estate's IHT liability.

The Residence Nil-Rate Band Explained

The residence nil-rate band (RNRB) is an additional tax-free allowance introduced in 2017, worth up to £175,000 per person in 2026. It applies when you pass your main home — or a share of it — to direct descendants, which includes children, grandchildren, stepchildren, and adopted children.

Combined with the standard nil-rate band of £325,000, this means an individual can potentially pass up to £500,000 free of inheritance tax, provided the home is left to qualifying descendants. For a married couple or civil partnership, the combined allowance can reach £1,000,000.

However, the RNRB tapers off for larger estates. For every £2 by which your estate exceeds £2,000,000, the RNRB reduces by £1. Estates above £2,350,000 receive no RNRB at all. Careful estate planning — including lifetime gifting — can help bring an estate below this taper threshold.

The Seven-Year Rule for Gifts

One of the most commonly used IHT planning strategies involves making gifts during your lifetime. Gifts made more than seven years before your death are generally outside of your estate for IHT purposes — known as potentially exempt transfers (PETs).

If you die within seven years of making a gift, the gift may still be taxable, but the rate of tax reduces on a sliding scale called taper relief:

Taper relief only applies to the tax on the gift itself — it does not reduce the value of the gift counted against the nil-rate band. And importantly, taper relief only helps if the total value of gifts in the seven years before death exceeds the nil-rate band. For most estates, keeping records of all significant gifts is important so executors can accurately calculate the estate's IHT position.

Annual and Small Gift Exemptions

Several annual exemptions allow you to give away money each year without IHT consequences, regardless of the seven-year rule:

• Annual exemption: You can give away up to £3,000 per tax year free of IHT. Any unused allowance can be carried forward to the following year (but only one year). A couple can therefore give away £6,000 per year in total, or up to £12,000 in the first year if the previous year's allowance was unused.
• Small gifts: You can make unlimited small gifts of up to £250 per recipient per year, provided you have not used another exemption on the same person.
• Wedding or civil partnership gifts: Parents can give £5,000 tax-free to a child on marriage. Grandparents can give £2,500. Anyone else can give £1,000.
• Regular gifts from income: Gifts that form part of your normal expenditure — paid from income rather than capital, and which do not reduce your standard of living — are exempt regardless of amount. This is a powerful but frequently underused exemption for higher earners.

IHT and Pensions

From April 2027, unspent pension funds will be included in the value of your estate for inheritance tax purposes under proposed HMRC reforms. This is a significant change. Currently, pensions sit outside of your estate and can be passed to named beneficiaries free of IHT — making them one of the most tax-efficient assets to hold.

Under the proposed changes, executors will need to work with pension providers to calculate and pay any IHT due on unspent pension funds before assets are distributed. If you have significant pension assets, reviewing your estate plan before April 2027 is advisable.

How Trusts Interact with Inheritance Tax

Trusts can be used to reduce inheritance tax in certain circumstances, but the interaction between trusts and IHT is complex.

Assets placed into a discretionary trust during your lifetime are treated as a chargeable lifetime transfer. A 20% entry charge applies if the value transferred exceeds your available nil-rate band. The trust is also subject to periodic charges of up to 6% every ten years and exit charges when assets leave the trust.

A bare trust is treated differently — assets in a bare trust are generally treated as belonging to the beneficiary for tax purposes, so they fall outside the settlor's estate once transferred, provided the settlor survives seven years.

The most tax-efficient use of trusts for IHT purposes is usually through a will — assets passing into a will trust on death are generally not subject to entry charges, and the nil-rate band can be used to shelter them from IHT at that point.

Inheritance Tax Planning Strategies

Effective IHT planning can help families protect their wealth:

• Make a will: Ensures your assets are distributed according to your wishes.
• Use trusts: Can protect assets for children or grandchildren while reducing IHT.
• Gifting during your lifetime: Reduces the size of your estate and potential tax.
• Life insurance policies: Can cover IHT costs, ensuring heirs receive the intended inheritance.
• Spousal exemptions: Assets passed to a spouse are usually exempt from IHT, maximising tax efficiency.

Professional advice is recommended to tailor strategies to your family's circumstances.

Reporting and Paying IHT

• Executors must report the estate to HMRC using form IHT400.
• Payment is generally due within six months of the end of the month of death.
• Failure to report or pay IHT on time may result in penalties or interest.

Protect Your Legacy

Inheritance tax planning is not just about saving money — it's about ensuring your loved ones receive the assets you intend and that the process is smooth and legally compliant.

By understanding thresholds, exemptions, and planning strategies, families in England and Wales can reduce IHT liability and secure their financial legacy.

The two most important first steps are making a will and setting up a Lasting Power of Attorney. Both can be completed online, at home, in a matter of hours.

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*This article is for informational purposes only and does not constitute legal or financial advice. This guide covers inheritance tax in England and Wales. Scottish law differs in some key areas. For complex estates or significant Inheritance Tax concerns, we recommend seeking independent legal and financial guidance.*

Read our guide on what is estate planning for a broader view.

Learn how to make a will online as part of your tax planning.

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