Only 4% of estates within the UK pay Inheritance Tax (IHT) and yet people are stressed about what is to come after their death, especially when they have spent so much of their life accumulating their wealth in assets. I am in a privileged situation to know the ins and outs surrounding what governs our inheritance tax rules. Therefore, this article is here to educate those who have no idea whatsoever, as I will look to provide a basic overview of ways to go about protecting yourself from IHT at certain financial thresholds and ways of reducing the size of the estate to benefit from tax loopholes in your will. I will list 3 different scenarios and give a rough guideline on how to navigate the estate planning and protect your loved ones from paying 40%.
Scenario 1: Estate valuation £0-£500,000
If you have an estate value of £500,000, then the tax planning is relatively straightforward. One of the first things to come to terms with is the Nil-Rate Band (NRB), the government guideline for not paying any inheritance tax. The NRB is £325,000 as of 2025/26 so if your estate is worth £325,000 or less then you will not have to pay IHT.
Homeowners benefit from the Residential Nil-Rate Band (RNRB), which is an additional property allowance alongside the NRB. The RNRB is currently valued at £175,000 but you are only eligible for this allowance if the home is given to a direct descendant such as your children, grandchildren, step-children, adopted/fostered children and this applies to only 1 property.
Therefore, every individual in this country who owns a home will have a personal allowance of £500,000 given to them by the government as of 2025/26. Hence, if your estate is worth £500,000 or less then you will pay 0% IHT.
*Although it is worth remembering that the RNRB’s maximum allowance is £175,000, so if your home is valued less than £175,000, then your RNRB allowance will be as much as the net value of the property.
Scenario 2: Estate Valuation £501,000-£1,000,000
For estate valuations above £500,000, there are several things to be aware of, as your estate has now exceeded the government allowance. To benefit from potentially further exemptions, I will break this down into 2 separate subsections;
Married persons/Civil Partners
If you are a Married Person or have a Civil Partner who is UK-domiciled, then your entire estate can be passed on to your partner after your death and be completely exempt from IHT. As of 2025/26 there is no cap on the estate valuation that can be passed on to your partner. So, if your estate is worth £10M you can pass the entire estate to your partner without them needing to pay any IHT. This is called the Spousal or Civil Partner Exemption.
As a result of the exemption, the partner who dies first does not get to use their RNRB and NRB allowances, so this allowance gets passed on to the other partner upon their death. Hence, the total allowance the second spouse receives is £1m. This is calculated as £500,000 (individual’s RNRB + NRB allowance) + £500,000 (spouse’s Transferred NRB+Transferred RNRB allowance) = £1M (Total allowance).
*Note the Spousal & Civil Partner exemption does not apply to cohabitants.
Non-Married Persons
If you are unmarried or divorced, then you do not benefit from the spousal exemption, so you must find other ways to reduce the taxable estate. One of the ways to do this is through a Partially Exempt Transfers (PET), and this allows an individual to make gifts of unlimited value, which will be exempt from IHT in the event the person making the gift survives 7 years from when the gift is made. The gift can be a transfer of cash or transferring your land (e.g house) to someone else, essentially ways in which you are trying to reduce the value of the estate to not pay IHT.
However, if you have transferred your house to anyone else then you must not retain a benefit within the property. The PET won’t begin if you are receiving a benefit and this is called the Gift with Reservation of Benefit (GROB). So if you gift the property to your child and continue to enjoy it rent-free then HMRC will not exempt this for IHT purposes. Hence, if you choose to stay in the property you gift to your child or anyone else you must pay rent at the market rate.
Scenario 3: Estate Valuation of over £1,000,001
With estate valuations over £1M ways to reduce your IHT outlay remain the same, and these are primarily done through PETs. Since house prices are increasing by the year it’s unlikely the NRB and RNRB allowance is sufficient, therefore it is advisable to reduce the taxable estate by gifting parts of your estate to your direct descendants or people you desire to benefit from your will. Although this is contingent on you surviving 7 years after the gifts are made the UK government does offer a taper relief for PETs.
Taper Relief on PETs
When the gifts are made, there is no IHT due at the time of the transfer and the gift will remain exempt if the donor survives 7 years, but if the donor does not survive the 7 years then the gift will be chargeable.
If the donor dies within 3 years, IHT is charged at the full rate (40% charged)
Transfer made 3-4 years before death (32% charged)
Transfer made 4-5 years before death (24% charged)
Transfer made 5-6 years (16% charged)
Transfer made within 6-7 years (8% charge)
More than 7 years - No tax
Charity Exemptions
Another way wealthy people benefit from IHT is to donate more than 10% of their taxable estate to charity and this lowers the IHT to 36%. Furthermore, any gifts made to charity are totally exempt from IHT.
Marriage Exemptions/Annual Exemption
The UK government allows people to benefit from gifts made to someone in consideration of marriage and exempts them for IHT purposes. If you are a parent who wishes to gift your child for marriage purposes then you have a £5,000 allowance on your gift. You have a £2,500 allowance if you gift your grandchildren and £1,000 to any other person. Marriage gifts within the threshold limit are not PETs, therefore you do not need to survive 7 years after it is made to benefit from IHT.
Furthermore, every individual benefits from the annual exemption of £3,000 available (and potentially the prior tax year exemption if not used) and this as of 2025/26 protects people from paying Capital Gains Tax and this also applies after death.
RNRB tapered allowance on estates worth over £2M
The £2 million threshold in the UK’s Residence Nil Rate Band (RNRB) is a taper threshold that reduces the RNRB by £1 for every £2 that an estate exceeds £2 million. If an estate is worth £2.35 million or more, the full RNRB of £175,000 is lost, as is any transferable RNRB for the surviving spouse. Hence, to protect yourself from not losing this allowance requires careful estate planning to ensure the estate is worth below £2M.
Ultimately, IHT planning can be daunting and not many want to plan for what will happen after they die but doing some research on this topic makes it easier on your loved ones. I hope this basic overview helps those who are struggling to start and need to seek guidance from others.