How Inheritance Tax works
Important information - investment values can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and tax rules may change.
Please note that the UK Government has announced that from April 2027 unused pensions will be included in the calculation of the value of estates for Inheritance tax purposes and could therefore be subject to Inheritance Tax. Please visit Inheritance Tax changes for more information.
Inheritance tax (IHT) is a tax that may be payable on the value of a person's estate when they die. It is usually paid from the estate by the personal representatives, such as the executors or administrators. The word 'estate' sounds grand, but it really just refers to the property, money, possession, savings and other investments someone owns, like ISAs, (pensions are often currently excluded from the estate and the tax implications differ - although this is due to change from 6 April 2027). Whether you're receiving an inheritance or passing on your wealth, it helps to understand what the implications of IHT are.
Here's what we'll cover
Current Inheritance Tax rates and thresholds
Remember Inheritance Tax rules can change and are complex, so please don't rely solely on this information for your inheritance tax planning decisions. You may want to seek advice from a tax specialist. Here’s a summary of the UK IHT rules:
- The nil rate band (which is often abbreviated to NRB, is the basic tax-free threshold) is £325,000 per person.
-
The main residence nil rate band (RNRB) is an additional £175,000 exemption, if all the following apply: you own all or part of the home; you leave the home to direct descendants (children - including adopted, foster or stepchildren, or grandchildren); and your total estate is worth less than £2million (for every £2 over this amount, the RNRB is reduced by £1, until it no longer applies).
-
You can leave any amount to a spouse/civil partner without paying inheritance tax. After your death any unused NRB/RNRB can be transferred to your surviving spouse/civil partner. This means on the death of that spouse/civil partner, up to £1million of exemptions may be available (two NRBs/RNRBs).
- Gifts or bequests to charities and community sports clubs are usually exempt from IHT.
Ways to minimise Inheritance Tax
If you're thinking about passing on your wealth, it's possible to reduce or avoid paying more IHT than is necessary. Some of the ways you could do this include placing assets into a trust or leaving an estate to a civil partner or spouse.
There are also a number of specific gifts or money that can be passed on without any IHT being due - such as helping to pay for a wedding or providing financial support for a child's education. Likewise anyone can give £3,000 in assets or cash each year without any IHT being liable. You can learn more about gifting below.
Relief might also be available on certain types of property, such as farms and business assets. And, if a person dies within seven years of making a gift, a reduced rate of tax may be applied, depending on a number of factors such as available exemptions and allowances, the value of the gift, when it was given, any other gifts made and who received the gift.
It's worth keeping a record of any gifts, as they may be called into question at a later date. Always be aware that tax rules change, so please double-check what you can and can't do and consider professional advice.
It's usually the executor of the will (if there is one) who arranges to pay any Inheritance Tax. They'll do this either from cash within the estate, or from money raised from the sale of any the estate's assets.
The beneficiaries (those who inherit the estate) do not normally pay tax on things they inherit. However, they may have related taxes to pay if, for example, they get rental income from a house left to them in a will.
If you're at all unsure, you should seek help from a professional.
How we can help
If you're looking to invest an inheritance, here are a few ways to get you started.
I'm thinking about taking financial advice
I want to open or transfer an account
I want to know which account is best for me
I want to choose investments
Important information - this information and our tools are not a personal recommendation for a specific investment. You must ensure that the fund you choose is suitable for your individual circumstances and remains so over time. Seek advice if you’re unsure.
