How Does Inheritance Tax Work In The UK?

Inheritance Tax (IHT) is often described as the “silent tax” — one that many families only discover when it’s too late to plan ahead. In reality, with the right financial advice, it’s entirely possible to reduce or even eliminate unnecessary exposure.

As property values rise and tax thresholds remain frozen, more estates than ever are now falling within the scope of IHT. Whether you live in the UK or abroad but hold UK assets, understanding how Inheritance Tax works — and how to plan effectively — is vital for protecting your legacy.

At Blacktower Financial Management, we help clients across the UK and internationally create strategic estate plans that protect wealth, minimise tax, and ensure more of your estate passes to your loved ones.

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1️⃣ What Is Inheritance Tax?

Inheritance Tax is a tax on the value of your estate — everything you own at the time of your death, including:

• Property
• Savings and investments
• Pensions (in some cases)
• Life assurance policies not written in trust
• Personal belongings and valuables

If the total value of your estate exceeds a certain threshold, IHT may be payable before your beneficiaries can receive their inheritance.

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2️⃣ The Current Inheritance Tax Thresholds

For the 2024–2025 tax year, the Nil-Rate Band (NRB) — the amount you can pass on tax-free — remains frozen at £325,000 per person, a figure unchanged since 2009.

Anything above this threshold is typically taxed at 40%.

Example:

If your estate is worth £600,000, and your total tax-free allowance is £325,000, the remaining £275,000 could be subject to IHT at 40%, resulting in a £110,000 tax bill.

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3️⃣ Additional Allowances

The UK tax system offers additional allowances that can significantly reduce IHT exposure.

✅ Residence Nil-Rate Band (RNRB)

If you leave your main residence to direct descendants (children, stepchildren, or grandchildren), you may qualify for the Residence Nil-Rate Band, worth an additional £175,000 per person.

Together, this means a couple could potentially pass on £1 million (£325,000 + £175,000 each) before any IHT becomes due — provided the estate qualifies.

Note: For estates valued above £2 million, the RNRB is gradually reduced by £1 for every £2 above the threshold.

✅ Spouse and Civil Partner Exemption

Transfers between spouses or civil partners are exempt from IHT, regardless of the amount. Any unused allowance can also be transferred to the surviving partner, effectively doubling the total available allowance for the couple.

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4️⃣ When and How Is Inheritance Tax Paid?

IHT is usually paid by the executor or administrator of the estate from the assets before distribution to beneficiaries.

Key Timelines:

• Deadline: IHT must be paid within six months of the date of death.
• Late Payment Interest: If not paid on time, HMRC will charge interest.
• Property Sales: Where the estate includes property, IHT can sometimes be paid in instalments over 10 years.

Beneficiaries do not normally pay tax on what they inherit — but they may face Income Tax or Capital Gains Tax on any income or growth from inherited assets later.

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5️⃣ Lifetime Gifts and the “Seven-Year Rule”

One of the most effective ways to reduce Inheritance Tax liability is through lifetime gifting.

✅ Potentially Exempt Transfers (PETs)

If you make a financial gift to another individual and survive for seven years, that gift becomes fully exempt from IHT.

However, if you pass away within seven years, the gift may still be taxable on a sliding scale known as taper relief:

Years Between Gift and Death	Tax Rate Applied
0–3 years	40%
3–4 years	32%
4–5 years	24%
5–6 years	16%
6–7 years	8%
Over 7 years	0% (fully exempt)

✅ Annual and Small Gift Allowances

You can also make certain gifts that are immediately exempt, such as:

• £3,000 per year (your annual gift allowance).
• Small gifts up to £250 per recipient.
• Wedding gifts up to £5,000 for children or £2,500 for grandchildren.

Over time, these allowances can add up and meaningfully reduce your taxable estate.

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6️⃣ Trusts and Estate Planning

Trusts can play a valuable role in managing, protecting, and distributing wealth efficiently. By placing assets into a trust, you may remove them from your estate for IHT purposes while maintaining control over how they are used or who benefits.

However, trusts must be structured carefully, as they have their own tax rules and reporting requirements.

Common trust types include:

• Discretionary trusts: Allow flexibility in how beneficiaries receive income or capital.
• Life interest trusts: Provide income to one person during their lifetime, with assets passing to others later.
• Bare trusts: Give absolute entitlement to named beneficiaries.

Blacktower’s estate planning specialists work with legal professionals to design trust and gifting strategies that align with your goals and ensure compliance with UK tax law.

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7️⃣ Inheritance Tax for Expats and Non-Residents

Even if you live abroad, you may still be subject to UK Inheritance Tax if you are UK-domiciled or hold UK assets, such as property or investments.

Domicile — a legal concept distinct from residency — determines your long-term connection to the UK for tax purposes. Many expats remain UK-domiciled even after years overseas, meaning their worldwide estate could still be taxed.

International estate planning can help expatriates restructure assets through trusts, life assurance, and cross-border investment vehicles to mitigate exposure.

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8️⃣ How Blacktower Can Help

Inheritance Tax can seem complex, but with professional advice, it’s entirely manageable. At Blacktower Financial Management, we help clients:

• Assess potential IHT exposure.
• Implement gifting, trust, and life assurance strategies.
• Coordinate tax-efficient estate plans across jurisdictions.
• Ensure assets are passed on according to their wishes — not lost to tax.

With careful planning, you can protect your loved ones and preserve the wealth you’ve worked hard to build.

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Speak to one of our estate planning specialists to find out how you can reduce your Inheritance Tax liability and secure your family’s financial future.