The UK Inheritance Tax: An Overview

The UK’s Budget 2025 brought some unwelcome news to anyone who was hoping to see the reach of the inheritance tax stabilized, if not reduced. With the introduction of measures like the prolonged threshold freeze and announced inclusion of pensions, more estates may become liable to IHT, increasing the importance of understanding how the tax works. 

In this article, we’ll explore the UK inheritance tax, explaining how it operates, who is responsible for paying it, and which steps you can take to reduce its impact on your estate.

How Does the Inheritance Tax Work in the UK?

To understand how the UK inheritance tax works, it’s important to know:

1. What the UK inheritance tax rates are
2. Which assets are taxable under the UK inheritance tax rules
3. What the inheritance tax threshold in the UK is
4. What other UK inheritance tax allowances and reliefs exist

What Are the UK Inheritance Tax Rates?

The marginal tax rate on inheritance in the UK is 40%. However, on average, taxpayers in the UK pay an effective tax rate of 13% on their estates. The reduction typically results from allowances, exemptions, and tax planning strategies. 

Under the UK inheritance tax rules, you can reduce the marginal tax rate on your estate to 36% by leaving a portion of your estate to charity. To get the reduction, the value of the gift has to be at least 10% of the net value of your estate, i.e., the value after any debts are subtracted. 

While the charitable gifting option isn’t particularly cost-effective, it might be worth considering if you were already planning on giving a portion of your estate to a charity.

Which Assets Are Taxable Under the UK Inheritance Tax Rules?

The assets that form your estate are your valuable worldly belongings. These can include:

• Property
• Money or bonds in a bank or savings account
• Stocks and shares
• Cryptoassets
• Valuable personal possessions, such as jewelry or vehicles

Under the new reforms, even certain types of pensions and death benefits are taxable as of April 2027.

The rules also state that any form of debt, such as a mortgage, credit card debt, or unpaid bills, must be settled from the estate’s assets. 

It’s important to note that the UK will tax you on your worldwide assets as long as you maintain a long-term residency status in the UK. Even after you leave the country, you can be considered a long-term resident for up to 10 years, carrying a so-called residency tax “tail”. This is why you must act quickly to mitigate the exposure of your worldwide assets to the UK IHT.

Bonus read: To learn more about countries that don’t have an inheritance tax, read our guides on Malta, Oman, Panama, and the UAE.

What Is the Inheritance Tax Threshold in the UK?

The UK inheritance tax is levied only on the value of an estate exceeding a specific threshold. That threshold is GBP 325,000, and it’s called the nil-rate band. 

The cap can be increased if your estate includes your place of residence. If that’s the case, and you leave your home to your spouse, children, or grandchildren, an additional GBP 175,000 is added to the threshold for a total of GBP 500,000. 

Those additional GBP 175,000 are called the residential nil-rate band, and they only apply:

• To the value of the home
• To an estate that is worth under GBP 2 million

If the home is worth less than GBP 175,000, the leftover residential nil-rate band allowance isn’t applied to the rest of the estate. 

Conversely, if the estate is valued at over GBP 2 million, the residential nil-rate band is reduced by a pound for every two pounds above that amount. So if your property is valued at GBP 2.35 million, the residential nil-rate band no longer applies. 

Are There Any Other UK Inheritance Tax Allowances and Reliefs?

In addition to the regular and residential nil-rate bands, the two most important allowances under the UK IHT rules are those that let you:

1. Leave your estate to your spouse or civil law partner without paying any taxes, even if the estate’s value goes over the threshold
2. Transfer the unused portion of the combined nil-rate bands from one spouse or civil partner to another, for a maximum tax-free threshold of GBP 1 million

For the latter, any portion of the estate that was left to the spouse or civil partner will be considered tax-free without applying the nil-rate bands to it. So if a person leaves GBP 300,000 of their GBP 500,000 estate to their spouse and the rest to someone else, they will use up GBP 200,000 of their nil-rate bands, saving the rest.

Under the UK inheritance tax rules, some assets are exempt from taxation if specific conditions are met. The main types of reliefs include:

• Business property relief, which applies to qualifying businesses, shares in companies, and land, machinery, or buildings used by businesses
• Agricultural property relief, which applies to agricultural land and property used for growing crops or rearing animals

The relief for these assets can be either 50% or 100%, based on specific criteria. The inheritance tax rules allow the tax-free transfer of these properties even before the owner’s passing. 

Who Pays the Inheritance Tax in the UK?

In most cases, UK inheritance tax is paid by the estate, not the inheritors. The personal representative of the estate, an executor if there’s a will or an administrator if there isn’t, deducts the tax liability from the estate before releasing the inheritance to the beneficiaries. 

Some exemptions that could leave the inheritors liable for IHT include:

• Tax on gifts made within seven years of the estate owner’s passing
• Non-payment of tax liabilities by the trust
• Non-payment of tax liabilities by the personal representative

If you decide to transfer some of your estate into a trust, you might be liable to pay a part of the inheritance tax in advance in the form of a lifetime charge of 20%. This usually applies when the value of the assets you place into a trust exceeds the GBP 325,000 threshold.

It’s important to note that the inheritors might still be liable to pay other taxes on their inheritance. For example, they will have to pay income tax on any income derived from assets they inherit, such as rental income from property. They may also incur the capital gains tax liability upon selling the inherited assets. 

How Many People in the UK Pay the Inheritance Tax?

The percentage of estates that paid the inheritance tax in the UK in the 2022–2023 tax year was 4.62%. For comparison, roughly half of the population pays income tax.

Because of the frozen thresholds and appreciation of property values alone, the number of estates liable for tax is likely to grow. As seen from the new UK inheritance tax rules, the government may also take additional steps to broaden the pool of taxable assets. 

What Does IHT Look Like in Practice? UK Inheritance Tax Examples

If your estate is valued at GBP 1 million, and it includes a residential property, here’s how much inheritance tax you will pay in the UK:

Item	Value	Tax Rate	Payable Tax
Nil-rate band	GBP 325,000	0%	/
Residential nil-rate band	GBP 175,000	0%	/
Taxable estate	GBP 500,000	40%	GBP 200,000

In this example, the effective tax rate on your estate is 20%. 

If your estate is valued at GBP 500,000, and it doesn’t include a residential property, the payable tax will be:

Item	Value	Tax Rate	Payable Tax
Nil-rate band	GBP 325,000	0%	/
Residential nil-rate band	/	0%	/
Taxable estate	GBP 175,000	40%	GBP 70,000

The effective tax rate in this case is 14%.

How To Plan for the UK Inheritance Tax

Planning for the UK inheritance tax can be challenging, especially when trying to navigate the tax rules and regulations, as well as certain instruments you may use to mitigate the estate’s exposure to taxation.

Here are some important steps you should consider taking:

1. Create a will
2. Set aside funds for the IHT charge
3. Change your long-term residence status

While it’s important to understand these basic steps of a UK inheritance tax plan, you should also consider enlisting the services of a financial planner or solicitor. It might also be beneficial to collaborate with a company experienced in offshore assets and international residency.

1. Create a Will

A will is a document that enables you to designate the beneficiaries of your estate. As such, it is a key strategic tool you can use to mitigate the estate’s exposure to IHT. 

Without a will, your estate is divided according to the intestacy rules. In England, Wales, and Scotland, the spouse inherits the whole estate if there are no children. Rules are different if the children are involved:

Part of the UK	Intestacy Rules
England and Wales	The spouse inherits movable property and a fixed statutory legacy (currently GBP 322,000) 50% of the remainder is awarded to the spouse, while the rest is divided between the children
Scotland	The spouse inherits the interest in the home up to GBP 473,000, as well as up to GBP 29,000 in household contents, and GBP 50,000 in cash A third of the remainder of the estate is also awarded to the spouse, while the children divide the remaining two-thirds

Depending on the size and structure of the estate, such a division might not be the most tax-efficient, which is why having an up-to-date will is crucial.

2. Set Aside Funds for the IHT Charge

An effective inheritance tax planning strategy is to take out a life insurance policy and place it into a trust. Doing so protects the insured sum from being included in the estate for tax liability purposes.

More importantly, it will provide the estate executor a method to pay the inheritance tax on the estate before the six-month deadline. There would also be no need to sell off appreciating assets to settle tax obligations.

3. Change Your Long-Term Residence Status

If you hold substantial assets outside of the UK, taking steps to cease long-term residency in the country can protect the assets from the IHT liability. 

This strategy requires prompt action to reduce the exposure of worldwide assets to taxation due to the long-term residence tail. Since the process involves acquiring residency in another country and potentially restructuring assets across jurisdictions, finding expert guidance is crucial. To get assistance from experienced wealth and residency advisors, contact Nomad Capitalist.

Minimize Your UK Tax Rate With Nomad Capitalist

Nomad Capitalist is a consultancy company specializing in wealth protection and global mobility. We’ve helped more than 1,500 clients reduce their tax legally, invest overseas, and acquire residency or citizenship in countries that offer appropriate tax and lifestyle benefits. 

To help you plan for the UK inheritance tax, we will create a tailor-made Action Plan with all the steps necessary to mitigate the exposure of your overseas properties to IHT. Depending on your needs, the Plan can include steps for relinquishing UK long-term residency in favor of residency in another jurisdiction. We can also include favorable investment opportunities in the Plan. 

Here’s what working with us looks like:

1. We ask you to fill out a short form to help us determine whether we’re a good match
2. We schedule a 45-minute onboarding call with you to learn more about your situation and needs
3. Our agents create the Action Plan and present it to you for approval
4. We implement the Plan and manage the administrative parts during a 12-month period
5. You continue receiving lifelong support from us, even after the Plan was implemented

By partnering with Nomad Capitalist, you gain expert guidance at every stage of our collaboration. We can help you identify the most suitable jurisdiction for establishing new residency, manage the application process on your behalf, and provide ongoing support with all administrative and legal requirements. Ensure a smooth and efficient relocation and handle tax obligations with ease—get your Action Plan today!