Inheritance Tax (IHT) is often called the most hated tax in Britain. With frozen thresholds and rising property values, more families are getting caught by it than ever before. Here's how it works and what you can do about it.
The Basics
IHT is charged at 40% on the value of your estate above the nil-rate band. The nil-rate band is £325,000 and has been frozen since 2009. There's also the residence nil-rate band of £175,000 if you leave your main home to direct descendants (children, grandchildren). This means an individual can potentially pass on £500,000 tax-free, and a married couple £1 million. But if your estate exceeds these thresholds, the excess is taxed at 40%.
What Counts in Your Estate
Everything you own at death: property, savings, investments, pensions (in some cases), life insurance policies not written in trust, valuable possessions, and gifts made within the last 7 years. This is why rising house prices are dragging more people into IHT territory — a house worth £400,000 plus savings of £200,000 already exceeds the individual nil-rate band. Joint property passes to a surviving spouse IHT-free, but the full estate is assessed on the second death.
Exemptions and Reliefs
Spouse/civil partner exemption: everything you leave to your spouse is IHT-free (they inherit your unused nil-rate band too). Annual gift exemption: you can give away £3,000 per year tax-free. Small gift exemption: unlimited gifts of up to £250 per person per year. Wedding gifts: up to £5,000 for a child, £2,500 for a grandchild. Business Property Relief: business assets can qualify for 50-100% relief. Agricultural Property Relief: similar for qualifying farmland.
Basic IHT Planning
1. Write a will — dying intestate can mean IHT is paid unnecessarily. 2. Use your annual gifting allowances — £3,000/year adds up over decades. 3. Put life insurance in trust — the payout won't count in your estate. 4. Consider a discretionary trust for assets above your nil-rate band. 5. Make gifts from surplus income — regular gifts from income (not capital) can be IHT-free with no 7-year rule. 6. Charitable gifts — leaving 10%+ to charity reduces the IHT rate from 40% to 36%.
The bottom line
IHT planning isn't just for the wealthy. With frozen thresholds and rising property values, ordinary families are increasingly affected. Start with the basics: write a will, use your allowances, and seek professional advice if your estate is approaching the thresholds.
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