Until it affects you directly, you may not know what inheritance tax fully means or how to approach it. Heppenstalls solicitors are experts in IHT as well as other tax-specific protocols. In this blog post, we’ll walk you through what inheritance tax is in the UK and how it works, giving you the ability to plan ahead for you and your loved ones.
What is inheritance tax?
Inheritance tax is a tax on the estate of someone who has passed away. The estate can include the property, money and possessions of the person. It is paid out of the estate before the remaining assets are given to the beneficiaries of the deceased person. However, not every estate will owe inheritance tax if there are certain thresholds and exemptions in place.
How much is inheritance tax?
For the 2024-2025 tax year, inheritance tax is 40% of the estate’s value over the tax-free threshold (known as the nil-rate band). The nil-rate or tax-free threshold is £325,000 per person (as of May 2025). For estates below £325,000, this means there is no inheritance tax owed.
There are some additional allowances to note:
Residence Nil-Rate Band (also known as RNRB)
If a home is left to the children (or other direct descendants) of the deceased, then the estate may qualify for an extra allowance of up to £175,000.
Spouse or Civil Partner Exemption
Estates left to spouses or civil partners are exempt from inheritance tax.
Charity Exemption
Any gifts from the estate to charity organisations are also exempt from inheritance tax.
How is inheritance tax calculated?
This can depend on many factors like marital status, estate value and allowances applied.
For example, a single person with an estate worth £500,000 will receive the £325,000 nil-rate band, leaving £175,000 of the estate taxable at the current 40% inheritance tax rate. Therefore, £70,000 of the estate would be billed as inheritance tax before the rest of the value of the estate went to beneficiaries.
If the estate was left to their children or grandchildren, the person who owns the estate could apply for the RNRB of £175,000, which would raise the estate’s threshold to £500,000 (£325,000 + £175,000). This would mean no inheritance tax would be billed from the estate.
When and how is inheritance tax paid?
The responsibility of paying the inheritance tax falls to the executor of the will (or administrator). All IHT should be paid within six months of the death of the person. If not paid, interest may be charged on any tax amount that is unpaid. However, IHT can also be paid in instalments if the estate includes property or non-liquid assets.
How can you reduce inheritance tax?
You can reduce the amount of inheritance tax through different legal methods.
Gifting: You can gift assets or money away from the estate each year tax-free.
Trusts: You can place assets into a trust to reduce the taxable value of the estate.
Charity: If you leave at least 10% of the estate’s value to charity, you can reduce the IHT rate from 40% to 36%.
Life Insurance: Life insurance policies written in trust can help you cover the IHT bill without increasing the estate amount.
Investments: There are certain types of business shares which may qualify for 100% relief from inheritance tax by way of Business Property Relief.
Why get professional support for inheritance tax?
Navigating estate planning and inheritance tax can be very complex, with rules changing over time. Heppenstalls solicitors are here to provide expert advice and help plan your estate effectively, helping you to save costs wherever possible. If you would like to discuss inheritance tax planning, will writing, and estate planning, contact our team today for tailored, supportive advice.