A guide to inheritance tax planning
Inheritance tax and planning for your family’s future
Inheritance Tax is worked out when someone dies. But the choices you make during your lifetime, including gifts, can affect the value of your estate and the tax that may be due.
Inheritance Tax is just one part of planning for your family’s future. It is also important to make sure you have enough money to live the life you want, both now and later.
Before making gifts or changing your plans, think about your income, future living costs and possible care needs. This can help you avoid giving away money you may need yourself.
What our Life100+ research tells us
People want to support the people they care about. But they also need to protect their own future.
- 8 in 10 people expect to pass on wealth through an inheritance or gifts made during their lifetime.
- 50% of people who had made, or planned to make, a gift wanted to make a positive difference whilst they were alive.
- Only 24% said reducing Inheritance Tax was a reason for giving.
This shows that Inheritance Tax matters, but it is not the only reason people make gifts. People also need to think about when support could help most, and how much they can safely afford to give.
What is inheritance tax?
When someone dies, they may leave behind a home, money, savings, investments and belongings. Together, these are called their estate. The value of their estate is worked out after any debts, bills and funeral costs have been paid.
Inheritance Tax is a tax that may need to be paid from the estate before it is shared with family or friends.
The person dealing with the estate is often called an executor. They pay any debts and tax, then give what is left to the people who inherit.
When inheritance tax may be due
Inheritance Tax is usually due only if the estate is worth more than the available tax-free allowance.
Most people have a tax-free allowance of £325,000, known as the nil-rate band. Inheritance Tax is usually due only on the value above this amount. The usual rate is 40%.
There may be an extra tax-free allowance if the person leaves their home to their children or grandchildren. This extra allowance is worth up to £175,000, which could bring their total tax-free allowance to £500,000.
If someone leaves money or property to their husband, wife or civil partner, there is usually no Inheritance Tax to pay at that time. Any unused allowance may pass to the surviving partner. This means a couple may be able to leave up to £1 million without Inheritance Tax, if they meet the rules.
The extra allowance for a home becomes smaller if the estate is worth more than £2 million. It is usually lost if the estate is worth £2.35 million or more.
You can find out more about if your estate qualifies for Inheritance Tax at GOV.UK.
Money or property left to a charity is usually free from Inheritance Tax.
What may form part of an estate?
To work out whether Inheritance Tax may be due, add up the value of everything the person owned when they died.
This can include:
- their home, other property or land
- money in bank and savings accounts
- shares and investments
- business interests
- cars, jewellery and other belongings
- life insurance payouts
- items owned with someone else
- some gifts made before death.
You can usually take away debts, such as mortgages, loans, unpaid bills and reasonable funeral costs.
For valuable property, businesses, land, art or collections, you may need a professional valuation.
Who has to pay?
Inheritance tax is paid by your personal representatives. If you have a will, it’s usually the executor who arranges the payment. If you don’t have a will, it’s the administrator of your estate who will arrange payment.
When does it have to be paid?
Any inheritance tax has to be paid by the end of the sixth month after your death. In some cases, such as when your estate has items that may take time to sell, like a house, it’s possible to arrange to pay the tax in instalments over a period of up to 10 years, but the amount will have interest added to it.
HMRC can ask to see records up to 20 years after the inheritance tax has been paid, so it’s important to keep good records.
What other taxes could apply?
Inheritance Tax is not the only tax to think about when a person dies. You may also need to consider:
| Tax | Tax rate |
|---|---|
| Income Tax | If an estate or inherited asset produces income, such as rent or dividends. |
| Capital Gains Tax | If an inherited asset is sold for more than it was worth when the person died. |
| Tax on pension benefits | This can depend on the type of pension, who receives it and the rules at the time. |
What is changing for pensions?
From 6 April 2027, unused pension money and some pension death benefits are due to count as part of an estate for Inheritance Tax.
This could increase the value of an estate and the tax due.
If you have pension savings, it is worth checking:
- who you have named to receive pension benefits
- whether your will still reflects your wishes
- whether your family could have enough cash to pay any tax due
- whether your wider plans still work for you.
What are the rules for gifts?
Some gifts are free from Inheritance Tax straight away.
- You can give up to £3,000 each tax year.
- You can give small gifts of up to £250 per person.
- You can give wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
- You can make regular gifts from your income, if you can still meet your normal living costs.
- Gifts to a husband, wife, civil partner or charity are usually free from Inheritance Tax.
You can give more than these amounts. However, larger gifts may count towards your estate if you die within seven years of making them so make sure you keep a record of any significant gifts.
Different rules can apply if you give away property, shares or put money into a trust.
You should get financial advice before making a significant gift, giving away property or shares, or putting money into a trust.
How the seven-year rule works
Larger gifts may count towards your estate if you die within seven years of making them.
If Inheritance Tax is due on a gift, the amount of tax may reduce the longer you live after making it.
| Years between making the gift and death | Tax rate |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| Over 7 years | Usually 0% |
The rates only apply if tax is due on the gift. Not every gift made within seven years will be taxed.
Can trusts help with Inheritance Tax planning?
A trust is one way to hold money, property or investments for other people. It can give you more control over who receives assets, when they receive them and how they can use them.
For example, a trust may be useful if you want to provide for children, grandchildren or someone who needs extra support managing money.
Inheritance Tax is usually worked out when someone dies. If assets are genuinely given away and you no longer benefit from them, they may not form part of your estate. This could reduce the Inheritance Tax due when you die.
However, a trust does not automatically reduce Inheritance Tax. Depending on the type of trust, tax may be due when assets are put into it, every ten years or when money or assets are paid out. There may also be Income Tax, Capital Gains Tax, costs and paperwork to consider.
You must get financial advice before choosing or setting up a trust. A regulated financial adviser can help you decide whether a trust is suitable for your family, your future plans and the level of control you want to keep.
So should I give money now or leave an inheritance later?
Neither option is right for everyone. The best thing you can do is to speak to a professional.
Financial advice is not only for people with significant wealth or those ready to make a large gift. An adviser can help you understand your options, consider the needs of the wider family, and create a plan that can adapt as circumstances change.
Important information
This information is intended as a general guide only and is not personal financial, legal or tax advice. Consider taking appropriate financial, legal or tax advice before making decisions about retirement, savings, investments, gifting, inheritance, estate planning or family support.