Inheritance Tax (IHT) is a tax charged on the value of a person’s estate when they die. An estate typically includes property, savings, investments, personal possessions and other assets held in the individual’s name.
Under current rules, there is usually no IHT to pay when assets pass to a surviving spouse or civil partner. However, when wealth passes to other beneficiaries, the value of the estate may be assessed for tax.
Allowances and tax rates
Each individual currently has an IHT allowance of £325,000, known as the nil-rate band. Estates valued above this threshold may be subject to tax on the excess.
The standard IHT rate is 40%, although this may reduce to 36% if at least 10% of the estate is left to charity.
In some cases, families may also benefit from the residence nil-rate band, which can provide an additional allowance of up to £175,000 when a main home is passed to direct descendants such as children, stepchildren or grandchildren.
Planning ahead
In some cases, placing assets into trusts may help with passing on wealth while keeping a level of control, but this can be complex.
Planning ahead may help reduce the amount of tax due, but the rules can be complicated. Seeking professional advice can help ensure you understand your options and make informed decisions for yourself and your family.
Reviewing Inheritance Tax planning ahead of 2027
Proposed changes to the IHT treatment of pensions from April 2027 mean it could be a good time to review how pensions fit within your wider estate planning strategy. Under the new rules, unused pension funds may form part of your estate for IHT purposes, which could affect individuals with larger pension pots, particularly those who have traditionally treated their pension as the final asset to draw upon in retirement. This approach – the ‘pension as the last pot’ strategy – may not always be the most efficient option once the changes take effect.
Some people may therefore wish to consider alternative approaches, such as gradually drawing on pension funds during retirement, making use of lifetime gifting allowances, or reviewing how assets are structured and who they will pass to. Couples may also benefit from coordinating their planning to make the most of available allowances. While pensions will remain outside the IHT net until April 2027, reviewing your arrangements now could help ensure your retirement and legacy plans remain aligned with your long-term goals.