When someone passes away in England, Scotland or Wales, their estate might face a tax bill of 40% on everything above £325,000. That’s Inheritance Tax, and it catches more families each year as property values climb. You’ve likely heard stories of homes being sold just to cover the bill, or beneficiaries receiving far less than expected. The rules feel complex, the stakes are high, and planning ahead can feel overwhelming when you’re already dealing with the emotional weight of mortality.
The good news is that careful planning can dramatically reduce what HMRC takes. Most estates never pay a penny in IHT because the people behind them used allowances, made smart gifts, or passed assets to a spouse. You don’t need expensive advisers to understand the basics, and even modest planning steps can save your family tens of thousands of pounds.
This guide walks you through five practical steps to tackle inheritance tax planning in 2025. You’ll learn how the current thresholds work, how to value your estate properly, which allowances you can use, and what tools like gifts and trusts can do for you. By the end, you’ll know exactly where you stand and what action to take next.
What inheritance tax is and when it applies
Inheritance Tax (IHT) is a charge on your estate when you die. Your estate includes everything you own: your home, savings, investments, possessions, cars, and even life insurance policies if they’re not written in trust. HMRC takes 40% of anything above £325,000, which is known as the nil-rate band. This threshold has stayed frozen since 2009, meaning inflation and rising house prices push more estates into the tax net every year.
The tax only applies to estates in England, Scotland and Wales. You’ll face it if you’re UK domiciled (your permanent home is here) or if you own UK assets as a foreign national. Your domicile depends on where you consider your permanent home, not just where you currently live. If you moved to the UK from abroad, HMRC may still treat you as domiciled elsewhere unless you’ve lived here for at least 15 of the past 20 tax years. Seeking inheritance tax advice UK professionals provide can clarify your status if you’re unsure.
When your estate pays the tax
Your estate crosses the threshold when its total value exceeds £325,000 after debts. If you leave your main home to direct descendants (children, grandchildren, stepchildren), you get an extra £175,000 residence nil-rate band, taking your total allowance to £500,000. This bonus tapers away if your estate tops £2 million, losing £1 for every £2 over that limit.
The residence nil-rate band only applies when you pass your home to children or grandchildren, not to siblings, nieces, or nephews.
Married couples and civil partners can combine both allowances, potentially protecting up to £1 million from IHT. When the first partner dies, any unused nil-rate band transfers automatically to the survivor. You don’t lose this benefit even if the first person died years ago, before the current thresholds existed.
Who has to pay it
Your executor or administrator handles the IHT bill, not your beneficiaries. They must pay it within six months of your death, using money from your estate or through the Direct Payment Scheme if you have bank accounts. HMRC charges interest on late payments, so executors often pay some tax upfront before they’ve finished valuing everything. If you gave away assets in the seven years before death, the recipients might have to pay tax on those gifts separately from your main estate.
Step 1. Work out if IHT will affect you
Your first task is to establish whether IHT will touch your estate at all. Many families assume they’re safe because their savings look modest, then forget that their home alone might push them over the threshold. You need a clear picture of your total wealth right now, then compare it against the allowances available in 2025. This calculation takes about 30 minutes and gives you the foundation for everything else.
Calculate your rough estate value
Start by listing every asset you own. Include your home (at current market value, not what you paid), savings accounts, ISAs, investments, pensions that aren’t already in drawdown, cars, jewellery, and any business interests. Don’t worry about precision yet; you’re after a ballpark figure. Use property websites to estimate your home’s value, check your latest bank statements, and look up investment balances online.
Next, subtract your debts: outstanding mortgage, credit cards, loans, and any money you owe to others. Funeral expenses can also be deducted, typically around £4,000 to £5,000. The result is your net estate. If you jointly own your home, only include your share (usually 50%) in this calculation, not the full property value.
Apply the current thresholds
Compare your net estate to £325,000 (the basic nil-rate band). If you’re under this amount and you’re single, divorced, or widowed without inheriting unused allowances, you won’t pay IHT. If you own your main home and plan to leave it to children or grandchildren, add £175,000 to get a total threshold of £500,000. Married couples and civil partners can potentially double this to £1 million by combining both allowances.
Estates worth less than £325,000 never pay inheritance tax, regardless of who inherits.
Check where you stand. If you’re comfortably below the threshold, basic planning might be enough. If you’re close or over, you need to act. Getting professional inheritance tax advice UK specialists offer becomes more valuable as your estate grows, but you can still take several steps yourself before involving anyone else.
Step 2. Value your estate and track assets
Once you know IHT might affect you, you need an accurate valuation. HMRC expects proper figures, not guesses, and your executor will have to submit detailed forms within 12 months of your death. Getting this right now means your family won’t scramble later, and you’ll spot planning opportunities you’d otherwise miss. A proper valuation also helps you track whether gifts or other strategies are working over time.
Create your asset inventory
Start by building a spreadsheet with four columns: Asset Type, Description, Value, and Last Updated. List everything you own under these categories: property (main home, buy-to-let, holiday homes), bank accounts (current, savings, ISAs), investments (stocks, bonds, funds), pensions (workplace, personal, SIPP), business interests, vehicles, jewellery, art, collectibles, and life insurance policies not in trust. Your inventory should also capture jointly owned assets with a note showing your percentage share, typically 50% for spouses or the amount stated in your property deeds.
Document where you keep important paperwork for each asset. Your executor will need deeds, account numbers, policy documents, and contact details for financial institutions. Store this spreadsheet somewhere secure but accessible, and tell your executor or a trusted family member where to find it.
Get accurate valuations for each category
Property needs a professional estate agent’s valuation or a review of recent sales for similar homes in your area. Banks and building societies provide exact balances online, so check your accounts and note the figures with today’s date. Investment platforms show current values for stocks and funds; log in and take screenshots. Pensions require you to request a transfer value from each provider, which shows what your pot is worth now, not what it might pay out at retirement.
Life insurance policies count towards your estate unless they’re written in trust, so check your policy documents or contact the insurer.
Physical items like jewellery, art, or antiques need professional valuations if they’re worth more than a few thousand pounds. For cars, use valuation websites to get a market price. Business interests are trickier; you’ll need accounts showing net assets or a formal valuation if the business is substantial. Many people seeking inheritance tax advice UK professionals provide find that business valuations reveal unexpected value or opportunities for relief.
Update your records every 12 months
Property values shift, investments grow or shrink, and you’ll likely add or remove assets over time. Set a calendar reminder for the same date each year to review your inventory and update all figures. This annual check takes about an hour but keeps your planning current. It also helps you spot when you’re approaching IHT thresholds, giving you time to act before your estate crosses into taxable territory.
Track any gifts you make by adding a separate tab to your spreadsheet with columns for Date, Recipient, Description, and Value. HMRC looks back seven years, so keep records showing when you gave assets away and to whom.
Step 3. Use IHT allowances and spouse rules
Your estate gets several automatic protections that can shield hundreds of thousands of pounds from taxation. These allowances work like layers of defence, and you don’t need to do anything special to claim most of them. The key is understanding what’s available and structuring your will to take full advantage. Many families leave money on the table simply because they didn’t know these rules existed or how to apply them properly.
Claim your basic nil-rate bands
The nil-rate band gives you £325,000 of tax-free allowance, and the residence nil-rate band adds £175,000 if you leave your main home to children or grandchildren. You automatically get the first allowance regardless of who inherits. The second only applies when direct descendants (including step-children, adopted children, or foster children) receive your home, not when siblings, nieces, or partners inherit it.
If your estate exceeds £2 million, you start losing the residence allowance at a rate of £1 for every £2 over the threshold. This means estates worth £2.35 million or more get no residence nil-rate band at all. Calculate your position now so you know whether downsizing or giving away assets might keep you under this taper threshold.
Transfer unlimited assets between spouses
Married couples and civil partners can pass assets to each other completely tax-free when one dies, regardless of the amount. This includes property, savings, investments, and personal possessions. Your will should explicitly state that assets go to your spouse first, then to other beneficiaries after the second death. This strategy defers IHT until the surviving partner dies, but more importantly, it lets you combine both nil-rate bands for maximum protection.
When your spouse dies, their unused nil-rate band transfers automatically to your estate, potentially doubling your allowance to £650,000 (or £1 million with residence relief).
You must claim this transferred allowance when the second spouse dies, but executors handle this through the probate forms. The unused percentage transfers even if your spouse died decades ago, before current thresholds existed. If your first spouse used 30% of their nil-rate band, you get the remaining 70% added to your full allowance.
Use annual gift exemptions strategically
You can give away £3,000 each tax year without it counting towards your estate, and you can carry forward one unused year if you didn’t use last year’s allowance. This means £6,000 in total if you’re catching up. Small gifts of £250 per person to as many people as you like also stay outside your estate, as long as you haven’t used another exemption on the same person.
Wedding and civil partnership gifts get their own allowance: £5,000 to children, £2,500 to grandchildren, or £1,000 to anyone else. Regular payments from your income also escape IHT if you can prove they’re part of your normal spending pattern and don’t reduce your standard of living. Keep bank statements showing these patterns, as seeking inheritance tax advice UK specialists provide often reveals opportunities to increase these regular gifts safely.
Step 4. Plan gifts, trusts and other tools
Beyond using basic allowances, you can actively reduce your estate through strategic gifting and more sophisticated arrangements. These tools require more planning and documentation than simple exemptions, but they can save significant amounts of IHT over time. The trade-off is that you’ll need to give up control or access to certain assets, so you must balance tax savings against your own financial security and future needs.
Map out a seven-year gifting plan
Potentially exempt transfers (PETs) let you give away unlimited amounts to individuals, but these gifts only escape IHT if you survive seven years after making them. Create a simple tracking document with three columns: Date Given, Recipient, and Amount. Record every significant gift over £3,000 so your executor can prove the seven-year period has passed if HMRC questions them later.
Start by identifying which assets you can afford to give away without compromising your lifestyle or care needs. Property, shares, and large cash sums work well as PETs, but you must completely give up ownership and benefit from them. You can’t gift your home then continue living there rent-free, as HMRC treats this as a "gift with reservation" that stays in your estate.
Gifts made three to seven years before death qualify for taper relief, reducing the IHT rate from 40% down to 8%, depending on when you made them.
Consider setting up a trust
Trusts move assets out of your estate immediately while giving you control over who benefits and when. A discretionary trust lets trustees (people you appoint) decide how to distribute income and capital among your chosen beneficiaries. You might set one up to protect assets for young grandchildren or to provide for a vulnerable family member while keeping the money outside their direct ownership.
Basic trust structures include bare trusts (where beneficiaries own the assets outright once they reach 18), interest in possession trusts (where one person gets income, another gets capital later), and discretionary trusts (where trustees have full control over distributions). Each type faces different IHT treatment and reporting requirements. Setting up trusts usually requires professional help, and many people seeking inheritance tax advice UK solicitors provide use trusts alongside wills for complex estates.
Look at IHT-efficient investments
Business Relief and Agricultural Relief can reduce your IHT bill by 100% on qualifying assets. Business Relief applies to unlisted company shares you’ve owned for at least two years, or to a business you own directly. Some investment products (often called AIM portfolios) hold shares in companies qualifying for this relief, letting you invest money that escapes IHT after two years.
These investments carry higher risk than standard savings because they involve smaller, unlisted companies. Only use money you can genuinely afford to lose, and never rely on them as your sole IHT planning strategy. Combine them with safer approaches like gifting and using your allowances properly.
Step 5. Prepare your will and talk to family
Your IHT plan only works if you document it properly and ensure your family understands what you’re doing. A will translates your planning into legally binding instructions, while open conversations prevent confusion and conflict after you die. Many people complete steps 1 to 4 then never formalise anything, leaving their executors to guess their intentions or face avoidable tax bills. This final step requires honest discussions that might feel uncomfortable but protect everything you’ve worked to preserve.
Draft your will with IHT in mind
You need a professionally drafted will that explicitly uses your nil-rate bands and directs assets according to your IHT strategy. DIY will kits from stationers might seem cheaper, but they rarely capture the detail needed for complex estates. Your will should name executors, specify who gets what, create any trusts you’ve planned, and include substitution clauses in case beneficiaries die before you.
Make sure your will clearly identifies your main residence if you’re claiming the residence nil-rate band. Specify which property qualifies if you own more than one. State that assets pass to your spouse first (if applicable), then to children or other beneficiaries on the second death. Review your will every three to five years or after major life changes like divorce, remarriage, or the birth of grandchildren.
Have the inheritance conversation early
Sit down with your spouse and adult children to explain what you own, what your will says, and what you expect them to inherit. Walk through the IHT calculation you’ve done and explain any gifting or trust arrangements you’ve made. This transparency prevents siblings arguing over assets they didn’t know existed or feeling blindsided by arrangements that favour one person over another.
Families who discuss inheritance while everyone’s healthy avoid disputes and rushed decisions when someone dies.
Prepare a simple agenda for this conversation. Use this template:
Discussion points to cover:
- Current estate value and IHT liability
- Contents of your will and reasoning behind decisions
- Location of important documents (deeds, policies, passwords)
- Who your executors are and how to contact them
- Any gifts or trusts already in place
- Your wishes for funeral arrangements
Professional inheritance tax advice UK solicitors and financial planners provide often includes facilitated family meetings where an independent expert explains the plan and answers questions. This neutral presence can reduce tension and ensure everyone understands technical points about allowances, trusts, or business relief.
Bringing your inheritance plan together
You now have a clear framework for reducing your family’s inheritance tax burden. The five steps work together: understand the rules, value your estate, use every allowance, make strategic gifts, and document everything properly. Start with the calculations you can do today, then tackle bigger decisions like trusts or business relief investments as your confidence grows.
Review your plan annually and after major life events like retirement, downsizing, or receiving an inheritance yourself. Tax rules shift, property values change, and your family situation evolves. What worked three years ago might need adjusting now. Keep your records updated and your family informed so nobody faces surprises when emotions run high.
Planning ahead extends beyond finances to practical end-of-life decisions that ease pressure on loved ones. While you’re thinking about your estate, consider your funeral wishes too. Direct cremation services offer families a simpler, more affordable alternative to traditional ceremonies, letting them focus resources on what matters most. Getting professional inheritance tax advice UK specialists provide becomes valuable as your estate grows, but these steps give you solid foundations to build on.