What is Inheritance Tax?

Inheritance Tax, or IHT, is a tax imposed on the value of a person’s UK estate when they pass away. In England and Wales, estates above £325,000 are taxed 40%, unless these are left to a spouse, civil partner, charity, or a local amateur sports club. Additional allowances may apply if it’s passed to direct descendants, with thresholds increasing to £500,000.

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The majority of estates in England and Wales are not large enough to incur Inheritance tax, with only 16% of house sales above £500,000 and 2.8% over £1M in 2024. However, you should still consider it when making your will. Large estates can cost loved ones thousands of pounds in inheritance tax, but there are ways to reduce it.

Inheritance tax is the tax you pay on the ‘estate’ of someone who has passed away. How much you pay depends on the value of the deceased person’s estate, based on assets. This can be cash in the bank, property or business, investments, vehicles, and payouts from life insurance, excluding debts.

Inheritance tax from your estate is paid to HM Revenue and Customs (HMRC) by the “executor” or the person dealing with the estate.

You won’t have to pay inheritance tax if:

• The value of the estate is below £325,000
• You leave everything over £325,000 to your spouse, civil partner, a charity, or a community amateur sports club.

However, if the above doesn’t apply, anything over the £325,000 threshold will be taxed at 40% when you die. This can be reduced to 36% if you leave at least 10% of the value after deductions to charity.

While the current inheritance tax thresholds are frozen until April 2031, you have to realise that property values increase over time. Your property may be held liable for inheritance tax by then.

It is also important to note that your beneficiaries (the people you leave your estate to) don’t usually pay tax on things they inherit. But they may still have to pay related taxes, even if the estate is below the threshold. For example, if they receive rental income from a house left to them in a will.

What is the purpose of the inheritance tax?

The inheritance tax is designed to redistribute income so it can be returned to the state and distributed for the benefit of all. It focuses on taxing higher-value or large estates while allowing individuals to pass on assets efficiently through exemptions and reliefs.

What matters is how inheritance tax applies when leaving your property to beneficiaries.

Leaving your home to descendants

If you were to leave your home to your children (including adopted, foster, or stepchildren) or grandchildren, the inheritance tax fee could be lower, depending on the total value of the estate.

The £325,000 basic inheritance tax allowance still applies; however, a £175,000 ‘residence nil-rate band,’ otherwise known as a ‘main residence’ band, is applied on top as an additional allowance as long as you own your home or have a share in it. Therefore, your children or grandchildren won’t have to pay tax on the first £500,000. This will only take place if the estate is worth less than £2M. If the value of the estate is over £2M, then the main residence band decreases by £1 for every £2 above £2M.

The main residence band doesn’t apply if the estate has been left in a discretionary will trust, even if the beneficiaries of the trust are your children or grandchildren.

Leaving your home to a spouse or civil partner

Spouses or registered civil partners are completely exempt from inheritance tax on assets left to them so long as they are living in the UK.

Plus, if your estate is worth less than the £325,000 threshold, any unused threshold can be added to your partner’s threshold when you die.

Giving your home away before you die

If you give your home away, move out and live for a further seven years, there is usually no inheritance tax to pay. If you plan to continue living in the property after giving it away, you will need to:

• Pay rent to the new owner at the same rate as similar local rental properties
• Pay your share of the bills
• Live there for at least seven years

If these conditions are not followed through with, then it will count as a ‘gift with reservation’, a gift you still benefit from, and the property will be added to the value of your estate when you die.

You will not have to pay rent to the new owners, for example, if you transferred ownership of the house to a relative and continue to live in it, provided both of the following apply:

• You only give away part of your property
• The new owners also live at the property.

If you die within seven years of giving away all or part of your property, then your home will be treated as a gift, and the government’s 7-year rule will apply. The amount of tax due after your death depends on when you made the gift. Gifts that are given in the three years before your death are taxed at 40%; any gifts given after this are taxed on the ‘taper relief’ scale.

Rate of tax and the years between gift and death:

• 32% on 3-4 years
• 24% on 4-5 years
• 16% on 5-6 years
• 8% on 6-7 years
• 0% on seven years or more

How is inheritance tax on a gift paid

The estate usually pays for any inheritance tax that is due on gifts unless you give away more than £325,000 in gifts in the seven years before you pass away. If you give away more than £325,000, anyone who received a gift from you in those seven years will have to pay inheritance tax on their gift.

New Rules and Changes (2026 and Beyond)

Recent government updates reveal the growing importance of inheritance tax planning, especially if you have pensions, business, or agricultural assets.

Business and Agricultural Property Relief Update (From April 2026)

From 6 April 2026, business and agricultural property will continue to receive 100% inheritance tax relief. However, this is limited to a combined total of £1 million.

Values above this threshold will only get 50% relief. This means large estates may be liable for inheritance tax.

Pensions and Inheritance Tax (From April 2027)

From 6 April 2027, unused pension funds and death benefits will be added as part of your estate, at least for inheritance tax purposes. This means pensions can no longer be considered as a tax-efficient way to pass on wealth.

Frozen Threshold Until 2031

Inheritance tax thresholds are not expected to change until April 2031. This includes:

• Nil-rate band of £325,000
• Residence nil-rate band of £175,000
• Taper threshold of £2 million

However, as property prices and asset values rise, more estates may exceed these thresholds even before April 2031.

What This Means For Property Owners

Inheritance tax remains the same until April 2026. After that, there are changes that could affect how estates and assets will be taxed when the owner passes on.

If you own a high-value property, pension, or business asset, you need to review your estate planning strategy to minimise the effect of inheritance tax on your loved ones. Find out how you can protect what you pass on to your beneficiaries.

To find out more about inheritance tax and how the team at Muve can advise you when it comes to leaving a property in a will, don’t hesitate to get in touch or get a free quote.