Understanding Inheritance Tax (IHT)

Your taxable estate

Careful planning can reduce or even eliminate any IHT payable when you pass away.

Without appropriate provision, IHT at 40% could become payable on any portion of your taxable estate which exceeds the Nil Rate Band (NRB). The NRB is currently £325,000 and is fixed at this amount until 5th April 2030.

Your taxable estate consists of any assets that you owned, your share of any assets that were jointly owned, and your share of any assets that pass automatically by survivorship.

Outstanding debts and funeral expenses can be deducted from the value of your estate.

Your interest in the family home

From 6th April 2017, an additional Residence Nil Rate Band (RNRB) allowance was introduced. The RNRB gives you an additional £175,000 if you leave your interest in the main family home to direct descendants (such as children, stepchildren and/or grandchildren). This potentially increases your total IHT allowance to £500,000.

Set up a trust

As part of your IHT planning, you may want to consider putting assets into trust – either during your lifetime or under the terms of your Will. A trust enables you (the donor) to control who benefits from your estate, and under what circumstances – sometimes long after your death. By contrast, if you were to make a direct gift to someone, you have no control over what they do with it once given.

Family Trusts can be useful as a way of reducing IHT, making provision for your children and spouse, and potentially protecting a family business.

A trust is a legal arrangement. You will need to appoint ‘trustees’ who will be responsible for holding and managing the trust assets on behalf of and in the best interest of the beneficiaries, in accordance with terms set out in the trust deed.

Leave a portion to charity

Being generous to your favourite charity can reduce your IHT bill. If you leave at least 10% of your estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36%, rather than 40%.

As always, when considering complex financial matters such as this, it makes sense to seek sound advice from a regulated financial professional before taking action.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

The Financial Conduct Authority does not regulate advice on taxation, Trusts, Estate Planning or Will writing.

FP2025-144 – Last updated March 2025