UK Inheritance Tax Warning: Could Your Family Owe 40%?

Why More Families Are Facing IHT Than Ever

Inheritance tax was once considered a tax on the wealthy. That is no longer the case. With property values across the UK rising sharply over the past decade and the tax-free threshold frozen at £325,000 since 2009, a growing number of ordinary families are finding themselves exposed to a 40% tax bill they never anticipated.

HMRC collected a record £7.5 billion in inheritance tax receipts in 2023-24, a figure that has been climbing steadily. The Office for Budget Responsibility projects that IHT receipts will continue rising as more estates are dragged above the threshold by property price inflation alone.

If you own a home in most parts of England and the South East, there is a real chance your estate could exceed the nil rate band. This guide explains how inheritance tax works, who actually pays it, and what you can do to protect your family.

Understanding the IHT Thresholds

Inheritance tax is charged at 40% on the value of your estate above the nil rate band. The key thresholds are:

• Nil rate band (NRB): £325,000. This is the basic tax-free amount. It has not changed since 2009 and is frozen until at least April 2030.
• Residence nil rate band (RNRB): £175,000. This additional allowance applies when you leave your main home to direct descendants (children, grandchildren, stepchildren). It has been frozen since 2020.
• Combined individual threshold: £500,000. If you qualify for both the NRB and RNRB, your total tax-free amount is £500,000.
• Married couple threshold: up to £1,000,000. Married couples and civil partners can transfer any unused NRB and RNRB to the surviving spouse, giving a potential combined threshold of £1 million.

It is important to understand that the RNRB only applies if you leave your home to direct descendants. If you leave everything to a sibling, friend, or charity, you do not get the RNRB. And if your total estate exceeds £2 million, the RNRB begins to taper away at a rate of £1 for every £2 above that threshold.

Who Actually Pays Inheritance Tax?

IHT is paid by the estate, not by the beneficiaries personally. The executors of the will (or the administrators if there is no will) are responsible for calculating the tax due, filing the return with HMRC, and paying the bill before distributing the remaining assets.

In practice, this often means the family home or other assets must be sold to fund the tax payment, or beneficiaries need to arrange financing to cover the bill while waiting for assets to be liquidated.

The tax is due within six months of the end of the month in which the person died. Interest is charged on late payments. For property and certain other assets, HMRC allows payment in instalments over 10 years, but interest applies to the outstanding balance.

How Property Values Push Families Over the Threshold

The average UK house price is now above £290,000. In London and the South East, average prices are significantly higher. Even in areas traditionally considered affordable, many family homes now carry a value that, when combined with savings, investments, and personal possessions, pushes the total estate above £325,000.

Here is how quickly the numbers add up for a typical family:

• Family home: £350,000
• Savings and ISAs: £45,000
• Car, jewellery, and personal possessions: £15,000
• Life insurance (not in trust): £50,000
• Total estate: £460,000

For a single person without the RNRB, this estate faces IHT on £135,000 at 40%, producing a tax bill of £54,000. For a widow or widower who has inherited their spouse’s unused NRB, the threshold rises to £650,000 and no tax would be due.

The critical factor is whether you are married, whether you have children (for the RNRB), and whether your spouse has already used part of their nil rate band on previous gifts or trusts.

Exemptions and Reliefs You Should Know About

Several important exemptions can reduce or eliminate your IHT liability:

• Spouse and civil partner exemption. Transfers between spouses are completely IHT-free, with no limit on the amount.
• Annual gift exemption. You can give away £3,000 per tax year without it counting towards your estate. If you did not use the previous year’s allowance, you can carry it forward for one year, giving a potential £6,000.
• Small gifts exemption. You can make unlimited gifts of up to £250 per person per tax year, as long as you have not used another exemption for the same person.
• Wedding and civil partnership gifts. You can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else as a wedding or civil partnership gift.
• Gifts from surplus income. Regular gifts made from your income (not your capital) are exempt from IHT with no annual limit, provided you can demonstrate that you maintained your usual standard of living after making the gifts.
• Charity exemption. Gifts to qualifying charities are fully exempt. If you leave at least 10% of your net estate to charity, the IHT rate on the rest drops from 40% to 36%.
• Business and agricultural property relief. Qualifying business assets and farmland can receive 50% or 100% relief, though this is changing from April 2026.

The Seven-Year Rule for Gifts

Any gifts you make during your lifetime that are not covered by the exemptions above are called Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls completely outside your estate.

If you die within seven years, the gift is brought back into your estate for IHT purposes, but taper relief applies:

• 0-3 years: 40% tax rate (no reduction)
• 3-4 years: 32%
• 4-5 years: 24%
• 5-6 years: 16%
• 6-7 years: 8%
• 7+ years: 0% (fully exempt)

This means that early gifting is one of the most effective IHT planning strategies, but it requires you to genuinely give up control of the asset. You cannot, for example, gift your home to your children and continue living in it rent-free.

What You Can Do Right Now

If you think your estate may be approaching or exceeding the IHT threshold, there are several practical steps to consider:

1. Get an accurate picture of your estate value. Add up your property, savings, investments, pensions (from April 2027), life insurance, and personal possessions. Our free estate assessment tool can help.
2. Write or update your will. Without a valid will, your estate is distributed according to intestacy rules, which may not be tax-efficient. Ensuring your will is structured to make full use of both the NRB and RNRB is essential.
3. Start a gifting programme. Making regular use of your annual gift exemptions and surplus income exemption can significantly reduce your estate over time.
4. Put life insurance in trust. A life insurance payout written in trust does not form part of your taxable estate and can provide your family with immediate funds to cover any IHT bill.
5. Review your pension strategy. With pensions entering the IHT net from April 2027, the order in which you draw down your assets may need to change.
6. Take professional advice. For estates significantly above the threshold, or those involving business assets, agricultural property, or trusts, specialist advice is essential.

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If you want a more detailed picture, our estate assessment tool walks you through your assets step by step and highlights the specific planning opportunities available to you.

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