Inheritance tax 2024 explained

While only around 4% of estates pay inheritance tax, the amount that we pay is going up. The government is on course to rake in more than the 2022-23 record of £7.1bn. We explain how inheritance works in the UK, the thresholds, and whether you can reduce your inheritance tax bill.

An estimated £5.7bn was paid in inheritance tax between April and December 2023 – £0.4bn higher than the same period last year. The increase is due to frozen thresholds leaving more estates liable to pay the tax and historic house price growth.

Inheritance tax is due if you leave assets valued above a certain amount to your loved ones after you die. It is normally charged at a rate of 40% but there are lots of quirks and perks in the system, which we explain in this guide.

In this article we cover:

• What is inheritance tax?
• What are the UK inheritance tax thresholds?
• How does the residence nil-rate band work?
• How does inheritance tax work for married couples?
• What are the rules around gifts and inheritance tax?

Read more: How does inheritance tax on gifts work in the UK?

What is inheritance tax?

Even in death some of us can’t avoid the taxman. If you plan to pass on your assets to your loved ones after you die, there might be an inheritance tax bill to pay.

By assets, we mean:

• Money
• Savings and investments
• Property
• Possessions

When added together, these assets make up what is known as your estate. Inheritance tax (IHT) is deducted from this pot, as well as any debts or funeral expenses.

Inheritance tax can be charged at a rate as high as 40% on the value of the estate above a set tax-free threshold (see below).

Between April 2022 and March 2023, families paid a record £7.1 billion in inheritance tax, which is £1 billion more than the same period a year earlier.

Inheritance tax bills are continuing to rise: between  April and December 2023, HMRC raked in £5.1 billion. This is £400 million more than the same period a year earlier.

The increase is largely propped up by house prices which have tipped some estates over the tax-free threshold.

Read more: How can I reduce my inheritance tax bill?

How many estates pay inheritance tax?

Despite being one of the most hated taxes in the UK, according to HMRC figures, only one in 20 – or around 4% of – estates in the UK actually pay it.

The explanation for this small proportion is that either the:

• Value of the estate is below the threshold
• Estate has been left to a spouse, civil partner, a registered charity
• Family home has been left to direct descendants, meaning £500,000 is safe from the taxman

Bear in mind that if you are married or in a civil partnership, any allowance you don’t use can be added to your partner’s allowance when they die.

This means a couple can pass on as much as £1 million without their estate being subject to inheritance tax.

We go into these tax-free allowances in more detail in this guide.

However, the thresholds above which you must pay IHT have been frozen since 2021 and will remain so until 2028. It is estimated that the percentage of estates paying IHT by this time will increase to around 7%.

How much can you inherit without paying tax UK?

Inheritance tax is based on the value of everything you own when you die, which is known as your estate.

The government gives everyone a tax-free limit, known as the nil-rate band, which is currently set at £325,000.

This threshold had been frozen until 2026, however, the Chancellor extended this to 2028 in his Autumn Statement in November.

• If the value of your estate is below this figure then no IHT is due
• But if your estate is worth more than the nil-rate band, HMRC can potentially take 40% of the excess

What is the residence nil-rate band?

The government gives you an extra allowance if you leave your home to your children or grandchildren (including adopted, foster, and stepchildren).

This is known as the residence nil-rate band. It was introduced in April 2017 and has also been frozen at £175,000 until 2028.

This means that with the £325,000 nil-rate threshold on top, you could have a total tax-free allowance of £500,000.

The property limit applies even if you have chosen to sell up in later life to move to a smaller, less valuable property or to go into a care home.

If part of that £175,000 has been foregone as a result, you can make up the difference when your assets are passed on; the full nil-rate level will be restored.

You need to retain:

• Evidence of the sale
• Proof that it was your main home

Find out more about the tax implications of gifting property.

Does the residence nil-rate band apply to large estates?

If your estate is worth more than £2 million when you die, the residence nil-rate band becomes less generous. It gets chipped away by £1 for every £2 above £2 million.

So, for example:

• If you died leaving an estate worth £2.1 million
• This means your estate is £100,000 above the £2 million limit
• You left your £450,000 home to your daughter
• Under the rule above, the property limit is half of £100,000, so £50,000
• So your tax-free allowance reduces from £175,000 to £125,000
• This gives a combined IHT threshold of £450,000 (£325,000 plus £125,000).
• Subtract £450,000 from the £2.1 million estate, and that leaves a pot worth £1.65 million that could be subject to 40% tax.

More ways you can reduce the potentional inheritance tax bill on your estate.

How does inheritance tax work for married couples?

If you are married or in a civil partnership, you can leave everything to your other half with no tax to pay.

Married and civil partnership couples also stand to inherit any unused part of their partner’s tax-free thresholds.

So your surviving spouse will pay no IHT on anything you leave them. They will also receive your £325,000 inheritance tax threshold and the property limit of £175,000.

This means they will have a combined tax-free and property limit of £1 million when they die. This assumes the home is left to children or grandchildren and the estate is under £2 million.

It is only when the surviving spouse or civil partner dies that inheritance tax might be due on the estate.

Do you pay inheritance tax if your partner dies?

You don’t have to worry about paying inheritance tax if your civil partner or spouse dies.

However, if you are not married, you won’t be afforded the same luxury.

This means that inheritance tax could be due if your partner has passed on money or possessions to you when they die, provided their estate exceeds the threshold.

It is particularly important for unmarried couples to write a will because, if one of them dies, their assets won’t automatically go to the surviving partner.

Who are the beneficiaries?

The beneficiaries are the family members or friends who will inherit your estate.

You can write a will to make sure your estate is divided according to your wishes when you die.

Do beneficiaries of a will have to pay inheritance tax?

If IHT is due, the executor will already have paid HMRC before the assets of the estate can be distributed to the beneficiaries.

This means that the tax will effectively erode the value of the estate that the beneficiaries stand to inherit, but they don’t have to pay HMRC directly.

Does an executor have to pay inheritance tax?

If inheritance tax needs to be paid, it is usually the executor who is responsible for calculating the amount owing and paying it to HMRC out of the estate.

This needs to be done within six months after the person died.

An executor can also be a beneficiary of the estate – and so, potentially, liable for IHT on their own inheritance.

Here are the 12 things you need to know about the role of the executor.

The benefits of writing a will

Writing a will can help you reduce your inheritance tax bill or avoid it completely. Remember that making a will also allows you to pass on as much as possible to the people who you want to benefit.

We outline some ways to reduce your inheritance tax bill.

If you don’t write a will then the law dictates how your estate is divided, with HMRC potentially getting a greater slice.

With a will, you can:

• Take advantage of tax-free allowances
• Help protect the family home
• Leave legacies to organisations, which as a result will be excluded from your estate when it comes to calculating IHT (gifts to charities, for example, are exempt from IHT)

Also, if you leave 10% or more of your net estate (what’s left after applying the tax-free limits) to charity, you can shrink your IHT rate from 40% to 36%.

Find out more in our wills & probate section.

Do I have to pay inheritance tax on a gift?

The smaller your estate, the less IHT will be payable, if at all.

To reduce the size of your estate while you are alive, you could:

• Go on a huge spending spree
• Gift the money to loved ones, such as helping children with a deposit for a home

You can give away money, property or other assets while you live without them forming part of your estate for inheritance tax purposes. But for some gifts, that is only as long as you remain within the seven-year rule.

If you die within seven years of making these gifts and IHT will be payable if their total value is more than the £325,000 nil-rate threshold.

Find out: Five ways to invest and save for grandchildren

What is the seven year rule?

Some gifts will only be completely free from IHT if you to live for seven years after you have given it to them.

Once that time has elapsed, the gift sits outside your estate. In other words, it won’t be taken into account when calculating inheritance tax.

If you die within seven years, then tax is charged on a sliding scale (but only if you give away more than the nil-rate band of £325,000).

This is known as taper relief:

Years between gift and death	IHT rate
Less than 3 years	40%
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 or more years	0%

1. Annual exemption

You can give away up to £3,000 each tax year without it being included in any IHT calculation, even if you die within seven years.

You can also carry forward any unused allowance to the next year – but only for one year.

If you are married or in a civil partnership, you both could potentially give away up to £6,000 a year, or up to £12,000 if you hadn’t used the allowance the year before.

2. Small gifts

After the annual exemption, you can also give away up to £250 to as many other people as you like every year, with no inheritance tax implications.

3. Gifts from surplus income

There is no limit on the amount you can give away from your normal income each year, with the word “surplus” referring to the fact that the gifts must not affect your standard of living.

Your income includes:

• Employment earnings
• Rental income
• Interest
• Dividends
• Pensions

There are three important rules to follow when it comes to gifting in this way, which is what HMRC will look at when deciding if IHT is payable.

The gifts must:

1. Come out of your income
2. Be paid out on a regular basis, say by standing order, and form a part of your ‘normal expenditure’
3. Not impact on your standard of living

4. Wedding gifts

You can also give away wedding gifts when people get married or enter a civil partnership:

• £5,000 to your children
• £2,500 to a grandchild or great-grandchild
• Up to £1,000 to anyone else

5. Living costs

You can give payments to help with another person’s living costs, such as an elderly relative, an ex-spouse or a child under 18 or in full-time education.

6. Specific organisations and purposes

Gifts to charities, museums, political parties, universities, and for public benefit are all exempt from inheritance tax.

7. Gifts to spouses

You don’t have to pay inheritance tax to pay on gifts between spouses or civil partners.

As long as they live permanently in the UK, you are able to give them as much as you like during your lifetime.

Remember to keep records

Whatever gifts you make, keep clear records about what you gave, and when. It will help make things easier for the person tasked with sorting your affairs when you die.

You will need a balance between what you can afford to give away now, and what you would like to leave behind.

Is a pension subject to inheritance tax?

If you don’t fancy splurging or gifting to reduce your estate, you could pay into a pension instead.

Pension pots fall outside of your estate and are not subject to inheritance tax when you die.

There are a number of benefits to saving for the future in this way:

• Growth: your pot can grow free from income tax and capital gains tax
• Tax benefits: you get tax relief from the government plus a contribution from your employer if you’re working
• Access: you can also take cash out of the pension pot as needed, if you’re aged 55 or over  – although this flexibility, of course, would eat into the inheritance pot.
• Beneficiaries: any money left inside the pot when you die can be passed to your family and friends free from IHT

Find out more about pensions in our simple guide to pensions

Things to remember

• If you die before 75: your loved ones can inherit the pension entirely tax-free, provided they withdraw it within two years
• If you die after 75: they have to pay their highest rate of income tax on any withdrawals

Also bear in mind that normally you can pay 100% of your earnings, up to a maximum of £40,000, into a pension each year.

However, this allowance gets cut to £4,000 a year once you take money out of your pension pot above the 25% tax-free sum.

Find out more in our pensions guide.

Investments that benefit from inheritance tax relief

Rural assets

There are special rules about IHT relief on certain assets, such as:

• farms and agricultural property
• farms and agricultural businesses
• woodlands
• heritage assets like stately homes

So for example Agricultural Property Relief (APR) can reduce IHT by 50% or even 100% on farmland used for agricultural purposes, and on farm buildings, farmhouses and farm cottages in use.

The rules are complicated, but normally you need to have bought it at least two years, and possibly seven years, before you die.

Business property relief

You can also opt for riskier investments thanks to business property relief, which can also cut IHT bills by either 50% or 100%. Qualifying investments include:

• Shares traded on AIM, the junior stock market
• Enterprise Investment Scheme (EIS) shares

These become free from IHT once you’ve held them for two years.

Again, this is a complicated area, so it might be worth seeking financial advice. Kellands* is offering all of our readers a free hour-long session* with one of its independent financial advisers. They can get a good idea of your financial goals, and help you take the first step to achieving them.

Does life insurance count as inheritance?

If you have a life insurance policy, money is paid out to your loved ones when you die. A life insurance lump sum isn’t liable to income or capital gains tax.

However, if the life insurance proceeds were to take the value of your estate over the nil-rate threshold, IHT would be payable. The solution to this eventuality could be to write the life insurance policy into trust for your beneficiaries; the payout after death would not be liable for IHT.

Trusts are complicated so it’s best to speak to a financial adviser or tax specialist to get help setting one up.

Paying for life insurance could also make it easier for your family to pay any inheritance tax when you die if the value of your estate will be above the tax-free threshold because of the total value of all your other assets.

This could stop the family home being sold just to pay an IHT bill.

Read more: Guide to life insurance