We all want to make sure the wealth we’ve built over a lifetime goes to the people and causes we care about — not straight to the taxman. But understanding how Inheritance Tax (IHT) works can be confusing, especially with multiple thresholds and tapering rules. Here’s a clear breakdown of what you need to know and how to make the most of the available allowances.

💷What Is Inheritance Tax?

Inheritance Tax is a tax paid on the value of your estate when you die — including your property, savings, investments, and certain other assets. The current IHT rate is 40% on the portion of your estate that exceeds your available allowances.

🧭The Nil-Rate Band – Your Basic Allowance

Every individual has a Nil-Rate Band (NRB) — the amount you can pass on before Inheritance Tax applies. The standard Nil-Rate Band is £325,000. Anything above this is generally taxed at 40%, unless it qualifies for an exemption or relief. If you’re married or in a civil partnership, you can transfer any unused allowance to your spouse or partner, meaning a couple can currently pass on £650,000 before IHT is due.

🏠The Residence Nil-Rate Band (RNRB)

Introduced in 2017, the Residence Nil-Rate Band (RNRB) helps families pass on the family home to direct descendants. As of 2024/25, the RNRB is £175,000 per person and applies in addition to the standard £325,000 Nil-Rate Band. To qualify, you must own (or have owned) a home and leave it to direct descendants such as children or grandchildren. This means a married couple could potentially pass on up to £1 million free of Inheritance Tax.

⏳The Taper Rule – How Large Estates Lose the Extra Allowance

If your total estate is worth more than £2 million, your Residence Nil-Rate Band starts to taper away. For every £2 over £2 million, you lose £1 of RNRB. That means once your estate exceeds £2.35 million, the RNRB is lost completely.

Example: James and Sarah have an estate worth £2.2 million. They’re £200,000 over the threshold, so they lose £100,000 of their RNRB (£1 for every £2 over). Instead of £175,000 each, they can only claim £75,000 each. Their total tax-free allowance reduces from £1 million to £850,000.

💝Gifts and Lifetime Exemptions

You can reduce your taxable estate by making gifts during your lifetime. The main exemptions are:

• Annual exemption – £3,000 each tax year (carry forward one year)
  • Small gifts – £250 to as many people as you like each year
  • Wedding gifts – £5,000 to a child, £2,500 to a grandchild
  • Regular gifts from surplus income – immediately exempt if they don’t affect your standard of living
  Larger gifts fall under the ‘7-year rule’ — if you survive seven years, they’re normally free from IHT.

⚰️What Happens When You Die?

When someone dies, their executors calculate the estate’s total value, apply the allowances, and work out any tax due. The tax must usually be paid before probate is granted — within six months of death. Many families use Whole of Life insurance to cover this bill, so assets don’t have to be sold to pay HMRC.

🌳Ways to Reduce Inheritance Tax

Here are a few strategies to consider:
1️⃣ Use both allowances — the Nil-Rate Band and Residence Nil-Rate Band
2️⃣ Make lifetime gifts and keep records
3️⃣ Consider trusts to move wealth out of your estate
4️⃣ Invest in Business Relief assets — up to 100% IHT relief after two years
5️⃣ Use life insurance written in trust to provide funds for any tax liability.

❓FAQs: Inheritance Tax Explained

What is the current Inheritance Tax threshold?
Each person has a £325,000 Nil-Rate Band plus, if applicable, a £175,000 Residence Nil-Rate Band. Married couples can combine these for up to £1 million of relief.

At what rate is Inheritance Tax charged?
40% on the value of your estate above allowances (or 36% if you leave 10% or more to charity).

How does the taper rule work?
If your estate exceeds £2 million, you lose £1 of the Residence Nil-Rate Band for every £2 over that amount.

How can I reduce my IHT bill?
By gifting, using trusts, investing in qualifying business assets, and ensuring your estate plan uses all available allowances.

🌟Final Thoughts

Inheritance Tax doesn’t have to be inevitable. By understanding how allowances work — and planning early — you can ensure more of your wealth passes to your loved ones and less to HMRC. If you’d like to review your estate or explore steps to protect your family’s future, please get in touch — I’d be happy to guide you through your options in plain English.

To find out more, read my other blogs on inheritance tax here.

 Risk warnings 

·  The value of investments, and the income from them, can go down as well as up.

·  You may not get back the full amount you invest.

·  Past performance is not a reliable indicator of future results.

·  The tax treatment of investments depends on individual circumstances and may change in the future.

·  Pensions: Your eventual retirement income will depend on contributions, investment performance, and tax rules at the time

·  ISAs: Tax advantages depend on your personal circumstances and may change.

·  Property/Alternative Investments: The value of property and specialist investments can be harder to sell (illiquid) and may rise and fall in value more sharply.

·  Business Relief / EIS / VCTs: These are higher-risk investments and may not be suitable for all investors. They are often illiquid and tax benefits depend on HMRC rules.

·  Investments should always be considered in line with your risk profile and personal circumstances.

·  You should seek professional advice before making any investment decision.