Inheritance Tax UK: Planning Points for Families

Inheritance tax planning is fact-specific. Available thresholds, exemptions, gifts, trusts, charitable giving, insurance arrangements and qualifying business or agricultural reliefs can all be relevant, but none is an automatic way to remove IHT. This guide is a high-level UK-tax overview, not personal tax or legal advice. Trust, succession and property law differs across the UK nations, so obtain England-and-Wales legal advice where that law applies.

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax on the estate of someone who has died. In the UK, it is charged at 40% on the value of your estate that exceeds your available nil-rate band.

The key thresholds for 2026:

Nil-rate band: £325,000

The first £325,000 of your estate passes free from IHT. This threshold has been frozen since 2009 - and with property prices rising sharply over the same period, far more families are now caught by IHT than those who set the rules intended.

Residence nil-rate band (RNRB): £175,000

An additional allowance of up to £175,000 applies when you leave your main home to direct descendants (children, stepchildren, grandchildren). Combined with the standard nil-rate band, this takes a single person's total threshold to £500,000.

The couples allowance: up to £1 million

Married couples and civil partners can transfer any unused nil-rate band to the surviving partner. This means a couple can pass up to £1 million to their children free from IHT - provided the estate includes the family home passed to direct descendants.

The seven-year treatment for gifts

The seven-year rules can be relevant to certain lifetime gifts, but are not a universal answer. Exemptions, the type of transfer, retained benefit and other facts can affect the result. Taper relief may reduce tax on a death charge in some cases; it does not simply remove a gift from all IHT calculations.

Who Pays Inheritance Tax in the UK?

IHT is paid by the estate - not the beneficiaries personally. The executors named in your will are responsible for calculating the IHT owed, completing the HMRC forms, and paying the tax before probate can be granted.

There are common misconceptions worth clearing up:

• Beneficiaries don't usually pay IHT directly - it comes from the estate before anything is distributed
• IHT is due within six months of the end of the month in which the person died; interest accrues on unpaid amounts after that
• Property can create a liquidity problem - if most of your estate is tied up in property, the executors may need to sell it to fund the tax bill, even if that wasn't what you wanted
• Jointly owned property passes to the surviving joint owner automatically (outside the will and probate), but it is still included in your estate for IHT purposes

Understanding that IHT is generally an estate administration issue is useful. It does not mean a particular document or transfer determines the result: ownership, title, the type of gift and applicable tax rules all need checking. Probate and estate-administration requirements also depend on the assets and circumstances.

7 Planning Points to Discuss With an Adviser

1. Use Your Full Nil-Rate Band Allowance

Every individual has a nil-rate band of £325,000. If you're a homeowner leaving property to direct descendants, you also have the £175,000 RNRB on top. Make sure your estate is structured so that both allowances are used to their maximum - particularly important in second marriages, trusts, or estates with complex asset structures where the RNRB can be inadvertently lost.

2. Pass Assets to a Spouse or Civil Partner

Transfers between spouses and civil partners are completely exempt from IHT - there is no limit on this exemption. If you leave everything to your partner, no IHT is due at that point. Their estate then benefits from your transferred nil-rate band when they die, potentially sheltering up to £1 million from IHT altogether.

Note: This exemption does not apply to unmarried partners — see below.

3. Understand the consequences of a family discretionary trust

A family discretionary trust can give trustees discretion over how a class of beneficiaries may benefit. It can also have IHT, CGT, income-tax and administration consequences. Transfers can be chargeable lifetime transfers; entry charges, ten-year periodic charges and exit charges can apply. A retained benefit can affect IHT treatment. Check Trust Registration Service requirements, exemptions and deadlines for the particular trust.

4. Make Use of the Annual Gift Allowance

HMRC allows everyone to give away £3,000 per year completely free from IHT (the annual exemption). You can carry forward unused allowance from the previous year - so if you haven't gifted anything this year or last, you can give away £6,000 immediately with no IHT implications.

Additional exemptions:

• Small gifts exemption: up to £250 to any number of individuals per tax year
• Wedding/civil partnership gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Normal expenditure out of income: regular gifts from surplus income (not capital) that don't affect your standard of living are immediately exempt - no seven-year clock applies

5. Business Relief and Agricultural Property Relief

If an estate includes qualifying business or agricultural property, relief may be available, subject to detailed eligibility conditions, ownership periods, activity and structure. From 6 April 2026, the combined 100% Business Relief/Agricultural Property Relief allowance is £2.5 million; qualifying property above the allowance generally receives 50% relief. An unused 100% allowance may be transferable between spouses or civil partners where the rules are met. Eligible AIM/non-listed exchange shares generally receive 50% Business Relief, not 100%, and eligibility must be checked. A family investment company is not automatically a Business Relief vehicle.

6. Leave 10% or More to Charity

If you leave at least 10% of your net estate to charity, the IHT rate on the remainder reduces from 40% to 36%. For larger estates, this can produce a meaningful saving - and you're also leaving something significant to causes you care about.

7. Write Your Life Insurance Policy in Trust

Life-insurance arrangements can have different ownership, beneficiary, IHT and administration consequences. A policy trust may be relevant, but the policy wording, trust terms, beneficiaries and circumstances must be checked before relying on a particular outcome.

Trusts and Inheritance Tax - A Closer Look

A family discretionary trust changes the legal ownership and administration of assets, but does not automatically remove them from every IHT calculation. The transfer, trust terms, retained benefit, beneficiaries and applicable trust-tax rules need to be considered together.

Trustees manage the assets on behalf of the beneficiaries. In a family trust, the settlor (you) typically acts as one of the trustees alongside a spouse or adult child. Control doesn't disappear — it is formalised. The Trust Deed sets out what the trustees can and cannot do. Your Letter of Wishes records how you'd like them to exercise their discretion.

The seven-year rules can interact with trusts. Transfers into a discretionary trust may be chargeable lifetime transfers. A death within seven years can affect the IHT calculation, but the precise result depends on the transfer, available nil-rate band, previous transfers and other facts. A trust should not be set up solely on the assumption that it avoids IHT.

What Documents Do You Need?

Effective IHT planning requires more than one document - the strongest approach combines three that work together:

Trust Deed — the legal framework for a trust. It does not itself guarantee an IHT outcome; funding and administering the trust can create separate legal and tax issues.

Letter of Wishes — your instructions to the trustees. Tells them who you had in mind, how you'd like assets managed, and what your priorities are. Not legally binding, but essential guidance for trustees acting after you're gone.

Will — works alongside the trust to ensure assets not already in the trust pass to the right people in the right way. Without a will, the intestacy rules apply — and they may not reflect your intentions at all.

All three documents interact. A will that is inconsistent with your trust structure can undermine both. These documents should be prepared together, not in isolation.

Inheritance Tax and Unmarried Partners

This is one of the most consequential - and most commonly misunderstood - aspects of IHT in the UK.

The spousal exemption only applies to married couples and civil partners. Unmarried partners, regardless of how long they have lived together, how many children they have, or how intertwined their finances are, receive no automatic IHT exemption.

If an unmarried partner dies without a will, their estate passes under the Rules of Intestacy - and the surviving partner receives nothing. Not only is there no IHT exemption; there is no inheritance at all.

Even with a will leaving assets to an unmarried partner, the transfer is subject to IHT at 40% above the nil-rate band. There is no relief equivalent to the spousal exemption.

For cohabiting couples, a valid will and an understanding of ownership are often central. A trust or insurance arrangement may be relevant in some cases, but neither guarantees an IHT, inheritance or liquidity outcome.

IHT planning is not a last-minute exercise. Gifts, trusts and other arrangements may require time and careful documentation, but each has conditions and risks. A valid will governs only the assets and circumstances to which it applies.

The Family Protection Pack from Heirs & Order™ includes personalised template documents to take to a qualified solicitor and tax adviser before any trust or asset transfer. From £197.

See also: family discretionary trust UK guide for a plain-English explanation of trustee discretion and tax considerations, and how to write a will in the UK for the separate role of a valid will. The Full Sovereignty Stack brings together personalised template documents; it is not legal or tax advice.

Heirs & Order™ provides document preparation services for informational purposes only. Heirs & Order™ is not a law firm. This is not legal advice or tax advice. We recommend all documents are reviewed by a qualified solicitor and/or tax adviser before use.