UK Inheritance Tax and
Succession Planning

Inheritance Tax (IHT) is imposed on the estate of a deceased individual, covering all assets, properties, and finances. The standard Inheritance Tax rate is 40%, applicable only to the portion of the estate exceeding the tax-free threshold, which currently stands at £325,000.

Commencing Inheritance Tax planning early is essential. The earlier you begin, the better your chances of maximizing Inheritance Tax planning opportunities. Strategies such as asset gifting, trust creation, life insurance policies, or strategic spending can all contribute to your plan. Given the intricate nature of Inheritance Tax rules, seeking professional advice is recommended to make well-informed decisions tailored to your unique circumstances.

Nil Rate Band

The nil rate band (NRB), also known as the inheritance tax (IHT) threshold, signifies the threshold up to which an estate incurs no IHT liability. Each individual's estate can benefit from the NRB, with the potential addition of a 'residence nil rate band.' Any unused NRB and residence nil rate band can be transferred to a surviving spouse or civil partner.

For the tax year 2024/25, each person has their own NRB set at £325,000. The portion of the estate up to the NRB threshold is subject to a 0% IHT rate, while any amount surpassing this threshold typically incurs a 40% IHT charge upon death.

The NRB is applicable to the taxable, non-exempt estate transferred upon death, along with any taxable gifts made within the seven years preceding death."

Residence Nil Rate Band

A residence nil rate band came into existence on 6 April 2017. The residence nil rate band is an allowance for passing on the family home. It is currently £175,000 and can be transferred between married couples and civil partners.

The allowance is tapered down for people with larger estates, reducing by £1 for every £2 that the estate is valued at over £2 million. The residence nil rate band can only be used when passing on a residence to ‘direct’ or ‘lineal’ descendants and applies only to your home, not a buy-to-let property. ‘Direct’ or ‘lineal’ descendants refers to children (biological, step or adopted), grandchildren or great-grandchildren.

Potential Exempt Transfer

A Potentially Exempt Transfer (PET) enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.

If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT. If the combined value is more than the IHT threshold, IHT may be due.

Any lifetime transfer that is Potentially Exempt must meet certain conditions subject to certain exceptions. The transfer is a gift made by an individual to another individual or to a specified trust. This means, for example, the gift cannot be made from or to a corporation or company.

For example, if a gift of £400,000 is given:

The gift will initially use up the available NRB of £325,000 (oldest gifts are attributed first).
The remaining £75,000 on death is then subject to IHT (in addition to IHT on the estate).
If the remaining £75,000 was given over three years before the death, taper relief may apply.
For example, if the whole gift was made between three and four years before the death, the tax charge on the £75,000 would be 32%.
So IHT due on the PET would be £24,000.

Gifts where you still have an interest in it, no matter when you’ve given it, don’t qualify as a PET.

For example, if you continue to live rent-free in the house you gave your child more than ten years ago, the house would still be considered part of your estate and therefore subject to IHT. This is known as a gift with a reservation of benefit.

Inheritance Tax for Married/Civil Partner Couple

There are specific IHT rules that apply only to married couples and those in a civil partnership. In most cases, these rules will mean that there is no inheritance tax to pay, if you leave everything to your legal partner.

There are three main inheritance tax exemptions and allowances that affect spouses:

Inheritance Tax Spouse Exemption
Transferable Nil Rate Band
Residence Nil Rate Band

Together, they can help a couple protect up to £1 million of assets against unnecessary inheritance tax.

Under the IHT spouse exemption, married couples and civil partners living in the UK can pass all of their estate to their surviving partner, tax free. There is no upper or lower limit to the value of the estate. Any inheritance tax payable becomes due only on the death of the second partner. This exemption does not apply for couples who are simply living together, in a so-called common law relationship. For this reason, many long-term cohabitees might wish to consider marriage or forming a civil partnership, as part of their IHT planning.

When the second parent in a married couple or civil partnership passes away, their estate will be subject to inheritance tax if it exceeds the inheritance tax threshold of, including any available residence nil rate band.

In certain cases, the unused inheritance tax threshold of the first deceased spouse or civil partner can be transferred to the surviving spouse or civil partner, effectively increasing their threshold and potentially reducing the inheritance tax liability.

UK Inheritance Tax and Succession Planning

Nil Rate Band

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UK Inheritance Tax and
Succession Planning