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1. Understand the Inheritance Tax Threshold
In the UK, inheritance tax is only due if the value of the deceased’s estate exceeds the nil-rate band. As of the 2025/26 tax year, this threshold is £325,000. Estates valued below this amount are not subject to inheritance tax. If the estate is valued above this threshold, inheritance tax may be payable on the amount over £325,000, but when considering this you also have to add in any “non-exempt” gifts you have made in the seven years prior to death.
2. Consider the Main Residence Allowance
In addition to the nil-rate band, there is a main residence allowance (also known as the residence nil-rate band) available if the estate includes a home that is passed to direct descendants (children or grandchildren). For the 2025/26 tax year, this allowance is £175,000. This means that if you’re passing on your home to your direct descendants, you can benefit from this additional allowance, potentially increasing the amount you can pass on tax-free. However, if the value of your estate is greater than £2 million, this additional allowance is reduced by £1 for every £2 the £2m threshold is exceeded.
3. Calculate the Total Value of the Estate
To determine if inheritance tax might apply, you need to calculate the total value of the estate.
This includes:
- Property: The value of any real estate.
- Cash: Bank accounts, savings, and investments.
- Personal possessions: Jewellery, antiques, and valuable items.
- Investments: Stocks, bonds, and other financial assets.
- Life insurance: Proceeds from policies, if they are part of the estate.
- Pensions: From 6th April 27, most pension pots will be included within the taxable estate for IHT purposes. This represents a major shift from the current position, where pensions usually fall outside the estate. Individuals should review their pension and estate planning arrangements well ahead of this change to understand how it may affect their beneficiaries.
Once you have the total value, subtract any debts and liabilities to get the net value of the estate.
4. Look into Exemptions and Reliefs
Certain exemptions and reliefs can reduce the inheritance tax liability:
- Spousal Exemption: Transfers between spouses or civil partners are generally exempt from inheritance tax.
- Charitable Donations: If 10% or more of the estate is left to a registered charity, the inheritance tax rate on the rest of the estate can be reduced from 40% to 36%.
- Business and Agricultural Reliefs: If the estate includes business assets or agricultural property, there may be reliefs available to reduce the inheritance tax liability on these assets.
5. Review Lifetime Gifts
Gifts made during a person’s lifetime can also impact inheritance tax. Gifts made more than seven years before death are generally exempt from inheritance tax. However, gifts in excess of the 3,000 annual gifting allowance made within seven years of death need to be included in the assessment but may be subject to taper relief, which reduces the amount of tax payable on them if the gift was made more than three years prior to death and would have attracted IHT in its own right.
6. Be Aware of the Upcoming Change: Pensions to Be Included in the Estate (from 6th April 27)
From 6th April 27, most pensions will be included in an individual’s estate for inheritance tax purposes — a significant change to the current rules.
At present, pensions (particularly defined contribution or personal pension pots) are generally outside the scope of IHT, meaning that any remaining pension funds can usually be passed to beneficiaries free of inheritance tax. This has made pensions a highly effective tool for intergenerational wealth planning.
However, under the new rules proposed to take effect in 2027, most pension savings will be treated as part of the taxable estate for IHT purposes. This means that, when calculating the total estate value on death, the value of your pension fund will be included alongside your property, savings, and other assets.
The implications are far-reaching:
- Potential increase in IHT liability: Many families who previously fell below the IHT threshold could find themselves subject to tax for the first time.
- Reduced efficiency of pension-based estate planning: Pensions will no longer offer the same IHT advantages they currently do.
- Increased importance of proactive planning: Individuals may need to review their retirement and estate plans, consider alternative tax-efficient vehicles (such as trusts or lifetime gifting), and assess how beneficiaries will be impacted.
It’s important to seek advice before 6th April 27 to understand how these changes may affect your personal situation and to explore potential steps to mitigate the impact.
7. Assess Any Potential Tax Liability
If the total value of the estate exceeds the threshold and there are no additional applicable exemptions or reliefs to cover the excess, then inheritance tax may be due. For estates above the threshold, the tax is charged at a rate of 40% on the amount exceeding the nil-rate band, unless the required gift to a registered charity has been included — in which case the rate would be 36%.
8. Consult a Professional
Inheritance tax laws and rules can be complex, and navigating them can be challenging. Consulting with a financial adviser or estate planning specialist can provide clarity and ensure that all potential liabilities are addressed. They can also help with strategies to minimise inheritance tax through effective estate planning and use of exemptions.
Final Thoughts
Understanding whether you or your parents have an inheritance tax liability involves evaluating the value of the estate, considering applicable exemptions and reliefs, and possibly addressing lifetime gifts. With the inclusion of pensions in the estate from 2027, proactive planning will be more important than ever.
By seeking professional advice early, you can better manage potential tax liabilities and ensure that you’re prepared for any financial implications. Effective estate planning can make a significant difference in reducing tax burdens and preserving wealth for future generations.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
SJP Approved: 16/12/2025