Inheritance tax is one of the UK’s most misunderstood taxes, with a maze of allowances, exemptions and reliefs that can make it difficult to work out exactly what you owe – or how to reduce the bill.
Here, Sarah Coles, head of personal finance at AJ Bell, explains 13 inheritance tax rules and allowances that are worth knowing…
1. Everything left to your spouse is inheritance tax-free
Anything you leave to your spouse or civil partner is generally exempt from inheritance tax. This applies to married couples and civil partners and covers assets passed between them.
2. You have two nil rate bands
Up to £325,000 can usually be left to someone other than a spouse or civil partner free of inheritance tax through the standard nil rate band.
On top of that, many people can also benefit from the £175,000 residence nil rate band if they leave their main home to direct descendants, including children, stepchildren and adopted children.
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Together, these can allow up to £500,000 of an estate to be passed on tax free.
Above the thresholds, the standard inheritance tax rate is 40%, unless other reliefs apply.
3. You may be able to use your spouse’s unused allowances
If you’re married or in a civil partnership, when the second partner dies, anyone inheriting their estate may be able to claim any unused nil rate bands from the first partner.
Where both allowances transfer in full, a couple can potentially pass on up to £1m before inheritance tax becomes payable.
4. You have annual gift allowances
You can usually give away up to £3,000 each tax year without it counting towards your estate for inheritance tax purposes.
If you don’t use the allowance, you can carry it forward for one tax year. You can also make gifts of up to £250 to any number of people, provided they haven’t also benefited from your £3,000 annual exemption. Separate exemptions also apply for certain wedding gifts.
5. Larger gifts can fall outside your estate
You can give away larger lump sums, known as potentially exempt transfers (PETs).
If you survive for seven years after making the gift, it normally falls outside your estate for inheritance tax purposes. If you die within seven years, some or all of the gift may still be taken into account when calculating inheritance tax.
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6. Regular gifts from surplus income can also be exempt
Regular gifts made from surplus income can also fall outside your estate, provided they meet HMRC’s rules.
The gifts must come from income rather than savings, leave you with enough income to maintain your usual standard of living, and form part of a regular pattern. Keeping detailed records is essential.
7. Grandparents can contribute to Junior ISAs
Parents or guardians open and manage Junior ISAs, but grandparents and other relatives can contribute money to them, up to the annual limit of £9,000.
These contributions count as gifts for inheritance tax purposes and will fall under the normal gifting rules.
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8. Pension rules are changing
From April 2027, unused defined contribution pension pots are expected to become part of an estate for inheritance tax purposes under government plans.
The changes are expected to bring more estates into the inheritance tax system and increase bills for some families.
9. Charitable donations can reduce your inheritance tax bill
Gifts left to UK-registered charities are free from inheritance tax.
If at least 10% of your net estate is left to charity, the inheritance tax rate on the rest of the taxable estate falls from 40% to 36%.
10. Some business investments qualify for inheritance tax relief
Some qualifying business assets, including certain AIM-listed shares, may qualify for Business Property Relief if they’ve been held for at least two years.
However, the rules have changed from April 2026, meaning relief is no longer always available at 100%, so it’s important to check the current position before relying on this exemption.
11. Life insurance can help cover an inheritance tax bill
Life insurance can help beneficiaries meet an inheritance tax bill if the policy has been written in trust.
This means the payout sits outside the estate, doesn’t increase the inheritance tax bill and can usually be accessed without waiting for probate – the legal right to deal with someone’s property, money and possessions (their estate) when they die.
12. Deadlines matter
Inheritance tax is generally due within six months of the end of the month in which someone dies.
HMRC charges interest if payment is late.
13. Inheritance tax usually has to be dealt with before probate
Before probate is granted, HMRC generally needs confirmation that any inheritance tax due has been paid or that acceptable payment arrangements are in place.
Where much of an estate is tied up in property or certain other assets, it may be possible to pay the tax in instalments rather than all at once.
