Inheritance Tax Made Simple: What You Need to Know

Inheritance Tax (IHT) is one of those topics that often sparks worry. People sometimes think it means losing a huge portion of their hard-earned wealth, but the reality is more nuanced. With the right knowledge and a clear plan, you can make sure more of your estate goes where you want it to — to your loved ones and the causes you care about.

But like many aspects of tax and financial planning, there’s a lot of misinformation, misunderstandings and red herrings around inheritance tax. Some IHT schemes that are promoted online can be ineffective, costly and sometimes come with significant drawbacks, so it’s essential to get good advice from a reliable and knowledgeable professional. Here’s a brief guide to the basics.

Please note: The figures quoted here are correct as at September 2025 but are subject to changes in legislation.

What Is Inheritance Tax?

Inheritance Tax is charged on the estate someone leaves behind when they die. Your estate includes everything you own — your home, savings, investments, and personal possessions.

You’ll only pay IHT if the value of your estate goes above a certain amount, known as the threshold.

Thresholds and Allowances

• Standard threshold: £325,000. If your estate is worth less than this, there’s no IHT to pay.
• Home allowance: If you leave your home to your children or grandchildren, the threshold can rise to £500,000 – although for larger estates over £2 million, this additional allowance can be reduced down to zero.
• Couples: Married couples and civil partners can combine allowances, meaning together you could pass on up to £1 million tax-free.

How Much Is Inheritance Tax?

The standard rate is 40%, and it only applies to the part of your estate above the threshold.

For example, if your estate is £500,000 and your threshold is £325,000, IHT is charged on £175,000. So your £500,000 estate would be liable to pay tax of (£175,000 x 40% =) £70,000.

Leave at least 10% of your estate to charity, and the rate may reduce to 36%.

Who Pays It?

The estate pays the tax before anything is passed on. Usually, the executor or administrator of the will is responsible for arranging this.

What’s Included in Your Estate?

• Your home and any other properties
• Savings and investments (including ISAs)
• Some pensions (from 2027 onwards)
• Personal possessions
• Certain gifts made in the seven years before death

Gifts and Taper Relief

• You can give away £3,000 a year without it being counted for IHT.
• Larger gifts may still count if you die within seven years of giving them, but the tax reduces the longer you live after making the gift — known as taper relief.
• If you make a gift but still retain a benefit from the thing you’ve given away, its value can be added back to your estate on your death when calculating the inheritance tax due. This means that giving away your home whilst you continue to live in it can make no difference to your tax bill.

When Is There No Inheritance Tax?

• Anything you leave to your spouse, civil partner, or a UK-registered charity.
• Some business and agricultural assets may qualify for special reliefs.

Key Takeaways

• No tax if your estate is under the threshold, or if you leave it all to your spouse, partner, or charity.
• The 40% rate only applies above your tax-free allowances.
• Thoughtful planning can reduce or remove the tax bill altogether.

Why Planning Matters

At Chesterton House, we believe inheritance tax planning isn’t just about saving money — it’s about peace of mind. It’s about knowing that the wealth you’ve built will look after the people and causes that matter most to you.

Our Financial Planners have decades of experience and understand the complexities of inheritance tax inside and out. They’ve helped hundreds of families put the right plans in place, making sure more of their estate is passed on in the way they want it to be.

Getting your financial house in order means having a clear plan for today, tomorrow, and beyond. With expert guidance, you can pass on your estate with confidence and clarity.

Arrange your free conversation with one of our qualified Financial Planners today.

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FAQs – Inheritance Tax Planning

Who has to pay Inheritance Tax in the UK?

Only estates above the tax-free thresholds are liable, and the estate itself pays the tax before it is distributed.

Can Inheritance Tax be avoided?

It can’t always be avoided, but careful planning — such as lifetime gifting, leaving money to charity, and using reliefs — can reduce the bill.

What is the current Inheritance Tax threshold?

As of September 2025, the standard threshold is £325,000, with a higher £500,000 allowance for passing a home to children or grandchildren.

Are gifts taxed if I give them before I die?

Gifts are generally exempt up to £3,000 per year. Larger gifts may be taxed if you die within seven years, with taper relief reducing the rate over time.

Can married couples combine allowances?

Yes, married couples and civil partners can combine thresholds, potentially passing on up to £1 million tax-free.

How can leaving money to charity affect Inheritance Tax?

Leaving at least 10% of your estate to charity can reduce the IHT rate from 40% to 36% on the remainder of your estate.

Can I give away my home and still live in it to avoid inheritance tax?

If you give away an asset but still reserve some benefit from it, it will still be included in your estate for inheritance tax, so you won’t make any tax saving unless you pay a market rent to the new owner. There are lots of other reasons not to give your home away, and if you’re thinking of doing so we recommend you get good advice from an independent professional.