Inheritance Tax Advice: Simple Explanations and 9 Tips for IHT Planning

You would be forgiven for thinking that, having paid so much tax to HMRC during your lifetime, the savings you leave behind as inheritance would be exempt. Unfortunately, not so. Inheritance Tax (IHT) is usually collected on any estates valued at over £325,000 (or £500,000 if you leave behind a home to your children or grandchildren, too), and is charged at 40%. This means that without the right inheritance tax advice, your loved ones may lose out on hundreds of thousands of pounds when you die.

Reliable advice on inheritance tax can be hard to come by, but it does exist. I’ve been studying tax law and accountancy for over 40 years at Yorkshire’s leading UWM Accountants, dispensing dependable IHT advice to those with estates both large and small. In this guide to IHT planning, I’ll walk you through inheritance tax jargon in simple language, before divulging my 9 top tips—designed to help the people you leave your wealth to receive as much of it as possible.

Contents

• What is considered your estate?
• Tax-free allowances and inheritance tax rules
  • IHT explained: what is the nil-rate band?
  • IHT explained: what is the additional residence allowance?
  • IHT explained: why might married couples have higher tax thresholds?
  • IHT explained: what is the standard rate of inheritance tax?
  • IHT explained: what is the IHT charitable tax rate?
  • IHT explained: the seven-year “gift look-back period”
    • Tapered tax relief for the 7-year rule
• Inheritance tax advice: How to get a head start on saving for your loved ones in 9 simple steps
  • Step 1) Value your estate
  • Step 2) Use your full annual gift exemptions
  • Step 3) Make the most of the seven-year rule
  • Step 4) Bequeath your home to your children or grandchildren
  • Step 5) Take advantage of any unused spousal allowances
  • Step 6) Consider moving all or part of your estate into a trust
  • Step 7) Use your pension to pass on wealth to loved ones
  • Step 8) Consider giving to charity now and/or in your will
  • Step 9) Talk to your trusted local IHT accountant
• Conclusion: You can’t take it with you, but you can give it away

What is considered your estate?

First things first, what actually is your estate? As the thing on which inheritance tax is imposed once you’re gone, it’s important to begin IHT planning with a working definition.

In essence, your estate is the wealth you own when you die. An estate can therefore be composed of:

• Property
• Cash and money held in bank and savings accounts
• Investments and shares
• Valuable assets and possessions such as cars, art, furniture
• Certain business interests
• Certain gifts made before death (unless exempt by the ‘seven-year rule,’ which I’ll explain later)

If you die in debt, your estate will likely be used to settle those debts before IHT is applied. It’s also worth pointing out that IHT is applied to your estate, rather than to your inheritors, meaning that your loved ones won’t typically pay inheritance tax on their inheritance—it will instead be applied to your estate before they receive it.

Tax-free allowances and inheritance tax rules

Inheritance tax is applied to your estate, but not to the entirety of it. There are a number of rules and allowances which govern how much tax is charged and to what portion of your estate.

Below is a table outlining the basic principles of each rule and allowance:

We’ll now explore these inheritance tax rules and allowances in more detail.

IHT explained: what is the nil-rate band?

All estates in the UK, subject to IHT, are generally afforded a basic £325,000 tax-free allowance called the Nil Rate Band (NRB). This means that if you leave behind an estate worth £325,000 or less, then it should pass to your inheritors entirely tax free.

On the other hand, if you leave behind an estate of a value greater than £325,000, inheritance tax will likely apply, at a standard rate of 40% on the amount above the threshold.

Example A) Annie dies with an estate worth £425,000. She does not leave her home to direct descendants, and no other allowances or exemptions apply. Annie’s £325,000 NRB reduces her taxable estate to £100,000, on which it is charged 40% IHT. The total inheritance tax paid by this estate is £100,000 x 40% = £40,000.

IHT explained: what is the additional residence allowance?

One of the most common tax-free allowances used by someone to reduce their inheritance tax liability is the Residence Nil Rate Band (RNRB). This is an additional tax-free allowance of £175,000, capped at the value of the qualifying home, added on top of the Nil Rate Band if and when you leave your home to direct descendants. The property must have been occupied as a residence at some point, and your direct descendants are defined as either your children (including adopted, step and foster children) or grandchildren.

In short, if you leave your home to your descendants, then your tax-free allowance for IHT purposes becomes £500,000 (£325,000 NRB + £175,000 RNRB), provided the relevant qualifying conditions are met.

It is important to note that if you leave behind an estate valued at over £2,000,000, then your RNRB is reduced by £1 for every £2 the estate is worth more than the £2m taper threshold.

Example B) Jack dies with an estate worth £2,100,000, including a house valued at £200,000 which he leaves to his grandchildren. RNRB tapers by £1 for every £2 above the £2m mark, meaning it is reduced by £50,000 (£100,000 divided by £2). Jack’s RNRB is now £125,000, whilst his NRB remains intact, thus totalling £450,000 in tax-free allowances. Together, Jack’s total taxable estate is valued at £1,650,000, which is taxed at the standard inheritance tax rate of 40%. Jack’s estate is charged IHT of £1,650,000 x 40% = £660,000.

IHT explained: why might married couples have higher tax thresholds?

In the table above, you’ll have noticed that whilst the maximum tax-free allowance on inherited estates for individuals is £500k (your NRB + RNRB), for married couples and civil partners the ceiling can be as high as double.

The reason for this is that when a spouse dies, they can leave whatever portion of their inheritance-tax allowance is unused to their surviving husband’s, wife’s, or civil partner’s estate.

If they have used none of their allowance, and the family home they’re leaving behind is held jointly in their name, then the surviving estate may be transferred the full £500k allowance. The surviving partner’s estate would therefore, upon the survivor’s death, enjoy a tax-free allowance of £1 million.

Example C) Jay’s civil partner Andy dies, bequeathing Jay his entire £500k tax-free allowance. When Jay dies, he owns an estate worth £960,000. Thanks to his combined allowances of £650,000 (2 x NRB) and £350,000 (2 x RNRB), Jay’s full tax-free allowance is £1,000,000. Thus, Jay’s entire £960,000 estate could pass to his inheritors without being taxed.

Note: It is also important to note that inheritance between spouses and civil partners usually triggers no IHT, as this type of inheritance is exempt.

IHT explained: what is the standard rate of inheritance tax?

Typically, when inheritance tax is applied, it is done so at a rate of 40%—the standard rate of IHT. Thus if your estate is worth £10,000 after allowances are accounted for, it would owe HMRC £4,000 in inheritance tax.

IHT explained: what is the IHT charitable tax rate?

If you leave 10% or more of your estate’s taxable value to charity (as per the baseline rules), then HMRC affords a reduced rate of inheritance tax on your estate, called ‘the reduced rate for gifts to charity’. The reduced charitable rate of inheritance tax is 36%.

How is the baseline amount calculated for the IHT charitable tax rate?

In order to receive the 36% rate of IHT on your estate, you have to leave a charitable legacy equal to at least 10% of your estate’s baseline amount. Let’s say your estate is worth £820,000 and you choose to leave £80,000 to charity, here’s how your baseline amount would be calculated:

Estate value at time of death: £820,000

Less charitable donation (£80,000) = £740,000

Less nil-rate band (£325,000) = £415,000

Taxable estate value = £415,000

Add back the charitable donation amount (£80,000) = £495,000

Baseline amount = £495,000

For the charitable giving condition to be met, the donation would have to be worth at least 10% of the baseline amount calculated, which in this case it is (£80k is about 16% of the baseline £495k). Thus the taxable estate (£415,000) liability would be £149,400 at the reduced rate, rather than £166,000 at the full rate of IHT.

IHT explained: the seven-year “gift look-back period” and tapered relief

One way people have historically tried to circumvent inheritance tax is by gifting parts of their estate to their inheritors before death—for example, by transferring ownership of their home to their children. Gifts made at least seven years before death may be excluded both from IHT and from using up your Nil Rate Band allowance.

However, gifts are generally considered only potentially exempt from tax (as Potentially Exempt Transfers, or PETs) until that seven-year period has passed. Therefore if you made a gift within the seven-year ‘gift look-back period’ prior to your death, then it will likely be considered a chargeable part of your estate upon death.

Note: Gifts are counted first in a person’s estate, and thus use up the person’s tax-free allowance before other elements of the estate are valued/judged taxable.

Thus, if you gave away £350,000 worth of gifts in the seven years before your death, they would use up your entire £325,000 allowance, leaving £25,000 subject to inheritance tax (which may be taxed at a tapered tax rate, depending on when it was given; see below.) The rest of your estate would then be subject to IHT at the standard rate, as it all would fall above the NRB threshold.

Alternatively, if you gave away £300,000 worth of gifts in the seven years before death, you would have £25,000 NRB left to cover your remaining estate from tax.

Tapered tax relief for the 7-year rule

There is tapered tax relief depending on how long before death a gift is given. This tax rate will be charged on the value of the gift(s) exceeding the available nil-rate band.

Example D) In 2022, Kako gifts an original painting by a renowned artist to his granddaughter Jo, worth £35,000. Kako passes away in 2026, leaving behind an estate worth £300,000. Kako’s gift to his granddaughter was made within 7 years of his death and so—assuming no gift exemptions are available—counts towards the value of his estate, reducing his NRB from £325,000 to £290,000. The £10,000 of the estate now exceeding Kako’s NRB is taxed at the standard IHT rate of 40%, meaning his estate generates an inheritance tax bill totalling £4,000.

Inheritance tax advice: How to get a head start on saving for your loved ones in 9 simple steps

With the rules and allowances outlined above in mind, let’s now turn our attention to what a personal tax advisor can do to help you set aside as much as possible for your loved ones.

These 9 pieces of IHT planning advice come from several decades of my own personal experience working in accounting, providing clients with actionable advice on inheritance tax to ensure their IHT bill is as low as possible, to the benefit of their beneficiaries.

Step 1) Value your estate

Step one is super simple: get your estate valued. Without a clear and accurate sense of how much wealth you currently control, it will be impossible to organise it in a tax efficient way. By valuing your estate now, an accountant will be able to identify the best routes to saving on your IHT bill down the line. In essence, the goal will be to reduce the tax liability of your estate to below (or as close to) your total tax-free allowance as possible—much like reducing your income to within a more comfortable tax bracket.

Step 2) Use your full annual gift exemptions

Speaking of routes to saving on inheritance tax, one of the most useful is your annual gift exemptions. In the UK, you are allowed to gift your wealth to various beneficiaries in a few different ways, tax free, up to annual or event-based caps.

By gifting money or assets exempt from tax, you can start to offload wealth to beneficiaries long before you’re gone, simultaneously avoiding tax now and reducing your estate’s inheritance tax liability later.

Here’s a look at what exemptions are available and how they work:

Step 3) Make the most of the seven-year rule

We touched on the seven-year rule earlier. This is the rule which grants exemption from inheritance tax to any gifts made more than seven years before your death. For smaller gifts, you can use the exemptions outlined above to avoid IHT, but for larger gifts, you’ll want to look at this option instead.

Just remember that gifting your home during your lifetime could affect your estate’s eligibility for the Residence Nil Rate Band, although downsizing relief may still be available in certain circumstances. Likewise, Capital Gains Tax and Stamp Duty Land Tax may also apply, depending on the nature of the transfer.

Example E) Taylor’s estate is valued at £700,000, of which his house accounts for £300,000. Taylor bequeaths his house and the rest of his estate to his son, Lewis. Typically, HMRC would take £80,000 in tax (equal to 40% of the estate’s value once Taylor’s full NRB and RNRB have been used). Taylor may therefore look to benefit from the seven-year rule by gifting his house to Lewis before he dies, thus removing it as an asset contributing to his estate’s value altogether. However, in order for this to work, Taylor would have to survive the gift of the house by at least 7 years. If he died within 7 years of gifting the house, it would still count toward his estate’s value and thus be subject to inheritance tax.

Note: HMRC’s ‘gifts with reservations of benefits’ rule states that a gift may still be considered taxable under IHT even if made more than 7 years before death, where the gift is given with “reservations of benefits”. In other words, using the example above, if Taylor continued to live in the house rent free following the transfer, this may be deemed a ‘reserved benefit’ and thus would make the gift still taxable upon Taylor’s death. There are various rules and exemptions to this which are important to consider if you plan to make a gift you feel may still benefit you.

Step 4) Bequeath your home to your children or grandchildren

Earlier in this inheritance tax advice guide, we mentioned something called the additional residence allowance, or RNRB. To recap, if you choose to leave your home to your direct descendants (children or grandchildren), then you may be entitled to an additional £175,000 tax-free allowance on your estate. Thus, bequeathing your home can be an exceptionally expedient way of dropping your estate’s prospective IHT bill to zero.

Note: RNRB tapers by £1 for every £2 an estate’s value exceeds £2,000,000 total, until your RNRB reaches £0. For properties worth less than the full RNRB of £175,000, the full property value may be deducted from an estate’s tax liability, but no more (i.e., a £160,000 house bequeathed to descendants would be exempt from tax provided you still had your full RNRB to use, but the remaining £15,000 tax-free portion could not then spill over to the rest of your estate, it would simply go unused).

Example F) Gabi’s estate, including her house, is worth £495,000. As is, she has exceeded her personal allowance of £325,000 by £170,000 and may owe HMRC upwards of £68k. However, if she leaves her house to her descendants in her will, her additional residence allowance increases her tax-free ceiling to £500,000, meaning her entire estate may pass without being subject to tax.

Step 5) Take advantage of any unused spousal allowances

If you have survived the death of a spouse or civil partner, their inheritance allowance is unlikely to be at the front of your mind. It is, however, worth looking into, however difficult, when planning for passing on your own inheritance.

If your spouse did not use their full allowance with their inheritance—for example, passing their estate directly to you tax-free, or leaving behind less than £325,000-£500,000 to their inheritors—then the unused percentage of their allowance may be claimed by your estate when you die. As such, your estate may be able to benefit from combined tax-free allowances of up to £1,000,000, provided the relevant conditions are met.

Note: This full amount would require your spouse not to have used any of their Nil Rate Band allowance, nor their Residence Nil Rate Band allowance.

Step 6) Consider moving all or part of your estate into a trust

Transferring some of your wealth into a trust can also be a viable route to reducing your estate’s potential IHT bill, or even negating it entirely. There are lots of different types of trusts you may consider setting up, each with its own tax rules, some of which can help reduce IHT.

When you gift assets to certain trusts, you may remove them from your estate for inheritance tax purposes, provided you no longer benefit from them. However, some transfers are classed as Chargeable Lifetime Transfers (CLTs), which can trigger an immediate IHT charge.

Alternatively, you may choose to sell assets—such as a property—to a trust as a genuine sale at market value. In this case,the sale itself would not ordinarily be subject to IHT under the seven-year gifting rule, as it would not be considered either a PET or CLT gift, but rather an asset purchased outright from you by the trust. The money you receive from such a sale, however, typically remains part of your estate.

It’s important to note, though, that setting up a trust is not a guaranteed means of avoiding inheritance tax. For example, the 7-year rule also applies to gifts made into certain trusts, and different trusts have different rules around IHT (e.g., some trusts can trigger an immediate IHT charge upon transferal of assets).

Example G) Beth has cash and shares worth £320,000 (below the NRB threshold) but also holds property worth £500,000 (above the RNRB threshold). By moving her property into a bare trust, she will generally be making a Potentially Exempt Transfer (PET), from which tax benefits can arise. As a PET, the property may fall outside her estate for inheritance tax purposes, provided the following conditions are met: Beth dies at least seven years after the transfer is complete and does not continue to benefit from the transfer (e.g., by continuing to live in the property rent-free).

Note: In a bare trust, the beneficiary is entitled to the assets, and the transfer is generally treated as a gift to that beneficiary for inheritance tax purposes. The beneficiary may be charged Capital Gains Tax on the inherited property if they choose to sell it.

Step 7) Use your pension to pass on wealth to loved ones

Pensions are historically one of the most tax-efficient ways to leave your wealth to your loved ones. Many (though not all) pension schemes pass to your named beneficiaries free from inheritance tax, as they are considered outside your estate, although Income Tax may still apply when beneficiaries access the funds. Thus, if you have alternative income sources in retirement, such as savings and ISAs, I have historically recommended drawing from them first to leave your pension pot as untapped as possible.

Please note, however, that as of April 2027, these rules are set to change. Reforms outlined in the Finance Act 2026 mean unused private pension funds will be brought into the IHT net from April 2027 onwards. As a result, the above advice must change, too. I would, therefore, recommend that from April 2027 onwards you review how you draw retirement income, what assets you intend to leave behind, and whether making lifetime gifts could help reduce your eventual inheritance tax liability.

As ever, speaking to a tax professional is the best way to stay ahead of rule changes whilst minimising your potential IHT bill.

Step 8) Consider giving to charity now and/or in your will

As we showed earlier, by bequeathing at least 10% of your estate’s baseline amount to charity, the chargeable rate of IHT on your estate drops from 40% to 36%. By giving to charity now, you can reduce your estate’s value overall—perhaps even below your tax-free threshold—and by leaving a charitable legacy in your will—provided it’s worth at least 10% of your baseline amount—you can reduce the rate of IHT your estate will be liable for, later.

Step 9) Talk to your trusted local IHT accountant

You’ll have gathered from this article just how many rules, regulations, allowances, exemptions and caveats there are to inheritance tax. I’ve divulged as many of my trade secrets and top tips in this free guide to IHT as I can, but the reality is that without professional guidance there are probably still tricks you’re missing which could help you avoid inheritance tax altogether.

At the end of the day, you’re preparing to pass on all of the hard-earned wealth you’ve accumulated throughout your lifetime. In order to ensure your loved ones receive as much of that wealth as is physically and legally possible, it is highly advisable to seek inheritance tax advice from the folks who’ve spent their lives getting to grips with it. So reach out, talk to a personal tax advisor today!

Conclusion: You can’t take it with you, but you can give it away

No one wants to think that when their time comes, all of the cash and assets they’ve spent their life earning will be wicked away by the taxman. To avoid that eventuality and perhaps avoid paying inheritance tax entirely, you’ve got two pretty solid options:

First, spend it! You can’t take your cash with you, and spending it is a guaranteed way to bring your estate within your allowance threshold. And, second, find yourself a personal tax advisor.

By working with a trusted local accountant, you will be able to create an actionable IHT plan—shifting assets, scheduling gifts, and utilising allowances—designed to reduce your inheritance tax liability for good. If you want to leave behind a proper inheritance, this is the only way to do it.