Inheritance Tax in the UK: A simple guide for 2025

Careful estate planning could ensure that your wishes are followed after you’re gone and that your wealth is passed on as tax-efficiently as possible.

Yet, according to research published by FTAdviser, 71% of UK adults don’t understand how Inheritance Tax (IHT) works.

Moreover, in her October 2024 Autumn Budget, the chancellor announced some important changes to IHT that could affect your estate planning.

So, if you want to pass on more of your wealth to loved ones, keep reading to find out everything you need to know about IHT.

Inheritance Tax is a tax on the estate of someone who has died

If your estate exceeds certain thresholds, your beneficiaries may face an IHT bill of up to 40% when you die.

Your estate is defined as your property, money, and possessions.

Only around 4% of estates in the UK pay Inheritance Tax

You may have seen headlines recently about an increase in IHT revenues. Indeed, the government has reported that IHT receipts for April 2025 were £0.8 billion, which is £97 million higher than the same period last year.

However, government figures also show that only just over 4% of UK estates faced an IHT charge in the 2021/22 tax year (the most recent data available).

Indeed, your beneficiaries will usually only pay IHT if the value of your estate exceeds the “nil-rate band”. This stands at £325,000 for the 2025/26 tax year.

If you pass on your main home to your children or grandchildren (including stepchildren and adopted children), the “residence nil-rate band” – which is £175,000 (2025/26) – could increase your IHT allowance to £500,000.

Moreover, for married couples or those in a civil partnership, any unused allowance can be transferred to the surviving partner. As such, couples could potentially pass on up to £1 million without their beneficiaries incurring an IHT charge.

Remember, too, that IHT is only due on the amount of your estate that is above the IHT-free threshold. So, if your estate is worth £550,000 and your IHT threshold is £325,000, your beneficiaries would likely only pay tax on £225,000.

Yet, it’s important to note that the government has frozen IHT thresholds at their 2009 levels until 2030.

This could result in more estates incurring IHT as the price of assets rises, and the nil-rate bands fail to track inflation. The Office for Budget Responsibility forecasts that IHT receipts could reach £14.3 billion by the end of the decade.

How and when Inheritance Tax is paid

IHT is usually paid from your estate or from funds raised by selling assets from your estate.

If you left a will, your chosen executor would likely arrange the payment. If there is no will, the administrator of the estate fulfils this responsibility.

The executor or administrator will need to obtain a reference number from HMRC at least three weeks before making a payment.

Most IHT payments are then made through the Direct Payment Scheme, which allows the responsible individual to request that payment is made directly from your bank account to HMRC.

If you have life insurance, your beneficiaries may use all or part of the payout to cover any IHT due.

However the funds are raised, an IHT bill must be paid by the end of the sixth month after a person’s death. HMRC will begin charging interest after this date.

Tax on certain assets, such as property, can be paid in instalments over 10 years, with interest accruing on the outstanding balance.

IHT exemptions and reliefs

While you may not be able to completely avoid an IHT charge on your estate, making use of the available exemptions and reliefs could reduce the amount your beneficiaries pay.

• Spouse or civil partner exemption – There is usually no IHT to pay on any assets you leave to your spouse or civil partner, both during your lifetime and after your death.
• Charity and political party exemption – If you give a gift (during your lifetime or in your will) to a registered charity, community, amateur sports club, or political party, this will usually be exempt from IHT. Moreover, if you leave at least 10% of your net estate to any such organisation, the IHT rate on the rest of your estate may drop from 40% to 36%.
• Gifting allowances and exemptions – You can give away a certain amount of gifts each tax year without them being added to the value of your estate for IHT purposes. For example, the Annual Exemption allows you to pass on gifts worth up to £3,000 each tax year (2025/26) without an IHT charge. The government website has a full list of gifting allowances and exemptions.
• Potentially exempt transfers (PETs) – Gifts made more than seven years before death are usually exempt from IHT. If you die within seven years of giving the gift, IHT will be charged on a sliding scale known as “taper relief”.

Putting some of your assets in trust could also be an effective way to mitigate an IHT bill. However, this can be complex, so you may benefit from working with a financial planner who can help you identify the options that suit your specific circumstances, needs and goals.

Planned changes to IHT rules

The chancellor, Rachel Reeves, announced several changes to IHT rules in her Autumn Budget that may affect your estate plan.

Business and Agricultural tax relief

Currently, farms and businesses can claim up to 100% IHT relief on eligible assets and property, and there is no limit on how much wealth can be exempted from tax in this way.

From 6 April 2026, the availability of 100% Agricultural Property Relief and Business Property Relief will be capped. These reliefs will only apply to combined business and agricultural assets worth up to £1 million, after which, 50% relief applies.

Pensions

Most workplace pensions are not included in your estate when IHT is calculated. As such, they are often used as an effective estate planning tool.

However, from 6 April 2027, the government plans to bring unused pension funds and death benefits payable from a pension into an individual’s estate for IHT purposes. The government estimates that 10,500 estates will become liable to pay IHT as a result of this change.

We can help you pass on your wealth as tax-efficiently as possible

The changes outlined above could mean that you’d benefit from reviewing and adjusting your estate plan.

Equally, if you haven’t yet thought about how to pass on your wealth to the next generation, it’s never too soon to start planning.

We can help you navigate IHT rules and understand how they apply to you.

Our financial planners in Bristol know how to craft an estate plan that meets your specific needs and objectives.

If you’d like to find out more about working with us, please get in touch by emailing helpme@aspirellp.co.uk or calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.