Inheritance tax – the basics
Peter McGahan
Monday 5th October, 2026.
I'VE covered some of the more technical aspects of inheritance tax over the last few weeks due to your questions, but I thought I would also bring it back to the beginning to cover the basics.
Inheritance tax planning has an unfortunate ability to become complicated before anyone has established whether it needs to be.
Trusts, gifts, insurance, pensions, seven-year rules, allowances and reliefs all get thrown onto the table. Before long, you have a financial version of a deep kitchen cupboard - everything is technically in there but finding what you need is another matter.
So, let’s start at the beginning.
Inheritance tax (IHT) is generally charged at 40 per cent on the part of your estate above the available tax-free thresholds. Your estate isn't simply the money in your bank account. Broadly, think property, savings, investments and other assets, less qualifying debts.
The standard nil-rate band is currently £325,000.
There is also a residence nil-rate band of up to £175,000 where a qualifying home passes to direct descendants, such as children or grandchildren. There are conditions attached, and it begins to reduce where an estate exceeds £2million.
Unused nil-rate bands can potentially transfer between spouses and civil partners. Consequently, a qualifying married couple or civil partners may ultimately have combined thresholds of up to £1million.
That £1million figure is useful, but don't tattoo it onto your financial plan. Your circumstances determine what is available.
The first job in Inheritance tax planning therefore isn't buying any financial products or solutions. Take your time. It is working out what you own.
Make a simple list of your property, cash, investments and other significant assets, together with debts. Then establish how those assets are owned and who they are intended to pass to. Your Will matters here too.
Only then can you see whether there is an Inheritance tax problem.
If there is, I would start with the simple allowances before disappearing down the rabbit hole of complicated planning.
You currently have an annual gifting exemption of £3,000. If unused, it can be carried forward for one tax year. There are also exemptions for small gifts of up to £250 per person, subject to the rules, and separate allowances for wedding or civil partnership gifts.
One of the more interesting exemptions is normal expenditure out of income.
If you have surplus regular income, it may be possible to make regular gifts which are immediately exempt from inheritance tax, provided the conditions are met, including that the gifts form part of your normal expenditure and leave you able to maintain your normal standard of living.
That can be extremely useful. Rather than allowing surplus income to accumulate in your bank account and potentially enlarge the eventual inheritance tax problem, you may be able to pass it to the people you want to benefit.
Keep records. Your executors will thank you for something considerably more useful than a shoebox full of unexplained bank statements – a pure delight.
Then come larger outright gifts.
If you give assets away to an individual and survive seven years, those gifts will generally fall outside your estate for Inheritance tax purposes. These are normally known as potentially exempt transfers.
The word I would underline, however, is give.
If you give money away, it isn't yours anymore. Inheritance tax planning should never involve giving away capital you might later need simply to save tax. Saving 40 per cent tax is not terribly clever if you subsequently need 100 per cent of the money.
That is where proper cashflow planning becomes valuable. How much do you need for your lifestyle? What happens if you live much longer than expected? What provision have you made for care, emergencies and inflation?
Once those questions are answered, trusts, life assurance and other estate-planning strategies can be considered where appropriate. They have their uses. They also bring conditions, costs, tax consequences and sometimes a loss of access or control. Complexity needs to earn its keep.
There is another important change approaching. From April 6, 2027, most unused pension funds and pension death benefits will be brought within an individual's estate for Inheritance tax purposes. Anyone whose estate planning has relied heavily on pensions sitting outside Inheritance tax will therefore need to revisit the numbers.
But don't begin there.
Good Inheritance tax planning starts with three much less exciting questions: What do I own? What might my estate be worth? And how much of it can I safely afford to give away?
Get those right first. If you have an inheritance tax query, please call 01872 222422.
Peter McGahan is the Chief Executive Officer of Independent Financial Adviser firm, Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
