What is Inheritance Tax and who pays it?

NEWS UPDATE

Taxes on inheritance have existed for many years. The first form of tax on inheritance called “Probate duty” was introduced as part of the Stamps Act 1694. Under different guises, taxes on estates continued to evolve until Nigel Lawson introduced Inheritance Tax (“IHT”) in 1986.

In 1986 the Nil Rate Band (“NRB”), a threshold that allows a portion of an estate to be passed on tax-free, was £71,000 and the tax had graduated rates from 30% to a top rate of 60% on the value of estates exceeding £317,000.

The NRB increased each year from 1986 to 2009 when it reached £325,000 and it has remained, and is set to remain, at that level until 2030/31. 2009 also saw the introduction of the transferable nil rate band (“TNRB”) between spouses. This gave married couples a potential tax-free allowance of up to £650,000 on the second death. Transfers of assets between spouses and civil partners are exempt under what is referred to as the ‘spousal exemption’.

The Residence Nil Rate Band (“RNRB”) was introduced in 2017, offering an additional allowance of £100,000 on a person’s “main residence”, provided it is inherited by direct descendants, i.e. children, grandchildren. This RNRB has risen and is now capped at £175,000 per person or the value of the main residence (whichever is lower). The RNRB tapers for estates over £2m by £1 for every £2 that the total estate exceeds that threshold.

Like the NRB, the RNRB can also be transferred to a surviving spouse if it is not used on the first death, giving a combined RNRB of £350,000, and thus, up to £1 million combined NRB and RNRB tax free allowances may be available on the second death.

Up to £1 million in combined NRB and RNRB tax free allowances may be available on the second death.

In 1988, IHT was fixed at a rate of 40% and this is still the rate today. In 2012, a reduced rate of IHT of 36% was introduced, which applies to the rest of an estate where a person leaves 10% or more of the “net value” of their estate to qualifying charities (the amount going to charities being completely exempt).

The most recent significant changes to IHT were announced in the 2024 Budget. Changes introducing a cap on Business Relief (BR)¹ or Agricultural Property Relief (“APR”) are effective from 6 April 2026, and from 5 April 2027, private pensions will be included in the value of a person’s estate, whereas previously they were not included in the value of an estate for the purposes of inheritance tax.

Funds from the estate are used to pay inheritance tax to HM Revenue and Customs (“HMRC”). This is done by the person dealing with the estate (called the ‘executor’, if there is a will). The beneficiaries of the estate do not normally pay tax on the value of property they inherit unless gifts have been made with a value in excess of £325,000 within 7 years of death. It is likely that pension trustees may also have some responsibility for the payment of inheritance tax following the inclusion of pension balances within the value of an estate from 5 April 2027.

Inheritance tax may also arise on some lifetime transfers which are excluded from being “potentially exempt transfers”, notably transfers into specified trusts and on transfers to some companies.

Inheritance tax receipts for the 6 months April to October 2025 were £5.2bn², which is £0.2bn higher than the same period in the prior year. Due to increasing property wealth, the inclusion of private pensions and the freezing of NRBs, receipts for inheritance tax are expected to increase significantly to 2030/31.

The good news is that there are strategies you can adopt during your lifetime to maximise the value of your estate that will pass to your beneficiaries.

Receipts for inheritance tax are expected to increase significantly to 2030/31.

Simple inheritance tax example:

A married couple have assets valued at £3m, consisting of a property valued at £1.75m and investments valued at £1.25m. On the first death all assets are transferred to the surviving spouse, tax-free under the spousal exemption. On the second death, assuming no other reliefs and exemptions are available, inheritance tax of £940,000 would be payable by the estate, leaving £2,060,000 for the beneficiaries.

The inheritance tax calculation is: on second death, assets are £3m less the NRB x2 (£650,000³) = £2,350,000 x 40% = £940,000. Net estate available to beneficiaries is £3,000,000 – tax of £940,000 = £2,060,000. Due to the size of the estate (£3m) no RNRB is available.

¹ Commonly also referred to as Business Property Relief or BPR

² HMRC Tax receipts for the UK monthly bulletin 21 November 2025

³ No Residence nil rate band is available due to the size of the estate.

TECHNICAL TEAM

Simon Palmer

Group Technical Director

Simon Palmer

Group Technical Director

Simon.palmer@theingeniousgroup.co.uk

Simon has overall responsibility for the tax affairs of Ingenious’ managed investment funds and services and of Ingenious’ group companies. Simon previously spent 21 years with Ernst & Young, including 8 as a partner, and 5 years providing tax consultancy services. Simon started his career as a tax inspector with the Inland Revenue (now HMRC) and was a member of the Chartered Institute of Taxation.

Sebastien Couplez

Technical Director

Sebastien Couplez

Technical Director

Sebastien.Couplez@theingeniousgroup.co.uk

Sebastien has extensive experience in tax transactional advisory and compliance across Ingenious’ managed funds and services, including Estate Planning, EIS, VCT, and film partnerships. Prior to joining Ingenious, Sebastien worked as an Advisor at Ernst & Young. Sebastien holds a Chartered Accountant designation from the Institute of Chartered Accountants of Scotland and a BCom (Honours) in Finance from the University of the Witwatersrand in Johannesburg, South Africa.

Jack Ingilby

Technical Manager

Jack Ingilby

Technical Manager

jack.ingilby@theingeniousgroup.co.uk

Jack provides tax support across Ingenious’ managed funds and services, including Estate Planning, EIS, VCT, and film partnership, and is responsible for client tax reporting. Prior to joining Ingenious, Jack was at Deloitte. Jack is a member of the Chartered Institute of Taxation.

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Ingenious Insights FAQs

What is Inheritance Tax and who pays it?

What is Business Relief?

What benefit does an investment within the Ingenious Estate Planning service provide?

How does an investment in a Business Relief solution compare to other estate planning solutions?

Business Relief and Trusts

My client already holds a Business Relief qualifying asset. Can they redeem the asset and invest in an Ingenious Estate Planning solution and immediately benefit from Business Relief?

Can my client borrow funds to make a Business Relief qualifying investment?

Once an investment is made, can my client easily access their investment at a later date and what might be the associated tax implications?

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