Inheritance Tax in the UK: Thresholds, Rates, and How to Reduce Your Bill

Inheritance tax (IHT) has a fearsome reputation, but for most people the rules are more manageable than they first appear — provided you understand the thresholds and plan ahead. With property values across London and Surrey having risen so sharply over the past two decades, more families than ever are finding themselves within reach of an inheritance tax bill, often without realising it.

Here is a clear guide to how inheritance tax works in the UK, and the legitimate ways a well-planned will can help reduce it.

The Basic Rule: 40% Above the Threshold

Inheritance tax is charged at 40% on the value of an estate above the available tax-free threshold. It is usually the estate itself that pays the tax, before assets are distributed to beneficiaries, rather than the beneficiaries paying it individually.

The Nil-Rate Band

Every individual has a nil-rate band of £325,000. This means the first £325,000 of your estate passes free of inheritance tax, regardless of who inherits it (with some exceptions covered below). This threshold has been frozen since 2009 and is set to remain frozen for the foreseeable future, which is part of why more estates are becoming liable each year as asset values rise.

The Residence Nil-Rate Band

On top of the standard nil-rate band, there is an additional residence nil-rate band of £175,000, available when a home is left to direct descendants — children, grandchildren, or step-children. Combined, this means a single person can potentially pass on £500,000 tax-free, and a married couple or civil partnership up to £1 million, thanks to the ability to transfer unused allowances between spouses.

The residence nil-rate band tapers away for larger estates, reducing by £1 for every £2 the estate exceeds £2 million, so very large estates may not benefit from it at all.

Exemptions That Reduce Your Bill

Certain gifts are entirely exempt from inheritance tax, regardless of size:

• Gifts to your spouse or civil partner — entirely exempt, provided they are UK-domiciled
• Gifts to charity — entirely exempt, and if you leave at least 10% of your estate to charity, the rate on the rest can drop from 40% to 36%
• Small annual gifts — you can give away £3,000 each tax year without it counting towards your estate, plus small gifts of up to £250 per person

The Seven-Year Rule on Gifts

Gifts made during your lifetime to anyone other than a spouse or charity can still be caught by inheritance tax if you die within seven years of making them. These are known as potentially exempt transfers. If you survive seven years, the gift falls outside your estate entirely. If you die within that period, the amount of tax due tapers down the longer you survived after making the gift — this is often called taper relief.

This is why gifting money or assets to children early, as part of a considered plan, can be a genuinely effective way to reduce a future inheritance tax bill — provided it is affordable and does not leave you short in later life.

Using Trusts for Inheritance Tax Planning

Trusts can play a useful role in inheritance tax planning, particularly for larger estates. Assets placed in certain types of trust may fall outside your estate for tax purposes after a set period, while still allowing you some influence over how and when beneficiaries receive them. Trusts are also useful for protecting assets from care home fees or providing for a vulnerable beneficiary. Our guide to what a trust is and whether you need one covers this in more detail.

How a Well-Drafted Will Reduces Inheritance Tax

A carefully drafted will can make a real difference to the tax your estate eventually pays, by:

• Making full use of the nil-rate band and residence nil-rate band
• Structuring gifts to spouses and charities to maximise exemptions
• Incorporating trusts where appropriate for larger or more complex estates
• Ensuring property ownership and gifts are structured tax-efficiently

By contrast, a poorly worded or generic DIY will can inadvertently waste allowances or create an unnecessarily large tax bill for your family. This is one of the strongest arguments for professional will drafting, discussed further in our guide to how to write a will in the UK.

Who Actually Pays the Inheritance Tax Bill?

Inheritance tax is normally paid by the estate itself, out of the deceased's assets, before probate is finalised and the estate is distributed. It is one of the reasons the probate process — covered in our plain English guide to probate — can take time when a large estate is involved: funds may need to be raised or a property sold before the tax bill can be settled.

Getting Advice for Your Circumstances

Inheritance tax planning depends heavily on individual circumstances — the size of your estate, who you want to benefit, and how your assets are structured. As a member of The Society of Will Writers, I help clients across Esher, Weybridge, and Sunbury understand what their estate may owe and how a properly structured will can legitimately reduce that liability, with home visits 7 days a week to discuss your options in person.