Inheritance Tax Explained – Simple Answers for Your Estate

If you’ve ever heard the term “inheritance tax” and wondered what it actually means, you’re not alone. In the UK it’s often called IHT, and it’s basically a charge on the value of a person’s estate after they die. The good news is the rules are clear enough that you can plan ahead and keep most of your money where it belongs – with your family.

What Triggers Inheritance Tax and How Much Is It?

Inheritance tax only kicks in when the total value of everything you own – property, savings, investments, even valuable personal items – is above the current nil‑rate band. As of 2025 that band is £325,000. Anything above that is taxed at 40%, unless you qualify for certain reliefs. For example, if you leave a home to your children or grandchildren, you can claim the residence nil‑rate band, which adds another £175,000 in most cases. That means many families can pass on around half a million pounds tax‑free.

There are a few situations where the rate drops to 36% – mainly when you give at least 10% of the estate to charities. So if philanthropy is part of your plan, you could shave a few percent off the bill.

Practical Ways to Reduce Your IHT Bill

First, look at gifts you can make while you’re alive. You can give away up to £3,000 each year without it counting toward your IHT limit. If you haven’t used that allowance in the past, you can even carry it forward for one year. Small regular gifts add up and aren’t taxed.

Second, think about trusts. Putting assets into a properly structured trust can take them out of your estate, which may lower the taxable amount. Trusts can be tricky, so getting professional advice is worth the cost.

Third, check your will for the residence nil‑rate band. If you own a house and plan to leave it to direct descendants, make sure the will clearly states that intention. This simple wording can unlock the extra £175,000 exemption.

Finally, consider life insurance to cover any potential IHT bill. The policy pays out to your heirs, and because the insurance benefit is usually not part of the estate, it can be a clean way to settle the tax without forcing the sale of assets.

All these steps work best when you start early. IHT isn’t a surprise tax that shows up out of nowhere; it’s a predictable charge that you can plan around. A quick chat with a financial adviser can show you which combination of gifts, trusts, and insurance works for your situation.

Bottom line: inheritance tax only affects estates that go over the £325,000 threshold, and there are clear tools to keep your family’s inheritance intact. By using annual gift allowances, taking advantage of the residence nil‑rate band, and considering trusts or insurance, you can dramatically cut the bill. The sooner you look at your numbers, the easier it is to make smart moves that protect the wealth you’ve built.