UK Inheritance Tax Planning: How To Protect Your Assets

The inheritance tax (IHT) is the United Kingdom’s least favorite tax, with 57% of the UK’s citizens seeing it as unfair or very unfair. 

Historically, IHT has been applied to a small percentage of estates. However, due to rising asset values, frozen thresholds, and new regulations, the number of estates liable for taxation is growing. This makes inheritance planning a necessity for an increasing number of UK citizens and residents. 

In this UK inheritance tax planning guide, we’ll provide an overview of the current IHT rules, including tax rates and exemptions. We’ll also discuss the different methods of protecting your assets against IHT.

Guide to Inheritance Tax in the UK

The UK inheritance tax is a tax levied on the estate left after the death of a UK citizen, or a resident in certain cases. The tax is typically paid from the estate by the executor of the will, if there is one, or the estate administrator if there was no will. While the inheritors of the estate don’t pay the inheritance tax, they might be liable to pay income taxes on some of the assets they inherit. 

The UK inheritance tax rate is usually 40% of the estate’s value. It is only paid on the value of the estate that is over a threshold called the nil-rate band. The UK employs two nil-rate bands:

Type of the Band	Value	Conditions for Application
Nil-rate band	GBP 325,000	All estates (no conditions)
Residence nil-rate band	GBP 175,000	Estates that include a residence Inheritors are direct descendants The net value of the estate is less than GBP 2 million

If the estate meets the conditions for a residence nil-rate band, it is added to the general nil-rate band, making the untaxable portion of the estate GBP 500,000. For example, an estate worth GBP 1 million that includes a residence and has children as beneficiaries will incur GBP 200,000 in taxes, which is 40% of the taxable portion of the estate.

Which Assets Are Taxed and Which Are Exempt?

The UK inheritance tax only applies to estates with an estimated value over GBP 325,000, or GBP 500,000 for estates where the residence nil-rate band applies. The assets that count towards the value of an estate include:

• Real estate and other immovable property
• Funds left in bank accounts or savings accounts
• Financial assets, such as shares
• Personal and household property

Starting on April 6, 2027, any unused portions of pension pots will be included as assets when determining the value of an estate for IHT purposes.

An estate also includes debts, such as mortgages, utility bills, or money owed on credit cards. When estimating the value of an estate, debts are generally deducted.

The regulations also provide some exemptions from IHT, as well as potential reliefs, for the following assets:

• Estates inherited by spouses or partners
• Gifts to charities and political parties 
• Gifts under GBP 3,000 per year
• Gifts you make more than seven years before passing (potentially exempt transfers, or PETs)
• Certain types of trusts, such as trusts for bereaved minors or disabled beneficiaries (if the transfers into the trust are made more than seven years before passing)
• Certain types of businesses and agricultural properties
• Property with a scientific, historic, or artistic importance 

Are Non-UK Assets Subject to Inheritance Tax?

The treatment of your non-UK assets for IHT purposes depends on your status in the country. In April 2025, the UK transitioned from a domicile-based to a residence-based tax regime, including the inheritance tax. The full 40% IHT liability applies to your assets only if you’re considered a long-term UK resident, which involves meeting one of two conditions:

1. You have been a tax resident in the country for the previous 10 consecutive years
2. You have been a tax resident for at least a total of 10 years in the past 20 years

As a long-term resident, your worldwide assets are subject to the UK IHT. Otherwise, only the UK-based assets are taxed when passed on as inheritance.

Under the new regulations, leaving the country doesn’t automatically revoke your residence status. You can remain a long-term resident in the UK for up to 10 years after moving abroad. This period is usually called a “tail,” and its length varies depending on how long you lived in the UK in the past 20 years:

Length of Living in the UK	Length of Residence Status After Leaving
10–13 years	Three years
14 years	Four years
15 years	Five years

Note that the 10-out-of-20 rule is reset if you leave the UK and don’t return for 10 years.

UK Inheritance Tax Advice: 6 Practical Tips To Consider

The key advice for UK inheritance tax planning is to start doing it as early as possible. Many tax-reduction steps you can take become effective only after a certain period of time has passed. Delaying planning can increase your estate’s tax liability.

Some practical steps you can take include:

1. Writing a will and keeping it up-to-date
2. Changing your tax residence status
3. Reducing taxable estate size with gifts
4. Setting up trusts 
5. Taking advantage of business relief
6. Giving to charities

1. Writing a Will and Keeping It Up-to-Date

Creating a will is a crucial element of UK inheritance tax planning, as it allows you to direct the distribution of your estate after passing. 

Without a will, some of your potential beneficiaries might be left without their inheritance. If there’s no will, the estate is divided according to intestacy rules, which generally include only the spouse and children of the deceased. Depending on the size of the estate, the following formula typically applies:

Estate Size	Spouse’s Inheritance	Children’s Inheritance
Up to GBP 322,000	The whole estate	Nothing
Over GBP 322,000	Up to GBP 322,000 in assets and half of the remaining portion	The other half of the remaining portion

For the purposes of minimizing IHT exposure, not having a will can also leave your estate without certain allowances, such as:

• The spousal tax exemption: It lets your spouse inherit your whole estate without paying IHT
• The transferable nil-rate band: It allows the surviving spouse or civil partner to inherit any unused portion of the deceased partner’s IHT allowance

2. Changing Your Tax Residence Status

If you want to minimize your tax liability on worldwide assets, consider modifying your status as a long-term resident in the UK. While this typically means moving to another country, you should also review all the factors that determine your UK tax residency status. 

Under the Statutory Residence Test used by HM Revenue and Customs, your UK tax residence will depend on a combination of factors, including the number of days spent in the UK, working patterns, and the strength of an individual’s personal and economic ties to the country. 

In general, the UK Statutory Residence Test determines your tax residency by:

• Automatic non-residence tests: Which apply if you maintain a low day count within the UK or work abroad full-time
• Automatic residence tests: Which automatically classify you as resident for tax purposes and include having spent over 183 days in the UK and working over a certain number of days from the UK
• Sufficient ties test: Applies if neither the automatic residence nor the automatic non-residence tests are met, and residence depends on connections such as family, accommodation, and work.
  • The possible ties are set out in the legislation. They are the family tie, the accommodation tie, the work tie, the 90-day tie (i.e., 90 days or more spent in the UK in either of the previous two tax years), and the country tie (i.e., the UK is the country in which an individual spends most of their time)

If an individual has been a UK tax resident for one or more of the preceding three tax years, they have to consider all of those ties; otherwise, they can ignore the country tie. The more days an individual spends in the United Kingdom, the fewer UK ties are needed for them to pass the sufficient ties test and be a resident. This ranges from one tie if they spend more than 120 days in the UK to four ties if they spend fewer than 46 days.

3. Reducing Taxable Estate Size With Gifts

Gifts may assist in reducing the size of your taxable income. The law gives tax exemptions on certain gifts, protecting them from the seven-year rule for Potentially Exempt Transfers (PET). 

The gifts that are always exempt from the inheritance tax include:

• Gifts totaling GBP 3,000 in one tax year
• Gifts for weddings and civil partnerships worth up to GBP 5,000 for your children, GBP 2,500 for grandchildren or grand-grandchildren, and GBP for anyone else
• Gifts of up to GBP 250 per tax year, per person 

In addition, gifts into certain types of trusts may trigger an immediate inheritance tax charge of 20%, rather than qualifying as PETs.

However, gifts will remain within the estate if the donor continues to benefit from the asset (known as a “gift with reservation of benefit”).

4. Setting Up Trusts

Trusts have lost some of their appeal as a method for minimizing IHT exposure. Assets placed in a trust would likely fall within the “relevant property regime” and be subject to taxation. For most trusts, IHT is charged: 

• On the tenth anniversary of the setting up of the trust, and every 10 years after that
• When any capital of the trust is distributed
• When a person becomes entitled to an interest in the income or capital of the trust
• On the conversion of the trust into a special trust
• When the value of the trust’s assets is reduced by a transfer made by the trustees
• Or, potentially, on the assets of a trust at the settlor’s death when certain conditions are met (e.g., if they are considered a long-term resident at their death despite the location of the assets)
• When the settlor of the trust passes away

To determine whether a trust would benefit you and what kind of trust you should set up, it’s best to consult a solicitor or a financial advisor.

5. Taking Advantage of Business Relief

If you have owned a business for more than two years before passing, your inheritors might be able to apply for Business Relief, significantly reducing the taxable value of the business. 

The rules surrounding the relief have also changed recently. As of April 2026, the reduction for eligible inherited businesses is:

• 100% for the first GBP 1 million of the business value
• 50% for the rest

To qualify, a business must perform a trading activity, not an investment-based one, whereby it holds or is:

• Predominantly stocks, securities, real estate, or investments 
• A non-profit
• In the process of sale or closure

6. Giving to Charities

While charitable gifts are exempt from inheritance tax, giving a sizable gift can also decrease the tax rate on your whole estate. If you designate 10% of the value of your estate for charitable giving, the rest will be taxed at 36%.

It’s important to note that the cost of the gift typically exceeds the resulting tax reduction. From a standpoint of minimizing your estate’s exposure to IHT, gifting to charity is not typically the most effective strategy. 

However, the situation changes if you were already planning to gift a portion of your estate to a charity. In that case, an increase in the size of the gift might qualify your estate for the tax rate reduction. If the amount saved by the tax reduction exceeds the value of the gift, expanding your gifting strategy may offer significant tax benefits.

UK Inheritance Tax Planning: Why Professional Advice Matters

The UK tax system is complicated and currently undergoing significant changes, making professional advice essential for structuring your estate effectively—especially where residence status, overseas assets, and long-term planning intersect. 

If you’re considering relocating or establishing a presence abroad, obtaining a second residency or citizenship may also optimize your overall tax position. Tax-friendly countries that are open to expats tend to have appropriate immigration initiatives, such as Golden Visa programs. However, these programs often involve legal, financial, and administrative complexities that are difficult to manage without expert guidance.

Specialist firms can assist in coordinating these elements, helping you approach IIHT planning with a more structured strategy. To protect your assets and reduce administrative legwork, contact Nomad Capitalist.

Reduce the IHT Tail With Nomad Capitalist

Nomad Capitalist is an advisory firm that specializes in wealth preservation and global mobility. We’ve helped more than 1,500 clients achieve the following: 

• Reduce their exposure to excessive taxation
• Acquire citizenship or residence abroad
• Identify new investment opportunities

At the core of our services is the creation of an Action Plan, a detailed document containing the exact steps our clients have to take to achieve their financial and lifestyle objectives. 

We create each Action Plan in coordination with our clients, through a multi-step process:

1. We ask our prospective clients to fill out a form to determine whether we’re a good match
2. We schedule a 45-minute onboarding call with the client to learn more about their circumstances and goals
3. Our specialists create the Action Plan and present it to the client for approval
4. We implement the Plan, managing all the administrative tasks, during a 12-month period
5. Our clients continue receiving support even after the Plan has been implemented

If you’re interested in reducing your exposure to the UK inheritance tax, we can help you choose a country with a favorable tax regime for a second residency. Our team can help you meet the requirements and manage the application process, providing you with the shortest route to removing your UK long-term resident status. Get your tailor-made Action Plan today!