Inheritance Tax Current Rules And Change Proposals
Inheritance Tax (IHT)
is a tax charged on property, money, and possessions passed on after death. Under current Inheritance Tax rules, it is generally payable by relatives of the deceased (spouse, children, or adopted children) on their death when an estate's total value exceeds the £325,000 threshold.
It is important to understand the current rules and the proposed changes announced in the 2024 Autumn Budget, essential for effective estate and tax planning.
This article covers the subject at a basic level; it is advisable to delve deeper to make sound Estate planning decisions.
Further details are available on the official government website and from the Estate planning providers.
https://www.gov.uk/government/publications/inheritance-tax-thresholds/inheritance-tax-thresholds
Inheritance Tax Thresholds and Allowances
Under the Inheritance Tax current rules, the standard nil-rate band is:
£325,000 per person
Inheritance Tax is usually charged at 40% on the value of an estate above this threshold, unless exemptions or reliefs apply.
Residence Nil-Rate Band (RNRB)
In addition to the standard allowance, an extra Residence Nil-Rate Band* (RNRB) of up to £175,000 is available when a main residence is left to direct descendants, including:
Children
Grandchildren
Adopted children
*Residence Band – additional inheritance tax allowance for up to £175,000 granted to closest relatives of the deceased (children, grandchildren, adopted children) on a main home that can reduce the inheritance tax on the estate and the unused part of the RNRB can be transferred between spouses up to the amount of £350,000.
Unused RNRB can be transferred between spouses or civil partners, potentially allowing a combined allowance of up to £350,000.
2024 Autumn Budget: Proposed Inheritance Tax Changes
The Inheritance Tax current rules are expected to remain frozen, but several important changes have been proposed in the 2024 Autumn Budget, mainly affecting estates above the £325,000 threshold.
Key Proposed Changes
Inclusion of Pension Pots in the Estate (from April 2027)
Pension pots may become part of the taxable estate for Inheritance Tax purposes, increasing the overall “inheritance pot.”Restriction of Agricultural and Business Property Relief (from April 2026)
Relief will be limited to the first £1 million of combined qualifying assets
Assets above this limit may be taxed, with the first £1 million potentially taxed at 20%
Freeze of Inheritance Tax Thresholds
Nil-rate band remains at £325,000
Residence Nil-Rate Band remains at £175,000
Inheritance Tax and Trusts
Different Inheritance Tax rules may apply when an estate is left in trust. There are several types of trusts, and choosing the right structure is crucial.
While not explored in depth here, a Living Trust is often used to provide added protection for children who inherit an estate, particularly if they later marry. However, trust planning is complex, and professional legal and tax advice is essential.
Some trusts may generate income and therefore be subject to income tax, although there is a tax-free income allowance of up to £500. Professional advisers can help select a trust that minimises tax exposure while meeting the family’s objectives.
Reducing the Inheritance Tax Liability
Under the Inheritance Tax current rules, there are several legitimate ways to reduce the taxable value of an estate, including:
Making lifetime gifts to family members
Donating to charities or charitable causes
Appointing pension beneficiaries (nominees)
Lifetime Gifting Allowances
While there is no limit on the value of assets that can be given away, certain thresholds determine whether gifts may later be subject to Inheritance Tax.
Key allowances include:
Annual Exemption: £3,000 per tax year (to one person or split between several)
Small Gift Allowance: £250 per person per tax year
Wedding or Civil Partnership Gifts:
£5,000 to a child
£2,500 to a grandchild or great-grandchild
£1,000 to anyone else
Spouse or Civil Partner: Unlimited gifts if the recipient resides in the UK
Gifts made from surplus income are also exempt, provided they are regular and do not reduce the giver’s standard of living.
The 7-Year Rule for Gifts
Under the Inheritance Tax current rules, gifts made within seven years of death may still be subject to Inheritance Tax. This is known as the 7-year rule.
Taper Relief Rates
If the giver dies within seven years, taper relief may reduce the tax payable when the value of gifts exceeds the £325,000 nil-rate band.
0–3 years: 40%
3–4 years: 32%
4–5 years: 24%
5–6 years: 16%
6–7 years: 8%
7+ years: 0%
If the giver survives for more than seven years, the value of the gift falls completely outside the estate for Inheritance Tax purposes.
Final Thoughts
Inheritance Tax is often described as a voluntary tax because careful planning can significantly reduce—or even eliminate—the liability. By understanding current Inheritance Tax rules, using available allowances, and seeking professional advice, individuals and families can protect their wealth and ensure it is passed on efficiently to future generations.
