Inheritance Tax Implications in the UK: 2025 Expert Guide

Managing Inheritance Tax (IHT) is a critical part of UK estate planning. This guide delivers an in-depth look at UK IHT rules, residency and domicile criteria, reliefs, exemptions, trust strategies, and practical advice for minimising liability—all tailored for both UK nationals and expats.

Disclaimer: This article is for informational purposes only. Always consult the UK Home Office or an immigration lawyer for personalized advice.

Understanding Inheritance Tax Basics

IHT applies to the transfer of an estate after death. Standard rate is 40% on value above the nil-rate band (NRB) of £325,000. The tax is charged on:

Assets transferred at death
Gifts made within seven years
Some lifetime chargeable transfers

For full guidance: Gov.uk IHT rules.

Who Pays IHT: Liability and Thresholds

IHT is due from the deceased’s estate. If value > NRB + RNRB, the excess is taxed at 40%. For example:

£500,000 estate minus £325,000 = £175,000 × 40% = £70,000 IHT
Residence nil‑rate band (RNRB) may further reduce liability

Domicile and Residence: IHT Triggers

Tax liability hinges on domicile status:

UK-domiciled individuals are taxed on worldwide assets
Non-UK domiciled but UK resident are taxed only on UK assets
Non-UK domiciled & non-resident usually face no UK IHT

Definition via Gov.uk domicile guidance.

Nil-Rate Band & Residence Nil-Rate Band

Nil-Rate Band (NRB)

Standard £325,000 across estates
Transferable between spouses allowing up to £650,000 combined

Residence Nil-Rate Band (RNRB)

Up to £175,000 per person (2025/26)
Applies when passing main residence to descendants
Reduced by £2 for every £1 of estate exceeding £2 million

Spousal Exemption and Domestic Exemptions

Assets transferred between UK-domiciled spouses are exempt. Same-sex, civil partners included. Key points:

No NRB limit on spouse transfers
Foreign spouse exemption applies if both UK domiciled
Other exemptions include annual gifts up to £3,000, wedding gifts, and maintenance transfers

More details: Gifts exempt from IHT.

Charitable Gifts and Reliefs

Charitable donations to UK-registered charities during lifetime or in will qualify for 100% IHT exemption on asset value. Estate meeting 10% charitable donation receives a 36% IHT rate on remainder.

Business Property Relief (BPR) & Agricultural Relief (APR)

These reliefs reduce the taxable value of qualifying assets:

BPR: 100% or 50% relief on qualifying business interests
APR: 100% or 50% relief on agricultural land/farm
Asset must be held for at least two years before death/gift

Check qualifying criteria: Business Property Relief.

Gifts and PET: Seven-Year Rule

Potentially Exempt Transfers (PETs):

Gifts between individuals
Becomes exempt if donor survives seven years
Taper relief applies between years 3–7 for tax on death within seven

Trusts and IHT Planning Strategies

Trusts can shield assets and reduce IHT but come with ongoing charges:

Discretionary trusts: charges every 10 years and on exit
Bare trusts: treated as belonging to beneficiary
Relevant property regime applies

Professional advice recommended for complex estates.

IHT on Overseas Assets For Expats

UK-domiciled individuals face IHT on worldwide assets, including:

Overseas property
Foreign bank accounts
Investments abroad

Non-UK domiciles taxed only on UK-based assets.

Valuation, Reporting & Payment Deadlines

Assets valued at date of death
Estates > £325,000 require IHT400 form
Payment due within six months of death month
Interest charged on late payment

See details: Pay Inheritance Tax.

Practical Steps to Reduce Estate Tax

Use annual exemptions
Make PETs early
Maximise NRB and RNRB
Gift through Trusts strategically
Leave assets to charity
Leverage business or agricultural reliefs

Internal Resources on UKBloom

Multiple allowances, reliefs, and transfer strategies can drastically reduce IHT exposure. For estates of significant value, structured planning using trusts, gifts, and charitable giving is essential. Domicile status plays a pivotal role in determining the scope of liability.

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