What is Inheritance tax​?

Inheritance tax can feel uncomfortable to think about, but it is better to understand it early than leave your family with confusion later. If you own a home, savings, investments, a business, or other valuable assets, inheritance tax may affect how much of your estate is passed on after you die.

In simple terms, inheritance tax is a tax on the estate of someone who has died. Your estate usually includes your property, money, possessions, investments and certain gifts made during your lifetime. The tax is normally paid from the estate before the remaining assets are passed to beneficiaries.

For many people, the main concern is not just whether inheritance tax applies, but whether their affairs are organised clearly. Good planning, tidy records and early advice can make a real difference. If you already receive support with your tax return, accounts or personal finances, it may be worth reviewing your inheritance tax position at the same time.

How inheritance tax works in the UK

Inheritance tax is usually charged at 40% on the part of your estate above the available tax-free thresholds. The standard nil-rate band is currently £325,000 and is frozen until 5 April 2031. The residence nil-rate band is currently £175,000 where a qualifying home is left to direct descendants, such as children or grandchildren.

This means 1 person may be able to pass on up to £500,000 before inheritance tax applies, if they qualify for both allowances. For married couples and civil partners, unused allowances can often be transferred, which may allow up to £1 million to pass on tax-free in the right circumstances.

However, this does not apply automatically in every case. Your estate value, property ownership, beneficiaries, previous gifts and reliefs all matter.

Why more families are paying attention to inheritance tax

Inheritance tax is no longer only a concern for very wealthy families. Rising property prices and frozen tax thresholds mean more estates are being pulled into the inheritance tax net. HMRC inheritance tax receipts reached £8.5 billion for April 2025 to March 2026, which was £0.2 billion higher than the same period the year before.

This is why it helps to look at your full financial picture. If you run a business, own rental property, have savings, or hold investments, inheritance tax planning should sit alongside your wider accounting and tax planning. Services such as company accounts, bookkeeping and financial reports can help you keep a clearer view of what you own and what may form part of your estate.

What is included in your estate?

Your estate can include more than your home and bank balance. It may include:

• Property you own in the UK or overseas.
• Cash savings and bank accounts.
• Shares, investments and ISAs.
• Personal possessions, jewellery, vehicles and valuables.
• Business interests.
• Certain gifts made within 7 years of death.
• From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of a deceased person’s estate for inheritance tax purposes.

If you are a sole trader, partner, shareholder or company director, your business interests should also be reviewed carefully. Business assets may qualify for relief, but the rules are detailed and have changed.

What is the residence nil-rate band?

The residence nil-rate band can give you an extra allowance when you leave a qualifying home to direct descendants. This can include children, grandchildren, stepchildren, adopted children and foster children.

The allowance is currently £175,000. However, if your estate is worth more than £2 million, the residence nil-rate band is gradually reduced by £1 for every £2 above that limit.

This means larger estates may not benefit from the full allowance. If most of your wealth is tied up in property, it is worth reviewing your position early.

How gifts affect inheritance tax

Giving assets away during your lifetime can reduce the value of your estate, but the rules need to be handled carefully.

The 7-year rule means that no inheritance tax is normally due on gifts if you live for 7 years after making them, unless the gift is part of a trust. If you die within 7 years, inheritance tax may still be due depending on the value and timing of the gift. Gifts made within 3 years of death are taxed at 40%, while gifts made between 3 and 7 years may benefit from taper relief.

Common exemptions include:

• Annual exemption of £3,000 per tax year.
• Small gifts of up to £250 per person.
• Wedding or civil partnership gifts within HMRC limits.
• Regular gifts from surplus income, where the conditions are met.
• Gifts between spouses or civil partners, usually free from inheritance tax.

Good records are important. If your executors cannot show what was gifted, when it was gifted and why it was exempt, HMRC may ask further questions.

Can business owners reduce inheritance tax?

Business owners may be able to use Business Property Relief, but you should not assume every business asset qualifies. The type of business, ownership period, structure and asset use all matter.

From April 2026, changes to Agricultural Property Relief and Business Property Relief mean 100% relief applies only up to a £2.5 million allowance per person for qualifying agricultural and business property, with 50% relief applying above that level. Spouses and civil partners may be able to pass on up to £5 million in qualifying assets between them before inheritance tax applies, on top of other allowances.

If you own a company, it may help to review your structure with limited company accountants. If you run a smaller operation, small business accountants can help you understand how your accounts, profits and ownership structure fit together.

Can charity gifts reduce inheritance tax?

Leaving money to charity can reduce the taxable value of your estate. If you leave at least 10% of your net estate to charity, the inheritance tax rate on some assets may reduce from 40% to 36%.

This can be useful if you want to support a cause while also reducing the tax burden on your estate. However, the wording in your will needs to be clear, and your executors need accurate figures.

Why inheritance tax planning should not be left too late

The best inheritance tax planning is usually done before there is pressure. Waiting until illness, retirement, business sale or family dispute can make decisions harder.

You may need to review:

• Whether your will reflects your current wishes.
• How your property is owned.
• Whether previous gifts have been recorded.
• Whether your business structure is still suitable.
• Whether your pension position needs reviewing before 2027.
• Whether your family understands where key records are kept.

If your financial records are spread across emails, spreadsheets and paper files, it may be harder for your executors to manage everything. Using proper QuickBooks accounting support, regular VAT return support where needed, and clear payroll services for your business can make your wider financial affairs easier to understand.

When should you get advice?

You should consider getting inheritance tax advice if your estate may exceed £325,000, you own a home, you have made large gifts, you own a business, you have overseas assets, or you are unsure how your pension may be treated.

You should also review your position after major life changes, such as marriage, divorce, selling a business, buying property, receiving an inheritance, or retiring.

At Asmat & Co Accountants, the focus is on practical advice that helps you stay clear, compliant and prepared. Whether you need support with personal tax, business accounts, bookkeeping or wider financial records, the right guidance can help you understand your position before problems arise.

To discuss your tax and accounting needs, contact Asmat & Co Accountants today and speak to a team that can help you make sense of your numbers with confidence.