It currently raises around £7bn a year for the government, and in the last few years figures show that the tax is paid by between 5-7% of estates.
But it’s often in the headlines as any more people than this believe their family will have to pay the tax after their death. A poll for The Times newspaper in July 2023 suggested a 33% thought they would be liable.
David Alexander, wealth manager and founder of The Legacy Hub, says: “All this talk of increasing taxes, and freezing thresholds might seem daunting and hard to digest.
“In truth only about five to seven per cent of estates in the UK actually end up paying IHT. This is however likely to increase if the government keeps freezing the threshold.
“Thresholds exist and each person has a nil-rate band (£325,000) – where they will pay no tax. If leaving a home to children or grandchildren, there is a residence nil-rate band (£175,000) also. Combining both thresholds means that many estates under £500,000 pay no IHT.”
A new poll says 12% of UK adults want to see no further changes to inheritance tax rules, including no cap on lifetime gifting. This view peaks among those aged 60-78 (16%) and those aged 79+ (15%).
Chase data also reveals it’s far more of a priority for parents (29%) than those without children (9%) as adults consider their legacies.
Shaun Port, Managing Director for Daily Banking at Chase, says: “Parents are hoping the Chancellor avoids tampering with inheritance tax rules so they can pass their legacy onto the next generation without any extra sting in the tail. This is a particular focus for those aged 60+ – as the generation considering what they will be able to pass on, and potentially still waiting to receive inheritance from their aging parents.”
What are the current inheritance tax exemptions and allowances?
There are a number of exemptions, as well as allowances for passing on a home to children, or grandchildren.
These include:
- any estate that is valued at less than £325,000
- anyone who leaves their estate to a husband, wife or civil partner
- somebody who leaves it to certain charities or community sports clubs
There are additional, significant allowances.
- If the person who dies leaves their home to their children or grandchildren the threshold goes up to £500,000.
- Married or civil partners can also transfer assets free of tax between each other, so one partner automatically inherits the other’s unused allowance.
This means the estate of someone who can use their late partner’s allowance, and leaves a home to their children or grandchildren, won’t be liable for inheritance tax on anything under £1m.
What is the standard Inheritance Tax rate?
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
As an example, if your estate is worth £500,000 and your tax-free threshold is £325,000, the Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000) if you aren’t leaving it to your husband or wife, children or grandchildren.
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)
Pensions and Inheritance Tax
There’s speculation that proposed changes to the Inheritance Tax treatment of pensions. These are currently exempt from IHT but could be included in estates from April 2027, which could hit unmarried couples who plan to pass their pensions to their partner.
Financial adviser Scott Gallacher, Director of Rowley Turton, says: “In my own case, the proposed change would mean an overnight tax hit of around £214,000 should I predecease my partner.
“Looking across our client base, the combined impact could exceed £40 million in additional IHT without proactive planning.”
Luke James, Tax Director at Gravitate Accounting, agrees that the tax hike would be huge.
He says: “Hardworking people who built solid pension pots to fund retirement but passed away before drawing them. Think of unmarried couples in their 50s or 60s, not yet accessing pensions, whose estates now face a sudden and significant bill. Their pensions weren’t tax dodges — just sensible planning.
“This change risks punishing prudence and could have far-reaching consequences for families. What’s most concerning is that few clients realise the implications. Our scenarios show that combined IHT and tapering restrictions could push marginal rates above 60%, a staggering result for families who thought they were doing everything right. Without proactive inheritance planning, many could be blindsided by a seismic shift in pension taxation.”
Can money still be given as a tax-free gift to children before death?
Yes, anyone can give away up to £3,000 a year, and pay no tax. This is known as the annual exemption. If unused, this allowance can be carried over to the following year, up to a maximum of £6,000.
There are also allowances for wedding gifts.
However, if someone gives a bigger sum, then dies within seven years, then the money may be used as part of inheritance tax calculations. This may also change, says David Alexander: “There’s a real possibility the government could extend the current seven-year rule to ten years or more – meaning people would need to live significantly longer after making a gift for it to fall outside their estate for inheritance tax purposes.
“Planning your estate now is key to reduce potential IHT liabilities for your heirs, ensuring they inherit the maximum when the time comes.”
The simplest way to avoid Inheritance Task might seem drastic
“It might seem drastic, but if you are likely to be faced with a large IHT bill when you eventually inherit, getting married is one of the simplest, most effective ways to avoid it,” says David.
“This is because of something called a spousal exemption. This means anything left to a marriage partner or civil partner is tax-free, which automatically protects most married couples’ estates.
“What’s great is you can leave any amount of money, property, or assets to your spouse without paying IHT.
“If one spouse dies, the surviving spouse inherits both their own nil-rate band and the deceased spouse’s unused nil-rate band, effectively doubling the tax-free allowance.
“This transferable allowance often means that you only become liable for IHT after both partners have passed away.”
What steps can I take before the Budget to mitigate any future IHT charges?
David says “One way that could still work to your advantage prebudget is gifting some of your wealth from surplus income. Any money gifted from earned income is immediately outside of the estate for tax purposes.
“The one stipulation is that you will need to still be earning. Then the way to do this is to take any surplus from your earned income, not out of your savings. Gifting out of your surplus income is tax free.
“Not a lot of people are aware of this loophole. I’d advise using it if you can now, before it gets closed down.”
Recommended reading:
What about the farm tax introduced in the last budget?
From April 2026, tax will be payable for the first time on inherited agricultural assets worth more than £1m.
Like other assets, there’s no inheritance tax payable on the first £325,000 above that limit, bringing the untaxed total to £1.325m.
The tax due on the amount above that limit would be 20% – half the usual rate.
However, if a farmer is married, they would be able to take advantage of the general exemptions which let them pass assets to their spouse tax-free, or to leave a main residence to children or grandchildren.
That could bring the total untaxed amount for a farming couple to £3m.
