Inheritance Tax (IHT) is a tax on the value of someone’s estate when they die. An estate includes money, property, possessions, and certain gifts made in the seven years before death.
There is usually no tax to pay if:
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The estate is worth less than the Nil Rate Band (NRB)
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Anything above the NRB is left to a spouse or civil partner
Anything above the available allowances is usually taxed at 40%, or 36% if at least 10% of the estate is left to charity.
What is a Nil Rate Band (NRB)
The NRB is the amount you can pass on before IHT is charged.
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It is currently £325,000, frozen until April 2028
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If someone dies and hasn’t used their full NRB, the unused portion can be transferred to their spouse or civil partner
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This can increase the total allowance for the surviving partner to £650,000
Residence Nil Rate Band (RNRB)
The RNRB is an additional allowance when a home is left to a direct descendant (children, step‑children, adopted or foster children).
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It is currently £175,000, also frozen until 2028
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It tapers away once an estate exceeds £2 million, and disappears completely above £2.35 million
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If the property is worth less than the RNRB, only the property value can be used
What Counts as Part of an Estate
HMRC will value your estate on death and will typically include:
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Savings and investments
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Property and possessions
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Certain gifts made within seven years of death
A simple example: If an estate is worth £600,000 and includes a home worth £300,000, both the NRB (£325,000) and RNRB (£175,000) may apply. Taxable amount: £600,000 − £325,000 − £175,000 = £100,000 IHT due: 40% of £100,000 = £40,000.
Legislative Change from April 2027: Pensions and IHT
From April 2027, pensions will no longer sit outside a person’s estate for IHT purposes. Under the new rules:
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Unused pension funds may be included in the value of an estate when calculating IHT
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This means pension savings could increase the total estate value and potentially push it above the NRB or RNRB thresholds
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The change is designed to bring pensions in line with other forms of wealth and reduce the use of pensions purely as an inheritance planning tool
This shift makes it more important for individuals to understand how their pension benefits are structured, who they are nominated to, and how this interacts with their wider estate planning.
How can I reduce or mitigate an IHT liability?
There are several ways people can reduce the impact of IHT during their lifetime, including:
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Making a valid Will
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Gifting assets to family or others
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Using trusts
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Making regular gifts from surplus income
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Leaving money to charity
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Taking out life insurance
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Spending assets during their lifetime
The options that are available can be confusing and it is therefore essential that you receive the correct financial advice before making a decision.
Aside from inheritance, Lovewell Blake can help you with all aspects of personal financial planning.
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