What Is Inheritance Tax in the UK?

Most estates pay nothing

Inheritance tax (IHT) gets more attention than it probably deserves for most people. Around 4% of estates in the UK actually pay it. But if your estate is likely to be above the threshold, it is worth understanding how it works before you write your will.

The basic threshold

The nil-rate band is £325,000. Estates below this pay no inheritance tax. Estates above it pay 40% on the excess.

So if your estate is worth £500,000, the taxable amount is £175,000 and the tax bill is £70,000.

The nil-rate band has been frozen at £325,000 since 2009 and is set to remain frozen until at least 2030. Rising property values mean more estates are being pulled into the taxable range.

The residence nil-rate band

Since 2017, there is an additional allowance called the residence nil-rate band (RNRB), currently £175,000. It applies when you leave a residential property to a direct descendant — children, grandchildren, or stepchildren. This takes the effective threshold for a homeowner leaving property to their children to £500,000.

The RNRB tapers away for estates worth more than £2 million (reduced by £1 for every £2 above that threshold), so very large estates do not benefit from it.

Spousal exemption

Assets left to a spouse or civil partner are completely exempt from inheritance tax, regardless of value. You can leave your entire estate to your spouse and no IHT is due at that point.

The unused nil-rate band also transfers to the surviving spouse. A couple can potentially pass on up to £1 million to their children free of tax (£650,000 in nil-rate bands plus £350,000 in residence nil-rate bands), provided the right conditions are met.

What is exempt from IHT

Gifts to registered charities are fully exempt and reduce the taxable estate. If you leave 10% or more of your net estate to charity, the IHT rate on the remainder drops from 40% to 36%.

Life insurance proceeds paid into a trust do not form part of your estate and are not subject to IHT. This is a common way to leave a tax-free lump sum to beneficiaries.

Business property relief and agricultural property relief can reduce or eliminate IHT on qualifying business or farm assets.

What your will can do

Your will is the mechanism through which your estate is distributed, so it shapes how IHT is calculated. Leaving assets to charity, structuring gifts to take advantage of the residence nil-rate band, and making sure spousal exemptions are properly used are all things your will needs to reflect correctly.

Your will cannot change the underlying tax rules. For estates where IHT is a significant concern, specialist advice from a solicitor or financial adviser is worth taking before you finalise the document. PureWill is for straightforward estates — if inheritance tax planning is a priority, a solicitor can structure things more precisely than an online will service can.

Lifetime gifts

Gifts made during your lifetime can reduce your estate for IHT purposes, subject to rules about timing. The main rule: gifts made more than seven years before your death are generally outside your estate. Gifts made within seven years may still attract tax on a sliding scale. This is outside the scope of your will but relevant to overall estate planning.