Blandy & Blandy: What is Inheritance Tax, Will It Be Payable on My Estate When I Die and What is Changing?

Louise Nelson, Partner, Blandy & Blandy Blandy & Blandy.

In the Budget on 30 November 2024 the Chancellor, Rachel Reeves, unveiled Inheritance Tax (IHT) related changes which the Government expects to raise an additional £2 billion a year.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate of a person who has died, including all property, possessions and money.

IHT typically accounts for under 1% of the Government’s annual tax take, yet it is perhaps one of the most debated and disliked forms of taxation and one that can have a significant impact on the beneficiaries of an estate.

In 2023/24, the Government received £7.5 billion from Inheritance Tax. IHT receipts for the period April 2024 to September 2024 total £4.3 billion, a £0.4 billion increase on the same period last year.

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According to the latest data available from HMRC, fewer than one in 20 estates, or around 4%, currently pay Inheritance Tax. However, the proportion of estates subject to IHT is forecast by the Institute for Fiscal Studies (IFS) to rise to around 7% by 2032.

When I Die, Will Inheritance Tax Have to Be Paid on My Estate?

Every individual has an Inheritance Tax-free allowance of £325,000, known as the Nil Rate Band (NRB). Estates valued below the NRB threshold will not incur Inheritance Tax, whilst those above it will be subject to IHT, charged at a rate of 40% on the portion of the estate in excess of the threshold, where no exemption applies.

For example, if a person’s estate is valued at £400,000, Inheritance Tax would only apply to the portion of the estate above the NRB threshold of £325,000, in this case £75,000, again where no exemption applies.

The Nil Rate Band threshold is currently fixed at £325,000 for individuals and in the Budget the Chancellor confirmed that this threshold will remain fixed until at least 2030.

Any lifetime gifts made by a person within seven years of their death that are above the thresholds set out below may form part of a person’s estate and be included in Inheritance Tax calculations.

IHT must be paid by the end of the sixth month following a person’s death, or interest will be payable.

Inheritance Tax Exemptions and Allowances

In addition to the NRB, further Inheritance Tax exemptions or allowances may apply, including:

An estate left to a husband, wife or civil partner will be exempt from IHT.
Any NRB allowance unused by an individual can be transferred to a surviving spouse or civil partner, which means that married couples can collectively bequeath a total of £650,000 tax-free.
Where an individual is passing on their main residence to direct descendants (including their child(ren) or grandchild(ren)), the Residence Nil Rate Band’ (RNRB), introduced in 2017, provides a tax free allowance of £175,000 per person which is also transferable between married couples and civil partners. This means that, for some people, no Inheritance Tax will be charged on the first £500,000 of their estate (£325,000 + £175,000). This means that married or civil partners able to use their late partner’s NRB and RNRB allowances and leaving their home to their childr(ren) or grandchild(ren) won’t be subject to IHT on up to £1 million of the estate.
If 10% or more of your estate is left to charity or to community amateur sports clubs (CASCs), your Inheritance Tax rate may be reduced, from 40% to 36%.
The Annual Exemption means that £3,000 can be gifted, tax-free, by an individual each year and the exemption can be carried forward for any tax year it is not used, up to a maximum of £6,000.
The Small Gifts Exemption means that £250 can be gifted to any one individual each tax year, although not to the same recipients of the Annual Exemption.

What About a Trust?

A trust is a legal arrangement that allows someone to manage assets, including property, money and investments, for the benefit of others, for example their child(ren), grandchild(ren) or other beneficiaries of their estate. There are different types of trusts, and they are taxed differently. Please contact us to find out more about trusts.

What Other Changes Were Announced in the Budget?

Several other changes affecting Inheritance Tax were announced by the Chancellor, including:

At present, inherited pensions are not included as part of an individual’s estate for Inheritance Tax purposes. However, from 6 April 2027 they will be.
IHT will be charged at a rate of 20% on estates containing business and agricultural assets worth more than £1 million from 6 April 2026.
Shares listed on the AIM stock exchange will also be subject to IHT at a rate of 20% from 6 April 2026.

Blandy & Blandy is a leading Thames Valley law firm with offices in Wokingham, Henley-on-Thames and Reading. For further information or legal advice, please call 0118 951 6888 or visit www.blandy.co.uk.