Your estate is the culmination of a lifetime’s work, and the desire to pass that full legacy on to your loved ones is universal. Yet, as Benjamin Franklin reminded us, taxes are a certainty—and on death, Inheritance Tax (IHT) can significantly erode what you leave behind. With careful and proactive planning, however, it is possible to substantially reduce that final tax bill. In this essential introductory guide, Andrew Norton, Head of Private Client at Holden Smith Law, demystifies the complexity of IHT. He covers what the tax is, the legal strategies available to reduce it, who ultimately becomes responsible for the payment, and the common myths and mistakes to avoid.
What is inheritance tax, and what is the current threshold?
Inheritance Tax (IHT) is the tax payable on the estate of a deceased person. This is valued at the date of the death, and it includes property, bank accounts, investments, and personal belongings.
As of 2025, the nil-rate band (NRB) is £325,000 per individual. The standard IHT rate is 40% on the value of the estate above this threshold. Practically, the IHT is payable if the value of the estate is above £325,000.00.
What are the main ways to legally reduce an inheritance tax bill?
However, there are some exemptions and relief applicable to this general rule:
- An additional allowance of up to £175,000 may apply if a main residence is left to direct descendants, potentially increasing the total tax-free threshold to £500,000 per individual.
- Transfers between spouses or civil partners are exempt from IHT; their estate can be combined, providing an available allowance up to £1 million.
- Gifts to UK-registered charities are fully exempt from tax.
- Certain business and agricultural assets may qualify for 50% or 100% relief.
Who is responsible for paying inheritance tax, and when is it due?
The executor or administrator of the estate is responsible for calculating and paying IHT. This is not an easy task, especially because IHT must be paid within six months of the end of the month in which the death occurred (for example, if a death occurred on 1st of January, IHT must be paid by the 30th of June). In the event of late payments, interest and penalties will accrue.
How does the “7-year rule” for gifts work?
A further way to reduce the IHT is the application of the “7-year rule,” which aims to determine when gifts made during the lifetime of a deceased person will still be part of his/her estate. As a matter of fact, if the donor survives for seven years after making the gift, this is fully exempt from IHT and falls outside the estate. Whereas, if the donor dies within the seven years, the value of the gift will be considered in the IHT calculation. However, the taper relief can also apply if the donor dies within three and seven years after making the gift, outlining some thresholds that can potentially further reduce the
IHT payable on that specific gift.
Moreover, the £3,000 annual exemption is a tax rule that allows individuals to make a total of £3,000 worth of gifts each tax year, which will be automatically exempt from Inheritance Tax, regardless of the date of the death. The gift can be made to one person or multiple people. If this annual exemption is not used during one tax year, the unused amount can be carried forward to the next tax year. However, the current year’s £3,000 exemption must be used before the amount can be carried from the previous year.
Interestingly, the combination of exemptions is possible, like the making of small gifts up to £250 per person per tax year and wedding or civil partnership gifts (£5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else).
What are the most common myths or mistakes people make when planning for inheritance tax?
Most people think that IHT only affects wealthy people, or that making gifts just before the writing of the will can exempt IHT from being paid. All these actions, including the making of the will on its own, do not guarantee the minimisation of the payable inheritance tax.
Contrariwise, keeping records of gifts made each year and proper estate planning with the help of a professional, who can provide advice on all the possible exemptions and relieves applicable, can significantly reduce or even eliminate Inheritance Tax liability.
Andrew is the Head of Private Client at Holden Smith, based in the Horsforth office, having joined the firm in 2024.
Andrew assists clients with legal matters, including: Court of Protection, Wills, Powers of Attorney, and Estate Administration
Featured image: scyther5, Getty Images, Canva
