Who actually pays it

Inheritance tax (IHT) is charged on a deceased person's estate — property, savings, investments and possessions — but only above generous thresholds, and the large majority of estates fall below them. The headline rate on the excess is 40% (reduced to 36% where at least 10% of the net estate goes to charity).

The thresholds that do the work

  • Nil-rate band — £325,000. Every estate gets this much free of IHT. It has been frozen at this level for years, which quietly pulls more estates into scope as asset prices rise.
  • Residence nil-rate band — up to £175,000 extra when a home (or downsizing proceeds) passes to children or grandchildren. It tapers away for estates over £2 million.
  • Spouse/civil partner exemption — unlimited. Assets passing between spouses and civil partners are exempt entirely, and any unused bands transfer to the survivor. A couple leaving a family home to children can therefore pass on up to £1 million before IHT starts.

Gifts and the seven-year rule

Gifts you make while alive can leave your estate — eventually. Most outright gifts to people are "potentially exempt transfers": survive seven years from the gift and it's outside your estate; die sooner and it's counted back in (with taper relief reducing the tax on large gifts after year three). On top of that, some gifts are immediately exempt:

  • £3,000 a year ("annual exemption", one unused year can carry forward)
  • Small gifts of up to £250 per person per year
  • Wedding gifts within set limits (£5,000 to a child, less for others)
  • Regular gifts from surplus income — genuinely unlimited if they're habitual, from income rather than capital, and leave your standard of living intact. Powerful, underused, and demands meticulous records.

The classic mistake

Giving away the house but continuing to live in it rent-free doesn't work — it's a "gift with reservation of benefit" and stays in your estate. Schemes promising to dodge this rule are a recurring source of expensive failure.

Pensions, insurance and other moving parts

  • Pensions: historically, unused DC pension funds usually sat outside the estate. Announced rules bring unused pension funds into IHT scope from April 2027 — a major planning change; check the current position when it matters to you.
  • Life insurance in trust: a policy written in trust pays out beyond the estate, quickly, without waiting for probate — often free to arrange and routinely overlooked.
  • Charitable legacies: exempt, and a large enough one cuts the rate on the rest of the estate to 36%.

Where advice fits

Estate planning is classic regulated-advice territory: the sums are large, the rules interact (gifts, trusts, pensions, the residence band taper), and mistakes surface only when it's too late to fix them. Substantial estates, business assets, blended families or anything involving trusts are strong signals to pay for proper advice — see do I need a financial adviser? and vet any firm with the toolkit. Solicitors and accountants also play roles here alongside financial advisers.

Common questions

How much can you inherit before paying tax in the UK?
There's no tax on receiving an inheritance as such — IHT is charged on the estate before distribution. Estates pay nothing below the nil-rate band (£325,000), rising to as much as £1 million for a couple passing a family home to children or grandchildren, thanks to the residence band and spouse exemption transfers.
Do I pay inheritance tax on money left by my spouse?
No — transfers between spouses and civil partners are wholly exempt, and the deceased's unused allowances transfer to the survivor, doubling what the second estate can pass on tax-free. Unmarried partners get none of this automatically, however long the relationship — a major reason cohabiting couples take estate planning (and wills) seriously.
Can my parents just give me money to avoid inheritance tax?
They can give any amount at any time — the question is what happens if they die within seven years, when large gifts get counted back into the estate. Annual exemptions, wedding gifts and regular gifts from surplus income leave the estate immediately. Receiving the gift is not itself taxable for you.

Sources and further reading

GOV.UK — inheritance tax · GOV.UK — gifts and exemptions · MoneyHelper — estate planning

About this guide: general education only — not regulated advice, tax advice or a personal recommendation, and FinancialAdvisor.co.uk is not an FCA-authorised firm. Thresholds and rules are those commonly applying at the time of review, change with Budgets, and depend on circumstances. For estate planning decisions, consult an FCA-authorised adviser and, where relevant, a solicitor or tax specialist.