Inheritance tax essentials for 2025/26
Price Mann • April 30, 2025
Inheritance tax essentials for 2025/26
Strategies for minimising IHT liabilities.
Inheritance tax (IHT) in the United Kingdom applies to the transfer of wealth after death. It can affect property, savings, investments, and other assets. Although it applies to a smaller portion of estates, those crossing certain value limits may face a 40% tax charge on amounts above available allowances. Thresholds have been frozen for several years, so rising asset prices can bring more families into scope.
This guide reviews the 2025/26 allowances, rates, and reliefs and outlines legal provisions under HMRC regulations. It offers factual, compliance-based guidance for individuals and families who wish to manage their affairs effectively.
Current thresholds and rates
- Nil-rate band (NRB): £325,000 per individual. This level has not changed for several years and remains frozen for 2025/26. Estates valued below £325,000 pay no IHT. Amounts above this threshold are generally taxed at 40%.
- Residence nil-rate band (RNRB): £175,000 per individual, available when a home is left to direct descendants (children, stepchildren, adopted children, or grandchildren). If the RNRB applies, it can raise a person’s overall tax-free allowance to £500,000 (i.e. £325,000 plus £175,000).
- Taper for RNRB: If the total estate exceeds £2 million, the RNRB is withdrawn by £1 for every £2 above £2m. High-value estates may lose some or all of the £175,000 allowance.
- Spouse and civil partner exemption: Transfers between spouses or civil partners are exempt from IHT, regardless of amount. The first spouse's unused NRB can pass to the survivor. This can double allowances to £650,000 (2 × £325,000) or up to £1m (2 × £500,000) if the RNRB is fully used.
- ● Rate of tax: The standard rate is 40% on any value above the available allowances. This can drop to 36% if you leave at least 10% of your net estate to charity.
These thresholds are set to remain in place until at least April 2030. Since property and investment values continue to rise, individuals who might not previously have worried about IHT may now need planning advice.
Lifetime gifts and exemptions
A common way to lower IHT liability is to pass on assets while still alive. Some gifts are instantly exempt, while others become exempt over time:
Annual gift exemption
- Each individual can give away up to £3,000 per tax year free of IHT. This amount can go to one person or be split among several recipients.
- If the full £3,000 exemption goes unused in a particular tax year, it can carry forward one year (up to £6,000 maximum). After that, any unused portion expires.
Small gifts exemption
- You can give any number of gifts up to £250 per recipient each tax year, and these are immediately exempt as long as no other exemption is used for the same person that year.
- This applies well to small, customary presents for special occasions.
Wedding or civil partnership gifts
- Gifts made on the occasion of a marriage or civil partnership are exempt up to certain limits: £5,000 for a child, £2,500 for a grandchild, and £1,000 for anyone else.
- You can combine this exemption with the £3,000 annual exemption.
Regular gifts out of income
- If you have surplus income, you can set up a pattern of gifts from after-tax income without affecting your normal standard of living. These are free of IHT immediately.
- Proper documentation is important: your executors should be able to show that the gifts came from income and did not erode your capital.
Potentially exempt transfers (PETs) and the seven-year rule
- Gifts above the specific exemptions above are known as PETs. They incur no IHT if the donor survives for seven years.
- If the donor dies within seven years, the gift may be added back into the estate, potentially creating a tax liability. However, taper relief can reduce the IHT rate on that gift if death occurs more than three years after the donation.
Gift with reservation of benefit
- You cannot keep using or benefiting from an asset you have supposedly “gifted.” For instance, giving a house to children but continuing to live there without paying market rent would not remove the property from your estate for IHT.
- The gift must be genuine and unconditional for it to leave your estate.
By making gifts early and consistently, an individual can reduce the size of their taxable estate. The seven-year window for larger transfers (PETs) is important to keep in mind. Good record-keeping is essential for executors to show HMRC the timing and nature of any gifts.
Trusts
Trusts can provide a structured way to transfer or protect assets. Different trust types follow specific IHT and tax rules:
Bare trusts
- A bare trust gives the beneficiary an immediate, absolute right to the assets. It is often used for minors until they reach adulthood.
- For IHT, putting assets in a bare trust counts as a PET. If the donor survives seven years, the gift is fully exempt.
Discretionary trusts
- Discretionary trusts allow trustees to decide which beneficiaries receive income or capital. No beneficiary has an automatic right.
- When establishing or adding assets to a discretionary trust, any amount above your available nil-rate band can be taxed at 20% (the lifetime rate). If you die within seven years, that may rise to 40%, with credit for the 20% already paid.
- Discretionary trusts face a “periodic charge” (up to 6%) every ten years on the value above the nil-rate band, and there may be an “exit charge” of up to 6% when assets leave the trust between those anniversaries.
Will trusts
- Assets can pass into a trust when someone dies, based on the terms in their will.
- In the past, couples sometimes used nil-rate band discretionary trusts in their wills so the allowance of the first spouse was not wasted. However, since the nil-rate band can now be transferred between spouses, that is less common for the sole purpose of using the band. Trusts in wills remain helpful for more complex family arrangements or controlled distribution.
Reasons to use trusts
- They allow control over how and when beneficiaries receive assets.
- Once assets have been correctly placed in trust for long enough (and any relevant IHT on entry paid or avoided through exemptions), future growth often sits outside the settlor’s estate, which may reduce IHT in the long run.
Trusts require careful drafting and administration. Specialist advice is often advisable to ensure the trust is set up in line with current tax laws.
Business and agricultural reliefs
Certain businesses and farms benefit from substantial IHT relief, preventing a situation where heirs must sell assets to cover the tax.
Business relief (BR)
- Some or all of a trading business can be passed on free of IHT, depending on qualifying criteria.
- Ownership of an unlisted trading company or partnership interest may attract 100% relief if held for two years.
- Assets such as land or machinery personally owned but used by the business can attract 50% relief.
- Businesses that focus on investment rather than trading (e.g. property letting) usually do not qualify.
- From April 2026, BR will be capped so that only the first £1 million of qualifying business assets (or interests) benefits from the relief.
Agricultural property relief (APR)
- Aims to protect working farms. Farm property, farmhouses, and buildings used for agriculture may receive up to 100% relief, depending on ownership duration and use.
- The agricultural value of the property is exempt, but extra development value might not be covered.
- From April 2026, a cap will apply so that only the first £1 million of qualifying agricultural property benefits from full APR, with reduced relief available above that threshold.
These reliefs can significantly reduce the taxable part of a deceased's estate by ensuring conditions are met (such as maintaining a genuine trading status or continuing active farming). Ownership time frames are key – most often, two years of ownership is required for 100% relief.
Pensions
Defined contribution pensions usually lie outside the estate for IHT purposes, making them a significant opportunity for wealth transfer:
- General treatment: Because most pension schemes are set up with discretion for trustees over death benefits, the funds are not considered part of the estate for IHT.
- Before vs. after age 75: If death occurs before 75, a nominated beneficiary may inherit pension funds tax-free (no income tax and no IHT). If death occurs after 75, the beneficiary pays income tax at their marginal rate when drawing from the inherited pot, but there is still no IHT on the fund.
- Practical approach: Many retirees choose to spend non-pension assets first, leaving the pension to grow or remain invested, as it can transfer to heirs with minimal tax consequences.
- Potential future changes: The government has indicated it may review these rules, especially from 2027 onwards, but for 2025/26, defined contribution pensions generally remain outside IHT.
By clearly nominating beneficiaries, individuals can ensure their pension passes smoothly, often free of inheritance tax. Given the freeze on other allowances, this is a popular planning tool.
Charitable donations
Leaving part of an estate to charity can reduce or remove inheritance tax on the donated sum and, in some cases, lower the rate on the rest of the estate:
Charity exemption
- Any assets left to a registered UK charity are fully exempt from IHT. This portion does not affect the nil-rate band.
- For example, leaving £50,000 to charity reduces the taxable estate by that amount.
Reduced 36% rate
- If 10% or more of the net estate (after allowances and deductions) goes to charity, the IHT rate on the remaining taxable estate is cut from 40% to 36%.
- Therefore, the effective cost of donating that 10% is partly offset by the lower tax on the rest.
Some people choose to combine these two benefits, both supporting philanthropic causes and reducing the overall tax their heirs might face.
Other strategies
Life insurance in trust
- A life insurance policy (often a whole-of-life plan) can be used to cover any IHT bill. Writing the policy in trust means the payout falls outside the estate and is paid promptly to the beneficiaries or trustees, who can then settle the tax.
- This approach does not reduce the IHT itself, but it removes the need for beneficiaries to raise cash – often a problem if most wealth is in property.
Equity release
- A homeowner can take out a lifetime mortgage to unlock cash from their property. This debt reduces the estate’s net value, and the homeowner might gift the released funds (which could be exempt if they survive seven years).
- The accumulating interest on the loan will further lower the estate’s final value. This can help reduce or avoid IHT, although it also means less equity remains for beneficiaries.
Family investment companies (FICs)
- A private company structure can allow parents to transfer shares to their children without giving them immediate control over the assets.
- Shares given to children count as potentially exempt transfers. If the parents survive seven years, the shares do not return to their estate.
- Parents typically retain voting (but low-value) shares, so future growth accrues to the children’s shares, helping to limit the parents’ taxable estate.
Wills and regular reviews
- A valid will is essential to use allowances and reliefs effectively.
- As personal or legislative circumstances change, reviewing IHT plans periodically helps to keep strategies up to date.
The value of professional guidance
While some estates remain below the IHT thresholds, many property owners now find themselves close to or over these limits. Families can mitigate or eliminate the 40% tax on amounts above the nil-rate bands by focusing on legitimate allowances, reliefs, and planning structures.
Early, informed action is the foundation of effective IHT planning. By reviewing current rules, seeking professional guidance, and monitoring any legislative changes, individuals can ensure their estate plans remain aligned with their wishes. Regular updates can help owners respond to shifts in property values, personal circumstances, and policies, allowing them to preserve more of their assets for future generations.
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Managing risk in your investment portfolio Tips for a balanced investment approach. Investment markets rise and fall, yet the goals that matter to you – retirement security, children’s education, a comfortable buffer against the unexpected – remain constant. Managing risk means giving each goal the best chance of success while avoiding avoidable shocks. You can do that by holding the right mix of assets for your timeframe, using tax wrappers efficiently, and controlling costs and emotions. The 2025/26 UK tax year brings unchanged ISA and pension allowances. This guide explains the key steps, such as diversifying sensibly, rebalancing with discipline, safeguarding cash, and monitoring allowances, so you can stay on track whatever the markets deliver. It is an information resource, not personal advice. Start with a clear plan Define goals and timeframes: Decide what each pot of money is for (for example: house deposit in three years, retirement in 20 years). Time horizon drives how much short-term volatility you can accept. Short-term goals usually need more cash and high-quality bonds; long-term goals can justify more equities. Set your risk level in advance: Ask yourself two questions. Risk capacity: How much loss could you absorb without derailing plans (linked to your time horizon, job security and other assets)? Risk tolerance: How do you feel about market swings? Use a more cautious mix if you are likely to sell in a downturn. Ring-fence cash needs: Keep 3-6 months’ essential spending in easy-access cash before you invest. This reduces the chance of selling investments at a low point to meet bills. Choose simple, diversified building blocks: Broad index funds and exchange-traded funds (ETFs) covering global equities and high-quality bonds provide instant diversification at low cost. Avoid concentration in a single share, sector or theme unless you are comfortable with higher risk. Diversification: Spread risk across assets, regions and issuers Diversification reduces the impact of any single holding. Practical ways to diversify include the following. Assets: Use both growth assets (equities) and defensive assets (investment-grade bonds, some cash). Regions: Combine UK and global holdings. Many UK investors hold too much domestically; global funds spread company and currency risk. Issuers: In bonds, mix UK gilts and investment-grade corporate bonds to diversify credit exposure. Currencies: Equity funds are commonly unhedged (currency moves add volatility but can offset local shocks). For bonds, many investors prefer sterling-hedged funds to lower currency risk. A diversified core helps the portfolio behave more predictably across different market conditions. You can add small “satellite” positions if you wish, but keep any higher-risk ideas to a modest percentage of the whole. Use tax wrappers to reduce avoidable tax and trading frictions Efficient use of ISAs and pensions is one of the most effective risk-management tools because it protects more of your return from tax. ISAs (individual savings accounts) Annual ISA allowance: £20,000 for 2025/26. You can split this across cash, stocks & shares and innovative finance ISAs. Lifetime ISAs (LISAs) are capped at £4,000 within the overall £20,000. Junior ISA (for children under 18): £9,000 for 2025/26 (unchanged). ISAs shield interest, dividends and capital gains from tax. Rebalancing inside an ISA does not create capital gains tax (CGT), which helps you maintain your chosen risk level at lower cost. Note: There has been public discussion about potential ISA reforms, but the current 2025/26 allowance is £20,000. If government policy changes later, we will let you know. Pensions (workplace pension, personal pension/SIPP) Annual allowance: £60,000 for 2025/26 (subject to tapering for higher incomes; see below). You may be able to carry forward unused annual allowance from the three previous years if eligible. Tapered annual allowance: If your adjusted income exceeds £260,000 and threshold income exceeds £200,000, the annual allowance tapers down (to a minimum of £10,000 for 2025/26). Money purchase annual allowance (MPAA): £10,000 for 2025/26 once you’ve flexibly accessed defined contribution benefits (for example, taking taxable drawdown income). Tax-free lump sum limits: The lifetime allowance has been replaced. From 6 April 2024, the lump sum allowance (LSA) caps total tax-free pension lump sums at £268,275 for most people, and the lump sum and death benefit allowance (LSDBA) is £1,073,100. Pensions are long-term wrappers designed for retirement. Contributions usually attract tax relief and investments grow free of UK income tax and capital gains tax while inside the pension. Personal savings: Interest allowances Personal savings allowance (PSA): Basic-rate taxpayers can earn up to £1,000 of bank/building society interest tax free; higher-rate taxpayers up to £500; additional-rate taxpayers do not receive a PSA. Starting rate for savings: Up to £5,000 of interest may be taxable at 0% if your other taxable non-savings income is below a set threshold. For 2025/26, that threshold is £17,570 (personal allowance of £12,570 plus the £5,000 starting rate band). Dividends and capital gains outside ISAs/pensions Dividend allowance: £500 for 2025/26 (unchanged from 2024/25). Dividend tax rates remain 8.75%, 33.75% and 39.35% for basic, higher and additional-rate bands, respectively. The annual capital gains tax (CGT) exempt amount , £3,000 for individuals (£1,500 for most trusts). CGT rates from 6 April 2025: For individuals, 18% within the basic-rate band and 24% above it, on gains from both residential property and other chargeable assets (carried interest has its rate). HMRC examples confirm the £37,700 basic-rate band figure used in CGT calculations for 2025/26. CGT reporting reminder: UK residents disposing of UK residential property with CGT to pay must report and pay within 60 days of completion. Other gains are reported via self assessment (online filing deadline is 31 January following the tax year; if you want HMRC to collect through your PAYE code, file online by 30 December; payments on account remain due 31 January and 31 July). Why this matters for risk: Using ISAs and pensions lowers the drag from tax, allowing you to rebalance and compound returns more effectively. Outside wrappers, plan disposals to use the £3,000 CGT allowance and each holder’s tax bands and consider transfer to a spouse/civil partner (no CGT on gifts between spouses) before selling where suitable. Bonds and cash: Interest-rate and inflation considerations Interest rates: The Bank of England reduced the Bank Rate to 4% at its August 2025 meeting. Bond prices can move meaningfully when rates are high or changing, especially for longer-dated bonds. Consider the duration of bond funds and whether a mix of short- and intermediate-duration exposure suits your time horizon. Inflation: Headline Consumer Price Index (CPI) inflation was 3.6% in the 12 months to June 2025, while the CPI including owner occupiers’ housing costs (CPIH) rose by 4.1%. Inflation affects the real value of cash and bond coupons, and can influence central bank policy, affecting bond prices. Review whether your mix of cash, index-linked gilts and conventional bonds remains appropriate as inflation and interest-rate expectations evolve. Cash strategy: For short-term needs, spread deposits to respect Financial Services Compensation Scheme (FSCS) limits. For longer-term goals, excessive cash can increase the risk of falling behind inflation. Control costs and product risk Keep fees low: Ongoing charges figures (OCFs), platform fees and trading costs compound over time. Favour straightforward funds and avoid unnecessary expenses. Understand the product: Structured products, highly concentrated thematic funds or complex alternatives can behave unpredictably. If you use them, size them modestly within a diversified core. Use disciplined trading rules: Avoid frequent tinkering. Set rebalancing points (see below) and resist acting on short-term news. Rebalancing: Why, when and how Markets move at different speeds. Without rebalancing, a portfolio can “drift” to a higher or lower risk level than you intended. Follow this simple rebalancing framework. Invest in something that will rebalance automatically (i.e. certain ETFs) Frequency: Review at least annually. Thresholds: Rebalance when an asset class is 5 percentage points away from target (absolute) or 20% away (relative). Tax-aware execution: I prefer to rebalance inside ISAs and pensions. Outside wrappers, use new cash or dividends where possible; then consider selling gains up to the £3,000 CGT allowance and factoring in dividend and savings allowances. Implementation tip: If markets are volatile, use staged trades (for example, three equal tranches a few days apart) rather than one large order. Safeguard cash and investments with the right protections FSCS protection (cash deposits): Up to £85,000 per person, per authorised bank/building society group is protected. Temporary high balances from specific life events can be covered up to £1m for six months. The Prudential Regulation Authority has consulted on raising the standard deposit limit to £110,000 and the temporary high balance limit to £1.4m from 1 December 2025 (proposal stage at the time of writing). FSCS protection (investments): If a regulated investment firm fails and your assets are missing or there is a valid claim for bad advice/arranging, compensation may be available up to £85,000 per person, per firm. This does not protect you against normal market falls. Operational risk checks: Use Financial Conduct Authority authorised providers, check how your assets are held (client money and custody), enable multi-factor authentication, and keep beneficiary and contact details up to date. Currency risk: When to hedge For equities, many long-term investors accept currency fluctuations as part of the growth engine, since sterling often weakens when global equities are stressed, partly offsetting losses. For bonds, many prefer sterling-hedged funds to keep defensive holdings aligned with sterling cashflow needs. A blended approach works: unhedged global equities plus mostly hedged bonds. Behavioural risks: Keep decisions steady Common pitfalls include chasing recent winners, selling after falls or holding too much cash after a downturn. Tactics to keep you on track include: automate contributions (regular monthly investing), which spreads entry points write down rules (what you will do if markets fall 10%, 20%, 30%) separate spending cash from investments so you do not sell at weak prices to fund short-term needs use portfolio “buckets” in retirement. Retirement planning: Sequence-of-returns risk and withdrawals If you are drawing an income from investments consider the following. Hold a cash buffer (for example, 12–24 months of planned withdrawals) to avoid forced sales during sharp market falls. Be flexible with withdrawals: Pausing inflation-indexing or trimming withdrawals after a poor market year can help portfolios last longer. Use tax bands efficiently: Consider the order of withdrawals (pension, ISA, general investment account) to make use of personal allowance, PSA, dividend allowance and the CGT annual exempt amount. Take care around the MPAA if you are still contributing to pensions after accessing them. Putting it together: A repeatable checklist Confirm goals and time horizons. Check emergency cash (3-6 months). Map your target asset allocation. Use wrappers first: Fill ISAs and workplace/personal pensions as appropriate. Keep costs low: Prefer broad index funds/ETFs. Set rebalancing rules: Annual review + thresholds. Document tax items: Monitor dividend/CGT use; note 60-day property CGT rule; plan for 31 January/31 July self assessment dates if relevant. Review protection limits: Spread larger cash balances across institutions in line with FSCS; note proposed changes for late 2025. Schedule an annual review to update assumptions for interest rates, inflation and any rule changes. Get in touch if: you are unsure how to set or maintain an asset allocation you plan to draw income and want to coordinate wrappers and tax bands you expect large one-off gains or dividends and want to plan disposals or contributions you have concentrated positions (employer shares, single funds) and want to reduce single-asset risk tax-efficiently you are considering more complex investments. Wrapping up Risk management is not a one-off task but an ongoing discipline. By defining clear objectives, spreading investments across regions and asset classes, using ISAs and pensions to shelter returns, and reviewing allocations at least annually, you create a framework that limits surprises and keeps decisions rational. Document key dates – self assessment payments on 31 January and 31 July, the 60-day CGT rule for property, and the annual ISA reset on 6 April – so tax never forces a sale at the wrong time. Check deposit limits and platform safeguards for peace of mind, and keep a written record of your rebalancing rules to prevent knee-jerk trades. If life events or regulations change, revisit your plan promptly. A measured, systematic approach lets your portfolio work harder while you stay focused on the goals that matter most. Important information This guide is information only and does not account for your personal circumstances. Past performance is not a guide to future returns. The value of investments and income from them can fall as well as rise, and you may get back less than you invest. Tax rules can change and benefits depend on individual circumstances. If you need personalised advice, please contact a regulated financial adviser. If you’d like advice on managing your portfolio, get in touch.
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