In brief
- UK Inheritance Tax (IHT) is charged at up to 40% on a person's estate when they die and on certain lifetime transfers.
- Since 6 April 2025, the rules on who pays IHT changed fundamentally, ending the non-dom regime and replacing it with a residence test.
- With the right planning, IHT liability can be mitigated.
What is Inheritance Tax and why does it matter?
IHT is a tax on a person's estate at the time of their death and on certain lifetime transfers. The applicable rate is up to 40% over and above the nil rate band (currently £325,000). Given the high rate of tax and relatively modest threshold, proactive inheritance tax planning is essential for high net worth individuals and families.
Do I have to pay it?
UK situs assets (such as UK property, shares in UK companies and UK bank accounts) are generally subject to IHT regardless of the residence status of the individual who owns them. Historically, offshore structures have been used to “block” IHT exposure by converting UK situs assets into non-UK assets. However, anti-avoidance rules now significantly limit their effectiveness in relation to UK residential and agricultural property.
From 6 April 2025, the rules determining who is assessed to IHT changed dramatically and a new residence-based test replaced the previous domicile-based rules. Under the new rules, a person's worldwide estate is subject to IHT if they have been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises, in which case they are known as a "long-term resident" (LTR). An individual can also be LTR if they have been UK resident for the previous ten consecutive tax years.
If an LTR leaves the UK, their worldwide estate remains within the charge to IHT for up to 10 years after departure (the 10-year tail). However, special transitional rules can apply giving people a shorter IHT tail if they were non-UK domiciled and deemed domiciled on 30 October 2024 and they were non-UK resident from 6 April 2025.
When is IHT payable?
As noted above, the standard rate of IHT is 40% on death, subject to the reliefs and exemptions outlined below.
IHT can also be levied on lifetime gifts or transfers as below:
- Transfers into trust and certain companies: Lifetime gifts of UK assets or any assets gifted by an LTR into a trust or certain companies may be subject to an immediate IHT charge of 20% over and above the available nil rate band.
- Trust charges: Assets subject to IHT within a trust are subject to periodic (10 year) and exit charges at a maximum rate of 6%. There is also an exit charge of up to 6% if a formerly LTR settlor becomes non-LTR.
- Gifts to individuals: Gifts to individuals are generally treated as potentially exempt transfers (PETs) and fall outside the scope of IHT if the donor survives the gift by seven years. If the donor does not survive the full seven years, taper relief on the IHT rate applies after three years. This assumes the donor is not caught by other anti-avoidance rules known as the 'gift with reservation of benefit' rules.
Are there any reliefs and exemptions?
There are certain reliefs and exemptions available to reduce the amount of IHT payable:
- The IHT-free threshold (the nil-rate band) is £325,000 per individual and married couples (and civil partners) can combine their allowances, giving a potential joint nil-rate band of £650,000.
- Residence Nil-Rate Band (RNRB): relief of an additional £175,000 is available if the person's Principal Private Residence is left to a direct descendant. Tapering applies for estates above £2 million to reduce the applicable RNRB by £1 for every £2 the estate exceeds £2 million such that the RNRB is no longer available for estates worth £2.35 million and over.
- Spouse / civil partner exemption: assets transferred between spouses during lifetime or on death are 100% exempt from inheritance tax, which can be a powerful planning tool. However, if one spouse is LTR and the other spouse is non-LTR the full spouse relief may not be automatically available.
- Charitable donations: If at least 10% of the deceased's net estate is donated to qualifying charities, a reduced IHT rate of 36% applies to the balance of the net estate.
- Business Property Relief (BPR) and Agricultural Property Relief (APR): As of 6 April 2026, business assets and agricultural assets up to £2.5 million respectively can qualify for 100% relief from IHT. The value of business/agricultural assets in excess of the £2.5 million threshold can qualify for a 50% relief from IHT.
- Annual gifting exemptions: A person can give away £3,000 per year (plus one year's unused carry-forward), and up to £250 per person as small gifts, without any IHT consequences.
Planning Considerations
We can assist with strategies to structure your estate in an IHT efficient manner, including lifetime gifting, transfers into trusts, and preparing an appropriate will to make full use of available reliefs.
For any queries arising from this article, please contact a member of the Private Wealth & Tax team.