What You Really Need to Know
Inheritance Tax (IHT) is one of the most debated and misunderstood taxes in the UK.
Some people assume their loved ones will lose almost half of everything they own. Others believe it only affects the mega-rich.
The reality is far more nuanced.
Most estates don’t pay any IHT, yet thousands of families still get caught out each year because they never understood the rules or didn’t plan early enough.
This guide breaks the topic down in simple, practical terms, using real-world examples and the latest allowances.
What Exactly Is Inheritance Tax?
Inheritance Tax is a tax on the value of someone’s estate when they pass away. An estate includes:
Cash and savings
Property
Investments
Vehicles
Personal possessions
Certain gifts made during their lifetime
IHT is not charged on everything you own and this is where many misconceptions start.
The Nil-Rate Band (NRB)
As of the 2024/25 tax year, every person in the UK has a £325,000 nil-rate band.
This means the first £325,000 of your estate is completely tax-free.
Only the value above this threshold is potentially taxed at 40%.
For example:
If someone’s estate is worth £250,000 = £0 tax
If someone’s estate is worth £450,000 = £125,000 could be taxed
Always check the latest rules at https://www.gov.uk/inheritance-tax
Extra Allowances That Can Boost Your Tax-Free Threshold
Here’s where things get complicated and where most misunderstandings begin.
The UK system includes additional allowances that can dramatically reduce or even eliminate an inheritance tax bill.
1. Residence Nil-Rate Band (RNRB)
If you leave your main home to direct descendants (children, grandchildren, stepchildren, adopted children), you may qualify for the Residence Nil-Rate Band, currently £175,000.
This can increase your total tax-free allowance to £500,000 per person.
2. Spouse or Civil Partner Exemption
Anything left to a spouse or civil partner is completely exempt from IHT.
You could leave a £5 million estate to your spouse, and the IHT bill would be zero.
This is one of the most generous tax reliefs in the UK.
3. Transferable Allowances
If a married couple or civil partners don’t use all of their allowances, the unused portion can be transferred to the surviving partner.
This is how many families can pass up to £1 million tax-free when the second partner dies:
£325,000 NRB × 2 = £650,000
£175,000 RNRB × 2 = £350,000
Total = £1 million
A Simple Example of How Inheritance Tax Is Calculated
Let’s look at a realistic example.
Sarah’s estate: £700,000 (including her home)
She leaves everything to: her two children
Her allowances:
£325,000 (nil-rate band)
£175,000 (residence nil-rate band)
Total tax-free allowance = £500,000
Taxable amount:
£700,000 – £500,000 = £200,000
Inheritance Tax owed:
40% of £200,000 = £80,000
Her children inherit £620,000 — far more than many people assume after hearing the word “Inheritance Tax”.
Why So Many People Get Inheritance Tax Wrong
Despite being around for decades, IHT remains one of the UK’s most misunderstood taxes.
Here are the main reasons why.
1. Constant rule changes
Allowances like the RNRB were introduced relatively recently, and political pressure means the rules could change again.
People often rely on outdated information.
2. Complex exemptions and gifting rules
Terms like “potentially exempt transfers”, “chargeable lifetime transfers” and “seven-year rules” confuse many.
Even simple gifts have different rules depending on timing and amounts.
3. Rising house prices
Property values have soared, especially in the South of England.
Someone who bought a home for £60,000 in the 80s could now have a property worth £600,000 unintentionally pushing them into IHT territory.
4. Lack of planning
Most people don’t think about inheritance tax until later in life, and by then, some reliefs or strategies are no longer available.
Can You Reduce or Manage Inheritance Tax?
There are legal and legitimate ways to reduce the potential IHT bill on your estate.
The aim isn’t to avoid tax it’s simply to make use of rules you’re entitled to.
1. Gifting During Your Lifetime
You can give away money or assets while you’re still alive.
Some key rules:
You can gift £3,000 per year tax-free (annual allowance)
Small gifts (e.g., £250 per person) are usually exempt
Gifts given more than seven years before death are typically IHT-free
However, gifting your home or giving large gifts can be more complicated, so always check the rules.
2. Charitable Donations
If you leave 10% or more of your net estate to charity, your IHT rate drops from 40% to 36%.
This can reduce the tax bill and support causes that matter to you.
3. Trusts
Trusts can help you control how money is passed on, protect vulnerable beneficiaries, and ring-fence assets.
But trust taxation can be complex, so they’re usually best used with professional advice.
4. Life Insurance
Some people choose to take out a life insurance policy written in trust so the pay out doesn’t form part of their estate.
The lump sum can help cover the tax bill and protect your loved ones from financial stress.
So… Is Inheritance Tax Fair?
Opinions vary widely.
Some argue IHT is unfair because rising house prices have pushed ordinary families into the tax net.
Others believe it helps redistribute wealth and prevents huge estates from compounding across generations.
But one thing is clear:
People misunderstand IHT because it’s complicated, highly personal, and full of rules that only apply in specific situations.
Understanding the basics and planning early can make a massive difference.
It can help you protect your assets, support your family, and avoid unexpected tax bills.
Disclaimer
This article is for general information only and should not be taken as financial, legal, or tax advice.
Tax rules can change, and how they apply depends on your personal circumstances.
If you need guidance on inheritance tax or estate planning, please speak to a qualified financial adviser or tax professional.
