A guide to UK inheritance tax Rules, thresholds and strategies to reduce your IHT liability - 25/26 tax year

Inheritance tax rules for married couples and charitable giving

If an individual leaves their estate to their spouse, civil partner or a charity, there is no inheritance tax applied whatsoever. You can effectively leave an unlimited amount of money to your husband or wife without inheritance tax being levied.

It’s also important to be aware that any unused nil rate band on the first death within a married couple, or civil partnership, can be transferred to the surviving spouse.[3] Although, you can only inherit double the allowance, so it won’t continue to accumulate if you are unfortunate enough to be widowed for a second time.

If charity is important to you, and you leave at least 10% of your estate to registered charities, the 40% inheritance tax charge will be reduced to 36% for the remainder of your estate.[4] This can be an effective way to reduce your inheritance tax burden whilst also making a positive impact on the world.

Inheritance tax on property

In 2017, the government introduced the ‘residence nil rate band’, which is a superb benefit for homeowners. The residence nil rate band is an additional £175,000 that can be added to your standard nil rate band when you are passing on a property to direct descendants such as children. It can only be applied to one property, and the property must have been a residence of the deceased.[5]

However, when totalled, the impact on your overall inheritance tax position is significant. If you are married, or in a civil partnership and you both own a property, you can effectively pass on £1 million of assets to your direct descendants entirely free of inheritance tax. This can get a little complicated though and the rules start to alter for estates above £2 million, so it’s best to seek advice if you fall into this category.

Inheritance tax and gifting

Gifting can be a great way to reduce your inheritance tax liability. Everyone has an annual gifting allowance which means they can give away £3,000 a year without any IHT implications.[6] There is also a phenomenal wrinkle in the tax system that few people make use of effectively, known as ‘gifts out of excess income’. As long as you can evidence that you are making a gift regularly and out of earned income (that you otherwise didn’t need), you can gift an unlimited amount completely tax-free. And finally, a gift of absolutely any size will fall out of your estate after seven years, which is unusually generous compared to other tax jurisdictions. Although do bear in mind that there are slightly different rules if the gift is made to a trust as opposed to an individual.

It’s why, if control isn’t important to you, gifting can be a great option. Before even considering gifting though (or any other methods to reduce your inheritance tax liability), do ensure you have carried out a cash flow plan with an adviser to determine that you have enough funds to meet your own needs first.

You can find out more about gifting in our article Smart gifting strategies for inheritance tax planning | Saltus.

Inheritance tax pension rules changes

In the 2024 Autumn Budget, the government published draft legislation proposing that unused defined contribution pension funds will be included in an individual’s estate for inheritance tax purposes from 6 April 2027.[7] This marks a significant shift from the current rules, where pensions typically sit outside the IHT net and can be passed on tax-efficiently, especially if death occurs before age 75.

Under the proposed changes, the unused value of a pension at death will be subject to the standard 40% inheritance tax rate, although safeguards will prevent full double taxation. Beneficiaries will be able to offset income tax on withdrawals by claiming a deduction for any IHT already paid. While these reforms remain in draft form, they could have an impact on estate planning strategies. Once these changes are finalised, it is important to review your approach and seek professional advice.

You can read more about the proposed changed in our article Pension reforms proposed for 2027 : What you should know… | Saltus.

How to value your estate

To calculate the value of an estate for Inheritance Tax purposes, start by listing all assets and determining their market value at the date of death. Assets include property and land, money in bank accounts, jewellery, cars, shares, insurance policy payouts, some trust assets such as Immediate Post-Death Interest in Possession Trusts and IPDIs, and jointly owned items.[8] As mentioned, from April 2027 most unspent pension pots and death benefits will also form part of the estate, meaning their value will be combined with other assets when assessing liability.

Next, deduct any debts and liabilities, such as mortgages, household bills, credit card balances, and funeral expenses. However, costs incurred after death, like solicitor’s or probate fees, cannot be deducted.

Most gifts made within seven years before death should be included, and in some cases, you may need to look back 14 years. Gifts with reservations of benefit, such as giving away a home but continuing to live in it, also count towards the estate.

Keep detailed records of valuations, such as estate agent reports, as HMRC can request evidence for up to 20 years after IHT is paid. Given the complexity, professional advice is strongly recommended to ensure accuracy and compliance.

Stay up to date

So, with the inheritance tax threshold impacting more and more people in the UK, make sure you keep an eye on all the rules and how they could apply to your estate. Inheritance tax continues to be rampant in the headlines, so remaining informed is vital.