UK Inheritance Tax (IHT) is charged at 40% on the part of an estate that exceeds the tax-free threshold of £325,000. It is paid by the personal representatives out of the estate before anything is distributed to the heirs, not afterwards. That single detail is why preparing a will and structuring assets in advance answers a very practical question rather than an abstract legal one: how much of what you have built will actually reach the next generation.
What inheritance tax is and when it arises
Inheritance Tax applies to the value of a deceased person’s estate. It is not calculated asset by asset or beneficiary by beneficiary: the estate is valued as at the date of death, debts, funeral expenses, exemptions and reliefs are deducted, and the tax is charged on whatever remains above the threshold. According to GOV.UK, the standard rate is 40%, reduced to 36% on the rest of the estate where 10% or more of its net value is left to charity.
An estate usually includes considerably more than people expect:
- property in the UK and abroad;
- bank accounts, deposits, investment portfolios and shareholdings;
- art, cars, collections and jewellery;
- life insurance policies that have not been written into trust;
- gifts made within seven years before death;
- assets held in certain types of trust, and interests in them;
- from 6 April 2027, unused pension funds.
The arithmetic works the same way for everyone. What changes from person to person is which assets fall within the charge — and since 6 April 2025 that question is answered on an entirely new basis.
Who is affected: the long-term residence test
Until 6 April 2025 the scope of the charge depended on domicile, a complex concept tied to a person’s permanent connection with a particular jurisdiction. From that date domicile and deemed domicile no longer apply for inheritance tax purposes. They have been replaced by the long-term UK residence test. As set out in HMRC guidance IHTM47020, an individual is a long-term UK resident if they have been UK tax resident for at least 10 out of the 20 tax years immediately preceding the year of the chargeable event.
In practice this means the following. If you are a long-term UK resident, your worldwide assets are within the charge. If you are not, only your UK-situated assets are. The familiar “15 out of 20 years” benchmark that applied to former non-doms no longer exists — the threshold has fallen to 10 years.
| Status at the date of death | Assets within the inheritance tax charge |
|---|---|
| Not a long-term UK resident | UK-situated assets only: property, UK bank accounts, shares in UK companies |
| Long-term UK resident (10 of the last 20 tax years) | Worldwide assets, wherever they are located |
| Left the UK after becoming a long-term resident | Worldwide assets remain within the charge for a “tail” period of between 3 and 10 years, depending on the length of residence |
The length of the tail depends on the number of years of residence: 10 to 13 years of residence gives a three-year tail, and it then increases by roughly a year for each additional year of residence, up to a maximum of ten. There is also a reset: after ten consecutive tax years of non-residence the long-term resident status falls away, even if the individual later returns. If your UK tax status has changed recently or will change over the next few years, it is worth reviewing it alongside the new FIG regime, which replaced the non-dom system for income and capital gains from the same date.
Rates, tax-free thresholds and how the tax is calculated
The calculation rests on two tax-free amounts. The first is the nil-rate band of £325,000, which applies to any estate. The second is the residence nil-rate band of £175,000, available only where a home the deceased lived in passes to direct descendants — children, grandchildren, adopted, fostered and certain guardianship children, and their spouses. As the GOV.UK guidance makes clear, nephews, nieces, siblings and other relatives do not count as direct descendants.
| Item | Amount | Conditions |
|---|---|---|
| Standard rate | 40% | On the part of the estate above the available tax-free amounts |
| Reduced rate | 36% | Where 10% or more of the net value of the estate is left to charity |
| Nil-rate band | £325,000 | Available to every estate; held at this level until 5 April 2031 |
| Residence nil-rate band | £175,000 | Only where a qualifying home passes to direct descendants |
| Taper threshold | £2,000,000 | Above this estate value the residence band reduces by £1 for every £2 of excess |
| Maximum for a married couple | £1,000,000 | Where unused bands transfer to the survivor and a qualifying home is involved |
The transfer of unused bands between spouses is the mechanism most often overlooked. Anything passing to a spouse or civil partner is exempt in full, and the unused proportion of both bands transfers to the survivor. That is where the £1 million figure for a couple comes from: £325,000 and £175,000, doubled. It is not automatic, however. It requires a qualifying home passing to direct descendants, an estate below the taper threshold, and a properly made claim when the estate is reported.
A simple worked example. A single person leaves an estate of £900,000, including a flat worth £500,000 left to their daughter. The available tax-free amounts are £325,000 plus £175,000, so £500,000 in total. Tax is charged on £400,000 at 40%, which is £160,000. Had there been no qualifying home, or had it passed to a nephew instead, only £325,000 would have been available and the tax would have risen to £230,000. A difference of £70,000 turning on a single line in a will.
Key takeaways
- The 40% rate applies only to the excess above the tax-free amounts, not to the whole estate.
- The residence nil-rate band of £175,000 is available only where a home passes to direct descendants.
- Above an estate value of £2 million the residence band tapers away.
- Transfers to a spouse are exempt, and unused bands pass to the survivor.
- Since 6 April 2025 residence, not domicile, determines which assets are in scope.
- Both bands are frozen until 5 April 2031, so rising asset values increase the effective burden.
Advantages of seeking advice on inheritance tax planning
- Valuation of the estate and identification of its components
- Determination of tax status under the residence test
- Calculation of the bands and reliefs available to the family
- Structuring of ownership across several jurisdictions
- Preparation of a will under the law of England and Wales
- Correspondence with HMRC on reporting and valuations
- Review of the structure as legislation changes
Calculating the tax is only half the task. The other half is making sure the property actually reaches the people you intended it for, which is what a will is for.
Wills and what happens without one
A will sets out who receives what, in what shares, and who acts as executor — the person who gathers the assets, settles the debts, reports to HMRC and distributes what remains. Without a will those decisions are made not by the family but by the intestacy rules, and the outcome often differs sharply from what the deceased assumed was obvious.
In England and Wales, where there is no will, the surviving spouse or civil partner receives the following, according to HMRC guidance:
- the personal chattels — household goods and personal possessions;
- a fixed statutory legacy of £322,000, which has applied since 26 July 2023;
- an absolute interest in half of the residue, where the deceased left children;
- the whole estate, where there are no children or other direct descendants.
The other half of the residue passes to the children on statutory trusts. Where there is no surviving spouse, the estate passes to relatives in a statutory order: children first, then parents, then siblings, and onwards by degree of kinship. Where no relative in any qualifying category can be found, the estate passes to the Crown as bona vacantia. One point deserves emphasis: an unmarried partner, however long the relationship, does not appear in that order at all and receives nothing without a will.
For families with assets in more than one country the position is more complicated, because several jurisdictions apply forced heirship rules that can conflict with an English will. Those cases call for co-ordinated documents in each country rather than one universal will, which is part of the wider task of international tax and estate planning.
Property within the estate
Property usually makes up the largest part of an estate and creates the central practical difficulty: the tax has to be paid in cash while the asset itself is illiquid. All property situated in the UK falls within the inheritance tax charge regardless of the owner’s residence, which includes non-residents who bought a London flat as an investment. Value is determined by open market price at the date of death, and HMRC can challenge a valuation, so a professional report is worth obtaining before the estate is reported.
Where an asset cannot be sold quickly, the tax can be spread. As set out on GOV.UK, tax on land and buildings, and on shareholdings meeting certain conditions, can be paid in equal yearly instalments over 10 years. The first instalment falls due at the end of the sixth month after the death and carries no interest if paid on time, while interest runs on the outstanding balance. For assets qualifying for agricultural or business property relief and inherited on or after 6 April 2026, the instalment option becomes interest-free.
The general deadline is the end of the sixth month after the month of death, and HMRC charges interest on late payment. In practice that means the money to pay the tax has to be arranged in advance — through life insurance written into trust, a liquid reserve, or a planned disposal of part of the estate agreed during the owner’s lifetime. Where property is being acquired now, the inheritance and ownership consequences are better built into the structure of the transaction at the point of buying property.
What to provide for when preparing a will
- Schedule of assets showing location and form of ownership
- Appointment of an executor and a substitute executor
- Terms on which the main home passes to direct descendants
- Directions covering business interests and signing rights
- Guardianship of minor children and access to funds
- Source of cash to pay the tax before distribution
- Alignment with wills and rules in other jurisdictions
Some assets can be taken out of the estate during a person’s lifetime. The mechanism for doing so looks straightforward only at first glance.
Lifetime gifts and the seven-year rule
A gift made more than seven years before death falls outside the inheritance tax charge. If the donor dies sooner, the gift comes back into the calculation, with the rate reducing as the gift recedes into the past. That mechanism is called taper relief, and the figures below come from GOV.UK.
| Years between gift and death | Rate of tax on the gift |
|---|---|
| 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 years or more | 0% |
One detail causes most of the confusion around this rule: the reduction applies to the tax on the gift itself, while the nil-rate band is set against the earliest gifts first. A gift within £325,000 made four years before death may therefore produce no tax at all, whereas a large gift above the band produces a charge even with taper relief applied.
Alongside the seven-year rule there are exemptions that take effect immediately:
- £3,000 in total each tax year — the annual exemption;
- £250 per person each year, with no limit on the number of recipients;
- wedding gifts of £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else;
- gifts to a spouse or civil partner, with no limit on the amount;
- gifts to charities and political parties.
Particular care is needed where someone gives away an asset but carries on using it — transferring the house to the children while continuing to live in it, for example. A transfer with a reservation of benefit is not treated as a gift for these purposes, and the asset stays in the estate. This is one of the most common reasons why a saving a family has calculated for itself fails to materialise.
What support with passing assets to heirs covers
- Review of the seven-year period for earlier gifts
- Analysis of the consequences of transferring a share in property
- Assessment of reservation of benefit risk
- Choice of ownership structure within the family
- Preparation of gift records for reporting purposes
- Alignment of directions with pension nominations
- Calculation of the cash needed to settle the tax
Trusts and passing assets to the next generation
A trust is an arrangement under which property is transferred to trustees to hold for the benefit of beneficiaries. In estate planning trusts serve several purposes: taking an asset out of personal ownership, setting conditions and timing for access to it, providing for the management of assets for minors, and keeping a life insurance payout outside the estate.
A trust is not, however, a way of removing property from the tax net. Trusts have their own regime: as the GOV.UK guidance explains, transferring assets into a trust above the nil-rate band can give rise to a charge at 20%, after which the trust pays periodic charges tied to ten-year anniversaries, along with charges when property leaves the trust. The actual figures depend on the type of trust, when it was created and what it holds, so the decision follows from a calculation for the specific situation rather than a general rule — usually as part of the broader question of succession and inter-generational wealth transfer.
Pensions, business and farmland: changes in 2026 and 2027
Two changes over the next two years materially alter the arithmetic for wealthy families, and both are worth building into planning now.
From 6 April 2027 unused pension funds and most death benefits are brought into the estate for inheritance tax purposes. According to the GOV.UK publication, the rule applies to deaths on or after that date, and personal representatives are responsible for reporting and paying the tax. Death in service benefits payable from a registered pension scheme, and dependants’ scheme pensions from defined benefit arrangements, remain outside the charge. The exemption for benefits passing to a surviving spouse or civil partner is maintained. For anyone who treated a pension as an efficient way of passing capital to their children, this is a substantial change.
The second change concerns business and agricultural assets. From 6 April 2026 a cap applies to the 100% relief available on such property, and in December 2025 it was announced that the cap will be set at £2.5 million per estate rather than the £1 million originally proposed. Relief of 50% applies to value above the cap. The allowance transfers between spouses, so a married couple can pass on up to £5 million of qualifying agricultural and business assets free of tax. Owners of a family business should therefore check how shares are held between spouses, since that directly determines how much relief is available.
How work on a will and estate planning is structured
The sequence is the same for people who are only now moving to the UK and for those who have lived here for years: the factual position on assets and status is established first, and the instruments are discussed only afterwards.
Consultation and valuation of the estate
Establishing tax status and calculating the burden
Drafting the will and the ownership structure
Execution of documents and safe custody
Review of the structure as circumstances change
Documents for preparing a will and valuing an estate
The accuracy of the calculation depends directly on how complete the underlying information is. The following are usually required:
- passport and proof of address;
- title documents for property in every country where it is held;
- bank and investment statements showing the form of ownership;
- details of company shareholdings, constitutional documents and shareholders’ agreements;
- pension documentation and details of nominated beneficiaries;
- life insurance policies and confirmation of whether they are written into trust;
- records of gifts made over the last seven years, with dates and amounts;
- any earlier wills, including those made in other jurisdictions;
- marriage and birth certificates and guardianship documents;
- history of tax residence and the self-assessment tax returns filed.
Practical examples from inheritance work
Three situations that come up most often show where the difference in outcome actually arises.
Relocation with assets in two countries. An entrepreneur has lived in the UK for eight years and owns a flat in London and a family business abroad. Under the residence test they are not yet a long-term resident, so the foreign assets are outside the UK charge. In two years’ time that will change, which makes the present the sensible moment to take decisions on how the business is held rather than afterwards.
A home left to someone other than a direct descendant. A couple without children plan to leave a house worth £600,000 to their nephews. The residence nil-rate band is unavailable, which reduces the tax-free amount by £350,000 across the two estates. The alternatives are a charitable component, which brings the rate down to 36%, or a different structure of the gift altogether.
A house given to the children while continuing to live in it. An owner transfers the house to their children but stays in occupation. A transfer with a reservation of benefit does not take the asset out of the estate, and it creates a capital gains tax exposure for the children on a future sale. The outcome is a double charge instead of the expected saving.
Client stories on relocation and tax planning
Finding an ideal home for a family from Ireland
Sean and Emma are a married couple from Ireland. They have been living and working in the UK for several years, both have permanent jobs and a stable income. Their children are grown up and have...
Tax planning for a foreign person when moving and buying a property in England
Pablo is originally from South America. He has been living in Britain for several years. His business involves supplying construction equipment to...
Tax planning for married couple moving to England to settle (Indefinite Leave to Remain)
Tobias and Hannah moved to the UK from Austria. The couple received a pre-settled status, which is granted to EU citizens, permitting them to relocate...
One of those families agreed to describe how the move looked from their side, and what set it in motion.
My name is Sean, my wife is Emma. We are Irish and have been living in the UK for several years. We rent a flat in London, but all this time we have felt uncomfortable in the big city. We miss living in the countryside, in our own house, in peace and quiet. When I received an inheritance, we seriously considered moving.
Common mistakes in estate planning
Most problems arise not from the complexity of the legislation but from a handful of recurring decisions taken without a calculation behind them:
- treating the £1 million threshold as an automatic entitlement without checking the conditions;
- relying on the former “15 out of 20 years” rule instead of the current 10 out of 20 test;
- giving away property while continuing to use it and assuming it has left the estate;
- making no provision for the cash needed to pay the tax before distribution;
- leaving a will unchanged after marriage, divorce, the birth of children or the sale of a business;
- assuming pension funds are permanently protected from inheritance tax;
- relying on a single will where assets are held in several jurisdictions;
- not reviewing how family business shares are split between spouses ahead of 2026.
Each of these carries a measurable cost, and almost all of them can be dealt with while the decisions are still open to change. What that planning work usually consists of is set out below.
Wills and inheritance
Estate planning with Imperial & Legal
Preparation of a will
Drafting under the law of England and Wales, allowing for assets held abroad.
Calculation of the tax burden
Valuation of the estate and of the bands and reliefs available under several scenarios.
Structuring of assets
Form of ownership, trusts and directions covering business interests.
Reporting and HMRC correspondence
Preparation of documents, valuations and claims for the available tax-free amounts.
Where to start with estate planning
Estate planning in the UK does not turn on finding a universal scheme. It turns on three specific questions: what your estate consists of, what your status is under the residence test, and who should receive what, in what order. The answers determine both the size of the tax and how smoothly the heirs will gain access to the assets.
Timing works against delay here. The seven-year clock on gifts starts only when the gift is made, the residence test accumulates years on its own, the bands are frozen until 2031, and the pension and business asset changes take effect in 2026 and 2027. Decisions taken now leave noticeably more options open than the same decisions taken in five years’ time. This material is for information only and does not replace individual advice: the calculation always depends on a particular family’s circumstances. Reviewing the wider tax position through tax optimisation, and not the inheritance element alone, is usually part of the same exercise.
