One of the big talking points of the last budget was inheritance tax – and rumours abound of further tweaks at next month’s set piece by the chancellor.
So what are the current rules?
First up, for those who don’t know, inheritance tax is a tax on someone’s “estate” when they die – ie, a tax on any money, possessions or property left behind.
It’s often called “the most hated tax” in the UK – but only around 4% of estates are actually affected by it, meaning most of us will never end up paying it at all.
When do you have to pay inheritance tax?
Inheritance tax is due when you leave an estate valued above a certain threshold to your loved ones when you die.
There is no tax if your estate’s value is below the £325,000 threshold or you leave your estate to your spouse or civil partner, or an exempt charity or group.
The tax is currently charged at 40% – but only on the part of the estate that lies above the threshold. For example, if someone’s estate is worth £400,000 when they die, then £75,000 of that estate would be taxed at 40% (£30,000 total tax).
Bear in mind that if you are married or in a civil partnership, any allowance you don’t use can be added to your partner’s allowance when they die.
This means a couple actually can pass on as much as £1m without their estate being subject to inheritance tax (we’ll explain this maths shortly).
Passing on a home
The rules are largely the same when it comes to passing on a home when you die.
If you’re giving it to your spouse or civil partner there’s no tax to pay, though it’ll count towards the value of the estate if it is being passed to another person in your will.
However, if you fully or partially own your home, your tax-free threshold can increase to £500,000 (which, multiplied by two partners, explains the £1m figure above) if you leave it to your children or grandchildren, or your estate as a whole is worth less than £2m.
There’s normally no tax to pay if you hand over the home before you die and live for another seven years or more.
When is the tax due, and how is it paid?
Inheritance tax is due within six months after the donor’s death. If it’s not paid by this time, the amount to be paid will start accruing interest according to the Bank of England’s base rate.
Funds from the estate are used to pay the tax to HM Revenue and Customs. This will be done by the person dealing with the estate, known as the “executor” if there is a will.
Are there any reliefs or exemptions?
You may be able to claim relief on gifts you give while you’re alive which are eligible to be taxed after your death.
A “taper relief” comes into effect if you lived for a certain number of years after giving the gift. The gifts are taxed on a sliding scale ranging from 32% if you lived for three to four years, to nothing if you lived for seven or more years.
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your “annual exemption”.
There are other reliefs available too:
- Small gift allowance: This lets you give as many gifts of up to £250 per person as you want throughout the year – you’ll just need to make sure you haven’t already used any other allowance on the same person;
- Weddings and civil partnerships: If you want to help out someone who’s getting hitched, you can give up to £5,000 to a child, £2,000 to a grandchild or £1,000 to any other person, tax free;
- Regular payments: You can make tax-free payments to someone to help with their living costs, so long as you can afford the payments after meeting your monthly living costs and it comes from your regular monthly income.
What changes have been made?
Rachel Reeves announced several changes to inheritance tax rules in last year’s budget.
One of the key announcements was that the £325,000 threshold we explained at the start of the post will be extended for a further two years until 2030, after remaining unchanged since 2009.
The chancellor also said inherited pensions, which are currently not counted for inheritance tax purposes, will be included from April 2027.
But perhaps the most notable announcement – and the one that’s caused the most uproar – is the change for combined business and agricultural assets, such as farms.
Although there will continue to be no inheritance tax on such assets worth less than £1m for now, from April 2026, those worth more than that will be taxed at an effective rate of 20%.
The announcement was met with anger from rural communities, with warnings the change could lead to food price rises and would have a “catastrophic” impact on family farms.