Depending on the arrangements you make, inheritance tax could take a sizeable chunk out of your estate, leaving less for your loved ones. But it’s possible to reduce the amount owed – or have no inheritance tax in some cases.
Here, we look at:
What is the inheritance tax-free threshold?
The good news is, you may not be liable for inheritance tax if:
If your estate is worth less than the tax-free threshold (£500,000) and you’re married or in a civil partnership – any unused allowances (NRB and RNRB) on your death can potentially be added to your partner’s tax-free allowance to use on their death.
The value of any tax benefits described will depend on your individual circumstances and tax rules could change in the future. Tax-free means free of IHT.
Inheritance tax is paid on all your UK and international assets if you’re UK domiciled. If you’re domiciled outside the UK but have assets in the UK , you may be liable for inheritance tax on them.
It's possible to be deemed domicile in the UK if you've been a resident in the UK for 15 out of the 20 tax years. The rules for non-domiciled individuals will be changing with effect from the 6 April 2025. From this date, the concept of domicile is to be replaced by a residence-based regime for the purposes of IHT.
On a practical level, the amount needed to pay the inheritance tax is usually paid by the executor of the will. If there isn’t a will, the administrator of the estate will do this.
It’s important to note that inheritance tax is due within 6 months after death. The tax needs to be paid before ‘grant of probate’ is issued, which will allow the executor or administrator to dispose of the assets.
It can be paid for with money remaining in your bank account after your death, or any money which has been left to cover the bill, or paid by the executor or administrator and then reclaimed once probate is granted.
The executor or administrator can distribute what’s left of the estate once the tax and any debts are paid and the grant of probate has been issued. The executor will need to show the grant of probate to be able to sell any assets or transfer their ownership.
Your loved ones will have 6 months after your death to pay the inheritance tax. At the end of the 6 month period, if it’s not been paid, HMRC will start charging interest.
You can read more about paying your inheritance tax bill on gov.uk.
If the total value of your estate is more than your tax-free threshold, then the amount that sits above the threshold will usually be liable for tax at a rate of 40%.
For example, let’s say your estate is worth £800,000 (which includes your residential property worth £200,000) and you want to leave it all to your children. If your tax-free threshold is £500,000 (£325,000 of your NRB plus £175,000 of your RNRB), there will be an IHT bill of £120,000 – that’s 40% of £300,000.
To work out the value of your estate:
Reducing your inheritance tax isn’t as simple as just giving your estate away before you die. Any money gifted usually counts as part of your estate and may be taxed – if you die within 7 years of making the gift. Therefore, it’s important to plan how you want to pass on your wealth early.
If you think you may be liable for inheritance tax, here are some ways you can reduce it:
Normally no tax is due on charitable donations. If you leave at least 10% or more of your net estate to charity, you could reduce the rate of inheritance tax from 40% to 36%.
The first £3,000 given away each tax year is not subject to inheritance tax when you die. If you don't give away £3,000 in one year, you can carry that allowance forward and give away £6,000 in the next tax year.
Inheritance tax applies to your assets. However, if you regularly give money from your income, such as your pension or earnings, it’s not included – as long as it leaves you enough income to maintain your lifestyle.
Currently, most pensions don’t count as part of your estate for inheritance tax purposes.
If you’ve got a defined contribution pension, you can nominate anyone – your spouse, children, grandchildren or even friends – to inherit your remaining fund. That way, the money could go to your loved ones without having to pay inheritance tax. Although they may pay income tax depending upon how old you are when you die.
Please note – from 6 April 2027, most unused pension funds and death benefits will be included within the value of a person's estate for inheritance tax purposes, as announced in the Autumn Budget 2024.
If you have a life insurance policy, writing it into a suitable trust, so it goes straight to your beneficiaries, will remove it from your estate for inheritance tax purposes. Contact your life insurance company to ask if they can help with this as many will be able to arrange for a trust document to be written.
Estate and tax planning is complicated, and much will depend on your individual circumstances. It can be worth getting advice to help you make the right decisions for your situation.
If you have over £100,000 in savings and investments, and hold an HSBC current or savings account, we can offer you a wide range of financial advice – from protecting your family to passing on your wealth. Please note, fees apply.
If you prefer, you can find a specialist estate and tax planning adviser in your area through the MoneyHelper’s Retirement Adviser Directory.
Planning for what you want to happen after you die is an important task that could save your loved ones thousands of pounds. If you haven’t done so already, it’s important to make a will so your wishes are known. It could make the world of difference to your family’s future and even future generations.
This article was last updated: 08/05/2025, 10:27
