What is the inheritance tax threshold for 2025?

The inheritance tax nil-rate band is £325,000 for 2025, frozen until 2030. Additionally, there's a residence nil-rate band of £175,000 for family homes passed to direct descendants, giving a potential £500,000 total allowance per person.

What is the inheritance tax rate?

Inheritance tax is charged at 40% on estates above the nil-rate band. However, the rate reduces to 36% if the estate leaves 10% or more to charity.

Do I need to worry about inheritance tax?

With house prices rising and thresholds frozen, more families are affected. If your estate (including property, investments, and possessions) could exceed £325,000 (£500,000 with residence allowance), you should consider IHT planning.

How can I reduce inheritance tax?

Key strategies include: making lifetime gifts (£3,000 annual exemption), setting up trusts, charitable giving, using business/agricultural reliefs, and considering life insurance to cover IHT bills.

Inheritance Tax Calculator: Will Your Estate Pay IHT? (2025 Guide)

Worried about inheritance tax? With house prices rising and the nil-rate band frozen until 2030, more families are being dragged into the inheritance tax net. What was once a tax for the wealthy is now affecting ordinary homeowners, especially in areas where property values have soared.

Understanding whether your estate will face inheritance tax and what you can do about it is crucial for protecting your family's financial future.

Inheritance Tax Basics 2025

Inheritance tax (IHT) is charged at 40% on estates above certain thresholds:

Nil-Rate Band

Individual allowance: £325,000
Married couple: £650,000 (transferable)
Rate above threshold: 40%
Frozen until: April 2030

Residence Nil-Rate Band

Individual allowance: £175,000
Married couple: £350,000
Condition: Family home to direct descendants
Tapered: Reduces for estates over £2m

Combined Allowances

For married couples passing their family home to children or grandchildren:

Maximum combined allowance: £1,000,000
Single person maximum: £500,000
Effective IHT-free amount: Higher than many expect

What's Included in Your Estate?

Your estate for IHT purposes includes everything you own:

Assets Included

Your home and any other property
Bank and building society accounts
Investments (shares, bonds, ISAs)
Life insurance policies
Personal possessions (cars, jewelry, art)
Business assets and shares
Money owed to you

Deductions Allowed

Outstanding mortgages
Other debts and loans
Funeral expenses
Professional valuation costs
Gifts to UK charities
Gifts to spouse/civil partner (if UK domiciled)

IHT Calculation Examples

Example 1: Single Person, £400,000 Estate

Estate value: £400,000

Nil-rate band: £325,000

Taxable amount: £75,000

IHT due: £75,000 × 40% = £30,000

Example 2: Married Couple, £800,000 Including Family Home

Estate value: £800,000

Nil-rate bands: £650,000

Residence nil-rate bands: £350,000 (home passed to children)

Total allowances: £1,000,000

IHT due: £0 (estate below allowances)

Example 3: Large Estate, £1.5m, With Charity Gift

Estate value: £1,500,000

Charitable gift: £150,000 (10% of estate)

Reduced taxable estate: £1,350,000

Allowances: £1,000,000

Taxable: £350,000

IHT due: £350,000 × 36% = £126,000

(36% rate due to charitable giving)

The Residence Nil-Rate Band Explained

This additional allowance is complex but valuable:

Qualifying Conditions

Family home: Must be your main residence
Direct descendants: Children, grandchildren, step-children
Close inheritance: Passed directly to descendants
Downsizing protection: Available even if you sell and downsize

Tapering for Large Estates

The residence nil-rate band reduces for estates over £2 million:

Reduction rate: £1 for every £2 over £2m
Complete loss: At £2.35m for single person, £2.7m for couples
Planning opportunity: Lifetime gifts to stay under taper

Inheritance Tax Planning Strategies

1. Lifetime Giving

The most effective way to reduce IHT:

Annual Exemptions

Annual gift allowance: £3,000
Wedding gifts: £5,000 (child), £2,500 (grandchild)
Small gifts: £250 per person per year
Regular gifts from income: Unlimited if from surplus

Seven-Year Rule

Potentially exempt transfers: No limit on gifts
Seven-year survival: Gifts become exempt
Taper relief: Reduced rates if death within 7 years
Annual exemption first: Use £3,000 allowance first

2. Trust Planning

Discretionary trusts: Flexibility for beneficiaries
Life interest trusts: Income for spouse, capital for children
Pilot trusts: Small trusts to use nil-rate bands
Professional advice essential: Complex area with tax implications

3. Business and Agricultural Relief

Business Property Relief: 100% relief on qualifying business assets
Agricultural Property Relief: 100% relief on farmland
AIM shares: Potentially qualifying for business relief
Two-year ownership: Minimum holding period usually required

Calculate Your Estate Planning Impact

Use our calculator to see how inheritance planning affects your family's finances:

Life Insurance for IHT

Life insurance can provide funds to pay inheritance tax:

Types of IHT Insurance

Term insurance: Cheaper, covers specific period
Whole of life: Guaranteed payout, higher premiums
Joint policies: Cover both spouses, pay on second death
Trust ownership: Keeps proceeds outside estate

Cost-Benefit Analysis

Insurance makes sense when:

Illiquid estates: Property-rich, cash-poor situations
Business assets: Avoid forced sales to pay tax
Equalizing inheritances: One child gets business, others get insurance
Certainty: Guaranteed funds regardless of investment performance

Common IHT Planning Mistakes

Mistake 1: Leaving It Too Late

Many IHT strategies require time to be effective. The seven-year rule for gifts means planning needs to start early.

Mistake 2: Giving Away Too Much

Don't impoverish yourself to save tax. Keep enough for your own needs and potential care costs.

Mistake 3: Ignoring Domicile Rules

Non-UK domiciled individuals have different rules. Seek specialist advice if this applies.

Will Writing and Estate Planning

Essential Will Provisions

Nil-rate band discretionary trust: Preserves both spouses' allowances
Residence nil-rate band optimization: Ensure qualification conditions met
Charity bequests: Consider 10% threshold for reduced rate
Regular reviews: Update for law changes and family circumstances

Powers of Attorney

Essential for IHT planning:

Financial LPA: Allows continued gifting if you lose capacity
Health and welfare LPA: Decisions about care and treatment
Gift clauses: Specific authority for inheritance tax planning

Future Changes to Watch

IHT rules may change:

Rate changes: Political pressure to reform the tax
Threshold adjustments: Frozen until 2030, but what then?
Residence nil-rate band: Complex rules may be simplified
Gift rules: Annual exemptions unchanged since 1980s

Planning for Uncertainty

Flexible structures: Trusts that can adapt to rule changes
Regular reviews: Annual check of plans and assumptions
Professional advice: Specialists can navigate complex rules
Family communication: Ensure everyone understands the plan

Inheritance tax planning is about more than just saving tax – it's about ensuring your wealth transfers to the next generation in the most effective way possible. With thresholds frozen and property values rising, more families need to consider IHT planning than ever before.

Use our calculator above to estimate your potential inheritance tax liability and explore different planning strategies.