Inheritance Tax

Understanding Inheritance Tax (IHT)

Inheritance Tax (IHT) is a tax charged on the estate of someone who has died. While it was once regarded as a tax affecting only the very wealthy, rising property prices mean an increasing number of families are now brought within its scope — often without realising it.

Our summary

40% Tax Rate payable above your personal allowance
£325,000 - The amount any individual can pass on free of IHT
£1M - Effective couples IHT threshold.
£175,000 - potential additional allowance per individual
40% Tax Rate payable above your personal allowance
Spousal exemption, assets pass without IHT charge.

Key Features

IHT FAQ's

Can I avoid Inheritance Tax?

Yes, avoidance of IHT is legal as long as the correct pathways are followed such as gifting, making use of your allowances etc. Evasion of IHT, as with all other taxes is illegal.

Is IHT charged on 1st death?

This depends on how your planning is structured and what your relationships are to those to whom you are leaving assets to. Seek detailed, specific advice to be certain of your position

What is the 7 year rule?

The 7 year rule is how IHT is calculated on larger gifts that are made during your lifetime. Those that are potentially exempt from tax, depending on how much time has passed between the gift being made, and the death of the gifting party.

IHT FAQ's

Can I avoid Inheritance Tax?

Yes, avoidance of IHT is legal as long as the correct pathways are followed such as gifting, making use of your allowances etc. Evasion of IHT, as with all other taxes is illegal.

Is IHT charged on 1st death?

This depends on how your planning is structured and what your relationships are to those to whom you are leaving assets to. Seek detailed, specific advice to be certain of your position

What is the 7 year rule?

Important Note on Pensions (from April 2027)

Important Note on Pensions
(from April 2027)

Pension funds are currently outside of your estate for IHT purposes. From April 2027, unused pension pots will be brought within the scope of IHT. If you have significant pension savings, early planning is strongly recommended.

How can I reduce my IHT bill?

Key areas to consider

Lifetime Gifting

Gifting directly from your estate to your loved ones is an effective way to reduce the overall value of the estate prior to death.

Tax advice should be sought on all gifting as there are meaningful differences between the types of gifts that can be made and the tax risk they carry.

Specialised Trusts

Trusts can play an important role in IHT planning — particularly for amounts above the Nil Rate Band.

A Discretionary Trust allows assets to be held outside of your estate while retaining an element of flexibility over who ultimately benefits. However, trust taxation is complex and professional advice is essential.

Allowances

There are a range of annual and one off allowances for gifts to be made free of any IHT implications.

Annual gifting can be done up to £3,000. Various small gifts can be made to different individuals up to £250.

Wedding/ Civil partnership gifts can be made to children, grandchildren and great-grandchildren.

The 7 Year Rule

What it is, why its important.

How it works

What is the 7 year rule?

If you make a large gift during your lifetime to someone (not your spouse) then this would be classes as a PET (Potentially Exempt Transfer).

The key word here is potentially
On death, the gift can become exempt on two potential conditions.

1 - The entire estate is valued under your personal IHT allowances on death.

2- Or, if 7 years have passed since the date when the gift was made.

If conditions 1 or 2 are met, the gift would qualify as exempt, no inheritance tax is due.

Where this becomes complex

Risks and issues

The first and most obvious issue arises if the gifting party passes before the 7 year timespan has completed.

In this instance, the executors would need to see if condition 1 is met, as it may be the case that even considering the gift as part of the deceased assets, the overall estate value falls below the individuals tax allowances and incurs no IHT as a result.

If condition 1 cannot be met, further investigation is required into how long the gift has been made, what value is placed on the gift and what potential tax may be owed.

The 7 year timeline

Taper relief

If a gift is deemed to be taxable, there is a calculation required to understand the value to be placed on the IHT due.

From the moment the gift is made, the clock is ticking and over some years the rate scales down as such. This is known as taper relief.

Survives 0-3 years, 100% IHT charged
Survives 3-4 years, 80% IHT charged
Survives 4-5 years, 60% IHT charged
Survives 5-6 years, 40% IHT charged
Survives 6-7 years, 20% IHT charged

Survives 7 or more years, the gift has fallen out of the estate entirely and no IHT is charged.

If a gift is deemed to be taxable, there is a calculation required to understand the value to be placed on the IHT due.

Survives 7 or more years, the gift has fallen out of the estate entirely and no IHT is charged.

How it works

What is the 7 year rule?

2- Or, if 7 years have passed since the date when the gift was made.

If conditions 1 or 2 are met, the gift would qualify as exempt, no inheritance tax is due.

Where this becomes complex

Risks and issues

If condition 1 cannot be met, further investigation is required into how long the gift has been made, what value is placed on the gift and what potential tax may be owed.

The 7 year timeline

Taper relief

If a gift is deemed to be taxable, there is a calculation required to understand the value to be placed on the IHT due.

Survives 7 or more years, the gift has fallen out of the estate entirely and no IHT is charged.

If a gift is deemed to be taxable, there is a calculation required to understand the value to be placed on the IHT due.

Survives 7 or more years, the gift has fallen out of the estate entirely and no IHT is charged.

Gifting with reservations

How use impacts IHT & other considerations

(GROB)

Gifts with Reservation of Benefit

In this instance, a gift of a classic car has been made. However, the gifting party wishes to be able to still retain use of the car and keeps the car at home in their garage.
By doing this, they are "reserving the benefit" of the item.
This is known as a Gift with Reservation of Benefit (GROB)

The only transfer that has happened is one on paper, and materially the party who technically owns the vehicle has no direct use or full control of the item.

For tax purposes, this would be treated as if the gift had never been made in the first place. It would form part of the gifting parties estate for the IHT calculation and could therefore incur IHT against the value of the item, if the estate breaches the maximum IHT threshold for the individual.

However, if the gifting party fully releases the gift, resigning access and utility of the item, this could now be considered a PET, the 7 year rule would then apply as if it were any other type of Potentially Exempt Transfer.

Inheritance Tax

Understanding Inheritance Tax (IHT)

Understanding Inheritance Tax (IHT)

40% Tax Rate payable above your personal allowance

£325,000 - The amount any individual can pass on free of IHT

£1M - Effective couples IHT threshold.

£175,000 - potential additional allowance per individual

40% Tax Rate payable above your personal allowance

Spousal exemption, assets pass without IHT charge.

Key Features

IHT FAQ's

IHT FAQ's

Important Note on Pensions (from April 2027)

Important Note on Pensions
(from April 2027)

Pension funds are currently outside of your estate for IHT purposes. From April 2027, unused pension pots will be brought within the scope of IHT. If you have significant pension savings, early planning is strongly recommended.

How can I reduce my IHT bill?

Key areas to consider

Lifetime Gifting

Specialised Trusts

Allowances

The 7 Year Rule

What it is, why its important.

What is the 7 year rule?

Where this becomes complex

The 7 year timeline

What is the 7 year rule?

Where this becomes complex

The 7 year timeline

Gifting with reservations

How use impacts IHT & other considerations

Gifts with Reservation of Benefit

Take the complexity away from IHT

Get in touch for guidance

Take the complexity away from IHT

Take the complexity away from IHT

Get in touch for guidance

Get in touch for guidance

Speak to an advisor about Inheritance Tax today

Speak to an advisor about Inheritance Tax today