Inheritance Tax: thresholds, rules and allowances

Inheritance Tax (IHT) could cost your loved one thousands of pounds if you don’t plan ahead.

Inheritance Tax can be a complex topic with various thresholds, rules and allowances that can be considered when trying to minimise your Inheritance Tax bill.

In this blog, we give you comprehensive information you need to know to plan for Inheritance Tax purposes to ensure you minimise the Inheritance Tax bill that your loved ones may face in the future.

What is Inheritance Tax?

Inheritance Tax is a tax charged when somebody dies. The tax is charged at 40% on property, possessions and money, as well as any gifts they have made in the 7 years before death that are above a tax-free threshold of £325,000.

The tax is only charged on the elements of the estate that are above the £325,000 threshold. For example, on an estate worth £500,000, the tax would apply to the additional £175,000.

Who pays Inheritance Tax?

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). It is the responsibility of the person managing the estate to value the estate and pay the Inheritance Tax due. For people who die and leave a Will, it is the duty of the ‘executor’ of the Will to arrange to pay the inheritance tax.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

Inheritance Tax rates

Inheritance Tax exemptions and allowances

Inheritance Tax exemptions and allowances

Passing on your estate to your spouse or civil partner

Married couples and civil partners can pass their estate to their spouse tax-free when they die. Therefore, the surviving spouse can inherit the entire estate without paying Inheritance Tax. They can also pass on their unused tax-free allowance to their surviving spouse or civil partner, meaning the surviving spouse will have a total tax-free allowance of £650,000.

Passing on your home

There are various exemptions and allowances for passing on a home to family such as children, spouse or grandchildren.

You can pass a home to your husband, wife or civil partner when you die with no Inheritance Tax to pay.

You can also pass on your home to anyone and not pay Inheritance Tax if your home is valued at less than the £325,000 tax-free threshold.

If you leave your home to certain charities or community sports clubs, then it may be able to be passed on tax-free.

If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:

• you leave it to your children (including adopted, foster or stepchildren) or grandchildren

• your estate is worth less than £2 million

If you leave the home to another person in your Will, it counts towards the value of the estate.

Giving away a home before you die

You can give your home away as a gift and there will normally be no Inheritance Tax to pay if you move out and live for another 7 years.

If you want to gift your home to someone and then continue living in your property after giving it away, you’ll need to:

• pay rent to the new owner at the going rate (for similar local rental properties)

• pay your share of the bills

• live there for at least 7 years

If the above rules are not followed, the property will be classed as a ’gift with reservation’ and will be added to the value of your estate when you die. The ’gift of reservation’ rule is to stop people from giving away an asset but continuing to derive benefit from it. If you make a gift and continue to derive benefit from the gift, the gift will not be considered a full transfer of ownership and the gift with reservation 7 year rule for inheritance tax will not apply.

Residence nil rate band

The Inheritance Tax Residence Nil Rate Band (RNRB) is a transferable allowance available to married couples and civil partners when their main residence is inherited by direct descendants, such as their children or grandchildren.

The residence nil rate band has a maximum allowance of up to £175,000 per person. If it is unused, it can be transferred to a surviving spouse or partner. The RNRB is in addition to the existing £325,000 Inheritance Tax (IHT) nil-rate band.

Rules on giving gifts

While you’re alive, you qualify for a £3,000 ‘gift allowance’ a year. This is known as your annual exemption. This allows you to give away cash or assets up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax purposes.

This annual exemption can be carried forward for one tax year. It can not be carried forward for more than one tax year.

You can give as many gifts of up to £250 to as many individuals as you want throughout your lifetime. Note: this doesn’t apply to anyone who has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to Inheritance Tax.

If you have enough income to maintain your usual standard of living, you can make gifts from your surplus income. For example, paying for life insurance or regularly paying into your child’s or grandchild’s savings account.

Grandparents can also use it to pay for grandchildren’s school fees.

Inheritance Tax may have to be paid after your death on some gifts you’ve given.

Gifts given less than 7 years before you die may be taxed depending on:

• who you give the gift to and their relationship to you

• the value of the gift

• when the gift was given

What counts as a gift

Gifts include:

• money

• household and personal goods, for example, furniture, jewellery or antiques

• a house, buildings and land

• stocks and shares listed on the London Stock Exchange

• unlisted shares you held for less than 2 years before your death

What is agricultural property relief and business property relief?

Agricultural property relief (APR) is a type of inheritance tax relief. It reduces the amount of tax that farmers and landowners must pay when farmland is passed to the next generation. Business property relief (BPR) is similar, but for business assets that are part of the estate.

The government announced in the 2024 Autumn Budget that it will reform agricultural property relief and business property relief from 6 April 2026. (See section below re: Budget announcements for more information).

Unused Inheritance Tax threshold

The current tax-free Inheritance Tax threshold is £325,000. If the threshold has not been fully used when the first person in a marriage or civil partnership dies, you can transfer the unused part to your spouse or civil partner.

Using trusts to save Inheritance Tax

Some parents set up a trust for their children or grandchildren, which means they will no longer own the assets. Assets in a trust will be free from Inheritance Tax.

However, there are different types of trust and some complicated rules, so seek independent advice from a tax specialist such as dns accountants.

Inheritance tax changes announced in the Autumn Budget 2024

There were a number of announcements in the Autumn Budget 2024 that affect IHT. Below are the details of these changes:

Tax-free threshold

The Chancellor announced that the £325,000 threshold will be frozen until April 2030.

Pensions

The Government announced in the Autumn Budget 2024 that from the 2027/28 tax year, pensions will form part of your estate – meaning they will be subject Inheritance Tax.

This means the value of your pensions when you die will be added up with your other assets to calculate whether your estate will pay IHT.

AIM shares

AIM shares’ Business Property Relief will reduce from 100% to 50% in April 2026, resulting in 20% IHT exposure and reducing their tax planning appeal

Agricultural Property Relief

For farmers and landowners, the Budget didn’t bring good news as the Chancellor announced changes to agricultural property relief. The new plans mean that from April 2026, the first £1m of combined business and agricultural assets will continue to attract no inheritance tax at all. However, assets over £1 million will get a 50% relief, with an effective rate of IHT at 20%.

Inheritance Tax for non-doms

IHT is currently a domicile-based system, relying on domicile status and location of assets. Under the current regime, no Inheritance Tax is due on non-UK assets of non-doms until they have been a UK resident for 15 out of the past 20 tax years.

However, with the fundamental reforms to the taxation of non-doms to be introduced with effect from April 2025, the government intends to move IHT to a residence-based system from 6 April 2025, subject to consultation.

Paying Inheritance Tax to HMRC

Inheritance Tax must be paid by the end of the sixth month after the person’s death, otherwise interest is charged in addition to the IHT.

You’ll need an Inheritance Tax Reference Number from the HMRC at least 3 weeks before you pay Inheritance Tax. You should ensure you request this number long before the end of the 6th month.

If you’re unable to release funds from the estate and cannot pay another way, you can ask to postpone paying Inheritance Tax.

HMRC do not send receipts for each payment you make. They’ll write to tell you when you’ve paid all the Inheritance Tax and interest you owe.

If you’ve paid through your own bank or building society, check your statement to confirm the payment has left your account.

Summary

There can be many ways to mitigate or reduce Inheritance Tax payable. Careful IHT planning should be carried out with qualified tax professionals such as dns accountants. Good IHT planning can save you thousands of pounds by ensuring you pass on as much of your estate as possible in the most tax efficient way.

Contact dns accountants today on 03330600706 or email on enquiry@dnsaccountants.co.uk to help you to save money on your IHT bill.

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