The financial advisers at YorWealth are here to make managing your money simple. In this guide, we talk you through all the things you need to know about inheritance tax to help you prepare for your family’s future.
What actually is inheritance tax?
Inheritance tax is the mandatory fee applicable on a person’s estate after their death. What that means in real terms, is that the value of their money, property, and all their belongings will be totalled up after they die. Then, if that’s over the government’s threshold, a percentage of the total will be taxable, and must be subtracted before and beneficiaries receive their share.
Thresholds and Allowances
Tax thresholds and allowances are industry speak for the amounts a person can have before they become eligible to pay tax on it. Your tax threshold is a standardised limit that determines which tax rate band you fall into, and therefore what percentage you need to pay.
In the UK, the standard rate of inheritance tax is 40%. This applies to the portion of the total sum of the estate that is over the tax-free threshold, which for 2026 is £325,000. This tax-free threshold is called the nil-rate band, and there are certain allowances that can increase the amount you can inherit before paying any tax.
If you are leaving your main home to your children or grandchildren (including adopted, fostered or stepchildren), you automatically qualify for what’s called the residence nil-rate band, which gives an additional £175,000 to your threshold before IHT is applied. That means for 2026, your descendants can get £500,000 in inherited property before tax applies, provided your estate is worth less than £2 million.
Married couples can also transfer their unused allowances to their surviving spouse. That means, if none of the decease’s personal allowance has been used before their death, the living partner can increase their own nil-rate band to £650,000. This request must be sent the HMRC within 2 years of their passing for it to qualify.
Reductions and Exemptions
If you’re looking for ways to increase your tax efficiency while still making sure you and your family meet the legal requirements, there are several options available to you.
When leaving money or assets to a charity, there is no tax to pay on their value. Additionally, the tax rate on the rest of your estate drops from 40% to 36%, provided your charitable donation is more than 10% of your estate’s total value.
In every tax year, you can give away some money or assets free of inheritance tax. Called your ‘annual exemption’, you can give away up to £3000 worth of gifts each year without them counting towards the total value of your estate. This can be given to one person or split between several people.
You might also be familiar with the seven-year rule which allows gifts or money, property or possessions to be tax-free, provided you live for at least 7 years after making them. If you pass away within 7 years, there may be tax to pay, but how much depends on the amount of time since they were given and if the value exceeds the tax-free threshold. Within three years, the 40% IHT may be applicable, and after three years, a ‘taper relief’ is calculated, with the percentage of tax charged decreasing as the number of years since the gift was given increases.
If you have set up a trust for your beneficiaries, they might also be eligible for inheritance tax. How much will depend on the type of trust set up and covers all assets, including money, shares, houses and land. Some trusts have initial inheritance tax charges of 20% when they’re set up, and there can be exit charges of 6% when your beneficiaries take assets out of the trust. Trusts are also eligible for 10 year anniversary fees, typically 6% on anything over the threshold.
Let’s talk tax!
We’ve included an overview of the key things you need to be aware of when it comes to inheritance tax in this guide. If you want to discuss the specifics of your estate, we’d be delighted to help.
Our independent financial advisers are very experienced in supporting our clients to efficiently manage their tax liabilities. If you want to see how you can best protect your family’s financial future, please get in touch.