UK inheritance tax receipts reached £8.5 billion in the 2025/26 financial year, a record high driven by two factors: rising asset values and the steady freeze of tax thresholds since 2009. More estates are affected each year, and for many families, IHT is no longer a concern reserved for the very wealthy.
For the broader context of multi-jurisdiction estate planning, see our guide on international estate planning. For the financial planning foundation underpinning these decisions, see our hub on financial planning.
In simple terms, if your estate is worth more than the threshold when you die, your beneficiaries may pay 40% tax on the excess.
Inheritance tax is a tax levied on the transfer of wealth from a deceased person's estate to their beneficiaries. In the UK, IHT is charged at 40% on the value of the estate above the nil-rate band threshold of £325,000. The estate includes all assets owned at death: property, savings, investments, business interests, and personal possessions.
The estate also includes certain gifts made in the 7 years before death, and assets in which the deceased retained an interest or benefit (the "gift with reservation" rules). The tax is paid by the estate before assets are distributed to beneficiaries. In practice, beneficiaries may receive significantly less than the gross estate value, particularly where the primary asset is a property that must be sold to fund the tax bill.
Both terms describe taxes on wealth transfer at death, but they operate differently. The UK system is technically closer to an estate tax in practice, despite being called inheritance tax.
| Feature | Inheritance Tax | Estate Tax |
|---|---|---|
| Who pays | Each beneficiary pays on what they receive | The estate pays before distribution |
| Primary examples | UK, Germany, France, Japan | United States (federal), some US states |
| Rate structure | Varies by beneficiary relationship | Flat rate on estate value above threshold |
| Planning implication | Reducing what each beneficiary receives reduces tax | Reducing total estate value reduces tax |
France and Germany apply true inheritance taxes at the beneficiary level, with rates depending on the relationship between deceased and beneficiary. The UAE applies neither. For families with assets in multiple jurisdictions, both types may apply simultaneously, making coordinated planning essential.
Every individual has a nil-rate band of £325,000: the amount that can be passed on free of IHT. This threshold has been frozen since 2009 and is currently frozen until at least 2030. Given house price inflation over this period, a growing proportion of estates exceed this threshold purely because of property values, even where other assets are modest.
An additional allowance, the Residence Nil-Rate Band (RNRB) of £175,000, is available where the family home is passed to direct descendants such as children or grandchildren. Combined with the nil-rate band, this gives an individual a potential IHT-free threshold of £500,000, or £1 million for a married couple, with the ability to transfer unused allowances between spouses.
The RNRB is tapered for estates above £2 million, reducing by £1 for every £2 of estate value above this threshold. For very large estates, it may be fully withdrawn. Careful structuring of the estate can help preserve entitlement to the RNRB where it might otherwise be lost.
Several exemptions allow assets to be transferred free of IHT, either immediately or after a waiting period. Understanding and systematically using these exemptions is the starting point for any inheritance tax planning strategy.
Lifetime gifting is the most straightforward inheritance tax planning strategy, and the most powerful over time. Assets given away during your lifetime reduce the value of your estate and therefore reduce the IHT payable on death.
Gifts made more than 7 years before death are generally exempt from IHT (with the exception of gifts into certain trusts and gifts where a benefit is retained). Gifts made within 7 years of death are known as Potentially Exempt Transfers (PETs) and are tapered back into the estate calculation:
| Years before death | Reduction in IHT rate |
|---|---|
| More than 7 years | 100% exempt |
| 6–7 years | 80% of normal rate |
| 5–6 years | 60% of normal rate |
| 4–5 years | 40% of normal rate |
| 3–4 years | 20% of normal rate |
| Less than 3 years | 0% reduction (full rate applies) |
The practical implication is clear: the earlier you begin a gifting programme, the greater the IHT saving. A gift of £500,000 made more than 7 years before death removes it from the estate entirely. The same gift made one year before death is fully included.
Using the £3,000 annual exemption consistently over 20 years results in £60,000 transferred completely free of IHT. Combined with a spouse's £3,000 exemption and strategic use of the normal expenditure from income exemption, annual gifting can remove significant sums from the estate over time without requiring large one-off transfers.
According to HMRC data, inheritance tax receipts for 2024/25 were £8.2 billion, up from £7.5 billion the previous year. The Office for Budget Responsibility (OBR) forecasts receipts of £8.7 billion for 2025/26, driven primarily by frozen thresholds and rising asset values rather than policy changes.
HMRC — Tax Receipts and National Insurance Contributions (2025) / OBR — Inheritance Tax Forecast (2025)Trusts are one of the most flexible and widely used tools in inheritance tax planning. By transferring assets into a trust, the settlor can remove those assets from their taxable estate, while retaining some degree of influence over how those assets are used by beneficiaries.
Assets transferred into a discretionary trust are no longer owned by the settlor and therefore do not form part of their estate on death. The transfer itself is a Chargeable Lifetime Transfer (CLT) and is subject to IHT at 20% on amounts above the nil-rate band if made during the settlor's lifetime. However, if the settlor survives 7 years after the transfer, no further IHT is payable on that gift.
For family financial planning, trusts serve multiple functions: they protect assets from beneficiaries who may not be financially mature, they can provide for multiple generations, and they give trustees discretion to respond to changing family circumstances.
Trust taxation is complex. Trusts are subject to entry charges, periodic charges every 10 years, and exit charges on distributions. Professional advice is essential before establishing any trust for IHT purposes. The right trust structure depends on the composition of the estate, family circumstances, and the timeframe of the planning.
Business Relief (BR) and Agricultural Property Relief (APR) are among the most valuable IHT exemptions available, and they apply without a 7-year gifting period.
Business Relief provides a 100% reduction in IHT on the value of qualifying business assets. Qualifying assets include:
The relief applies provided the asset has been held for at least 2 years before death. At 100%, Business Relief effectively removes qualifying business assets from the IHT calculation entirely.
AIM-listed shares can qualify for 100% Business Relief after 2 years of ownership, making them an accessible IHT planning vehicle for investors who can tolerate the higher risk associated with smaller company shares. However, the government has signalled potential changes to AIM Business Relief, and the rules should be confirmed with a specialist before relying on this strategy.
APR provides 100% IHT relief on the agricultural value of farmland and farm buildings that have been owned and used for agricultural purposes for at least 2 years. For estates with significant agricultural holdings, APR can remove substantial value from IHT. Where a property has both agricultural and development value, the relief applies only to the agricultural portion; the excess development value may still be subject to IHT.
Charitable giving achieves two objectives simultaneously: it supports causes the donor cares about, and it reduces IHT.
Gifts to registered charities are completely exempt from IHT, whether made during lifetime or on death through a will. There is no cap on the amount that can be given to charity free of IHT. For high-value estates, significant charitable legacies can materially reduce the overall IHT liability while aligning the estate plan with the donor's philanthropic objectives.
Where a deceased individual leaves at least 10% of their net estate to charity, the IHT rate on the remainder of the estate is reduced from 40% to 36%. This creates an incentive effect: by giving 10% to charity, the estate benefits from a lower rate on the remaining 90%. In many cases, the after-tax value received by non-charitable beneficiaries is only marginally lower than it would have been without the charitable bequest.
Life insurance is not an IHT planning strategy in itself. But life insurance written into trust is one of the most practical tools for managing IHT.
A standard life insurance policy pays out to the policyholder's estate on death. If the estate is subject to IHT, the payout forms part of the taxable estate and may itself be subject to 40% tax.
By writing a life insurance policy into trust, the payout is made directly to the trust beneficiaries rather than the estate. It falls outside the estate entirely, passing IHT-free to the named beneficiaries. This one step can preserve the full value of the policy for the intended recipients.
For estates with a known IHT liability, a whole of life insurance policy written into trust can be used to fund the anticipated tax bill. This ensures that beneficiaries receive the intended estate value without having to sell assets to pay the tax. It is particularly effective where the primary estate asset is illiquid, such as a family home or a business interest.
For a detailed exploration of life insurance structures and international portability, see our guides on term life insurance and offshore life insurance.
For individuals with significant wealth and the flexibility to relocate, moving to a jurisdiction that imposes no inheritance tax is a legitimate and increasingly common strategy.
UK IHT applies to the worldwide estate of UK-domiciled individuals. Domicile is a legal concept distinct from residence. It refers broadly to the country you consider your permanent home. A UK national who moves abroad but retains UK domicile remains subject to UK IHT on their worldwide assets.
Acquiring domicile in another country requires demonstrating a genuine intention to make that country your permanent home indefinitely, not merely temporary residence. HMRC scrutinises domicile changes carefully, and the burden of proof lies with the individual claiming to have abandoned UK domicile.
The UAE is one of the most commonly considered destinations for IHT-motivated relocation among UK nationals, for four reasons:
Simply residing in the UAE is not sufficient to escape UK IHT. An individual must also demonstrate that they have acquired UAE domicile, meaning they genuinely intend the UAE to be their permanent home. This is a high bar to clear, and professional legal advice is essential before relying on a change of domicile as an IHT strategy.
For expats considering Dubai as a financial planning base, our guide on personal financial planning covers the broader financial planning implications of international relocation in detail.
Inheritance tax planning is most effective when it begins well before it is urgently needed. The 7-year gifting rule, trust establishment, and domicile change are all strategies that require time to be fully effective. Professional guidance is particularly valuable when:
Our financial planning and wealth management guide covers how to identify and work with qualified financial advisers and estate planning specialists.
Inheritance tax planning is most effective when it starts early. Our advisers work with HNWI families and internationally mobile individuals to build strategies that preserve wealth across generations.
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Inheritance tax planning is the process of structuring your estate during your lifetime to reduce the IHT your beneficiaries will pay when you die. It matters because without planning, up to 40% of your estate above the nil-rate band may be paid to HMRC rather than your intended beneficiaries. At current UK thresholds and asset values, a growing number of estates are affected, including those of families who would not consider themselves particularly wealthy.
There is no single most effective strategy. The right combination depends on the size and composition of the estate, family circumstances, time horizon, and individual objectives. Lifetime gifting (particularly using the 7-year rule), trusts, Business Relief, and life insurance written into trust are the most commonly used tools in combination. Begin Your Journey With Us to discuss a strategy tailored to your estate.
Transferring your home to your children during your lifetime can remove it from your estate for IHT purposes, but only if you no longer live in it. If you continue to live in the property after the transfer, HMRC treats it as a "gift with reservation of benefit" and it remains in your estate. This is one of the most frequently misunderstood areas of IHT planning and can create significant problems if not handled correctly.
The 7-year rule means that gifts made more than 7 years before death are generally exempt from IHT. Gifts made within 7 years are included in the estate calculation and taxed on a tapering basis. The closer to death the gift was made, the higher the effective rate. Gifts made 3 to 7 years before death benefit from taper relief; those made within 3 years are taxed at the full rate. Contact us for guidance on implementing a structured gifting programme.
Not automatically. UK IHT applies to the worldwide estate of UK-domiciled individuals, and domicile is not the same as residency. Moving abroad while retaining UK domicile does not remove the IHT liability on worldwide assets. Acquiring a domicile of choice in another country requires demonstrating a genuine intention to make that country your permanent home indefinitely, a high threshold that requires professional legal advice to establish and document correctly.
