Inheritance tax is Britain’s most feared and least paid tax: barely 4–5% of estates owe anything. The gap between fear and reality is the thresholds — and the planning tools sitting in plain sight.
The Thresholds That Protect Most Estates
Everyone has a £325,000 nil-rate band. Passing your main home to direct descendants adds up to £175,000 more. Anything left to a spouse is exempt entirely — and unused bands transfer to the survivor. A married couple leaving a family home to children can therefore pass up to £1 million tax-free. Above that, the rate is 40% on the excess only.
The 7-Year Rule
Lifetime gifts leave your estate entirely if you survive 7 years. Die within 7 and the gift counts back in — with taper relief reducing the tax (not the value) on gifts above the nil-rate band from year 3 onwards.
Allowances Most People Waste
- £3,000 annual gifting exemption (plus one carried-forward year)
- £250 small gifts to unlimited people
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild
- Gifts from surplus income: unlimited and immediately exempt if regular and lifestyle-neutral — the most underused rule in estate planning
The Big Exemptions
Pensions have historically sat outside estates (rules evolving — check current position), charitable bequests are exempt and 10%+ to charity cuts the whole estate’s rate to 36%. IHT is often called a voluntary tax; for organised families, the description is fair.