What is Inheritance Tax (IHT)? – Meaning
- Inheritance Tax (IHT) is a UK tax paid on the value of a person’s estate (property, money, possessions, investments, etc.) when they die.
- It can also apply to certain gifts made during a person’s lifetime, especially if they die within 7 years of making the gift.
- The tax is intended to raise revenue from wealth transfers, but it only affects estates above set thresholds.
🏠 Thresholds & Allowances (2025)
- Nil-Rate Band (NRB):
- Everyone has a £325,000 tax-free allowance.
- Anything above this is usually taxed at 40%.
- This allowance is frozen until 2028, so more estates are dragged into paying (fiscal drag).
- Residence Nil-Rate Band (RNRB):
- Extra allowance of £175,000 if you leave your main home to direct descendants (children, grandchildren, step-children).
- Can be combined with the NRB → total potential allowance per person = £500,000.
- Married couples/civil partners can transfer unused allowances → up to £1 million tax-free per couple.
📊 How IHT Works (Example)
- Estate value = £800,000
- NRB = £325,000
- RNRB (if home left to children) = £175,000
- Taxable estate = £300,000 (£800k – £500k)
- Tax at 40% = £120,000 IHT due
🎁 Lifetime Gifts and the “7-Year Rule”
- Gifts made during your lifetime are normally exempt if you live for 7 years after giving them.
- If you die within 7 years:
- They may be taxed, but “taper relief” reduces tax after 3 years.
- Example: 40% if within 3 years, reducing gradually to 8% if between 6–7 years.
- Annual exemptions:
- £3,000 per year (can carry forward one year)
- Small gifts (£250 per person, unlimited recipients)
- Wedding gifts (£5k from parent, £2.5k from grandparent, £1k from anyone else)
💼 Reliefs
- Business Property Relief (BPR): Up to 100% relief on shares or business assets.
- Agricultural Property Relief (APR): Up to 100% relief on farmland and agricultural buildings (but see new changes below).
🔑 2025 Budget Changes to IHT
- Non-Dom Regime Abolished (April 2025):
- Previously, “non-domiciled” individuals could avoid UK tax on foreign assets.
- Now, long-term residents must include worldwide assets in IHT.
- Transitional relief: Temporary Repatriation Facility (TRF) allows overseas income/gains to be brought into the UK at 12% (rising to 15% in 2027/28).
- Agricultural Estates Reform (April 2026):
- Farms/estates over £1m will face a new 20% IHT charge on the excess (instead of 0% relief).
- Payable in instalments over 10 years.
- Future Proposals Under Review:
- Lifetime gift cap – possible new limit on how much can be gifted tax-free.
- 7-year rule reform – taper relief may be scrapped.
- Wealth tax debate – taxing ultra-wealthy estates/assets directly is being considered.
💷 Who Pays the Tax?
- Usually paid by the executor of the estate from the estate’s assets.
- If tax is due on a gift, the recipient may be responsible.
📈 IHT Receipts & Impact
- Forecast to raise £9.1bn in 2025–26.
- More families will be caught due to frozen thresholds and rising property values.
