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IHT rules at a glance

How Inheritance Tax works, how the rules might apply to your estate, and how experienced investors could get IHT relief

Inheritance tax is a charge that can be applied on the estate (the property, money and possessions) left behind when someone dies.

You shouldn’t need to worry about IHT if:

  1. Your estate is worth less than the current IHT threshold of £325,000 (this is known as the “nil-rate band”)
  2. You leave everything to an exempt beneficiary, such as a charity or a community amateur sports club

If your estate is worth more than £325,000, anything above this threshold could be subject to IHT at a rate of 40%.

Some homeowners could pass on up to £500,000 IHT free: the nil-rate band of £325,000 plus the residence nil-rate band, set at £175,000. Both nil-rate bands will stay at the current level until 2030.

Tax rules can change and benefits depend on circumstances. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. If unsure, seek advice. These are high-risk investments and you should invest on the merits of the investment, not for the tax advantages alone. 

IHT perks for some couples 

Married couples and civil partners enjoy potentially significant perks:

  1. Anything you pass on to your spouse or civil partner is IHT free. This applies even if you leave your whole estate – irrespective of its value – to them. 
  2. The nil-rate band is transferable. This means it is possible to benefit from a deceased spouse's or civil partner’s unused nil-rate bands.

Residence nil-rate band: what it is and how it works 

The residence nil-rate band was introduced in April 2017 to make it easier to pass on a family home tax efficiently. 

It is an additional nil-rate band which applies to an individual’s interest in a residential property. 

It is currently £175,000 and will remain at the current level until 2030. 

So, currently a single person could have a total IHT-free allowance of £500,000 (£325,000 nil-rate band, plus £175,000 residence nil-rate band). 

Whilst anyone can benefit from the nil-rate band of £325,000, the residence nil-rate band comes with some significant restrictions:

  • It only applies to one property which has been at some point your ‘residence’, provided you owned it on or after 8 July 2015. A property that has never been your residence does not qualify, nor might investment properties. 
  • It only applies if you pass your home on to a direct descendant. This includes your children (also step-children and adopted children) and their children. So anybody without direct descendants cannot benefit. 
  • If your estate is worth over £2 million, the residence nil-rate band will be tapered. For every £2 your estate is over £2 million (after deducting liabilities but before reliefs and exemptions), the residence nil-rate band will decrease by £1. That means that at £2,350,000 your residence nil-rate band will be zero.

How the residence nil-rate band tapers 

What forms part of someone's estate? 

Broadly speaking, the value of an estate is the total value of someone's assets, minus any liabilities, at the time of death.

Assets may include:

  • Value of main home
  • Other properties, such as business property or land
  • Cars, boats, fine art, fine wine, etc. 
  • Home contents and personal effects
  • Cash held in bank and building society accounts 
  • Investments 
  • Life insurance policies (if not held in trust)
  • Pensions lump sum (if not held in trust) and, from 6 April 2027, any unused pension
  • Gifts made in the seven years prior to the death

Under current rules, pension or drawdown plans typically sit outside of your estate at death for IHT purposes.

In the Autumn Budget 2024, the Chancellor announced that from 6 April 2027 unused pensions will be included in someone’s estate on death and potentially be liable to IHT. This is subject to consultation with further details expected after January 2025.

The rules can be complex: if you’re not sure please seek advice. 

Liabilities may include:

  • Mortgages
  • Utility bills
  • Loans, hire purchase, credit cards and other debts 
  • A reasonable funeral bill

The valuation of an estate is essential in determining if any inheritance tax is due and how much. To calculate this, any available reliefs, e.g. business property relief, must be taken into account. 

It is common to use a probate solicitor or specialist to help with estate valuation and IHT calculation.

Who pays inheritance tax? 

Inheritance tax is a charge on the estate, rather than on individuals. It is normally paid out of the estate before the estate can be distributed to any beneficiaries. 

In practice, the IHT payment – alongside the payment of any debts and liabilities – is usually arranged by the executor of the will; or, in the absence of a will, by the estate administrator. 

When does IHT need to be paid? 

IHT should normally be paid by the end of the sixth month after someone died. If this deadline is missed, HMRC will charge interest.

This is a broad summary of a complex topic. Tax rules can change and tax benefits depend on circumstances. If you are not sure please seek advice. 

What are the options to protect my estate from IHT? 

If you are concerned your estate might be subject to IHT, there are several ways to mitigate the impact. 

The main IHT-mitigation strategies include:

  1. Making a will
    This will help ensure your estate is passed on tax efficiently. In absence of a will, intestacy rules will apply, which could result in an avoidable IHT bill. 
  2. Giving money away
    Small gifts should be IHT free, as should be regular gifts out of income. Larger gifts are completely IHT free only if you live at least seven years after the gift. 
  3. Establishing a trust 
    A trust is an often-complex legal arrangement. Usually, when you put any assets in a trust, you no longer own them, so they’re not part of your estate for IHT purposes. However, like with larger gifts, a seven-year rule applies.
  4. Investing in companies that qualify for Business Property Relief (BPR)
    After two years the investment should benefit from IHT relief, provided you still hold it on death and the company remains qualifying. This option is high risk and you could lose the amount you invest.

What is BPR? 

BPR, which stands for Business Property Relief – was introduced in 1976 to allow family businesses to be passed down through generations tax efficiently.

Its scope subsequently widened and since 1996 it was made available for a range of assets, including limited companies and AIM-quoted companies.

This means if you buy and hold shares in such companies you could potentially benefit from IHT relief when you pass on those shares, provided that:

  • the shares are held for at least two years and are still held on death
  • the company still qualifies for BPR at the time of the investor’s death

From 6 April 2026 100% IHT relief on private companies will be limited to the first £1 million of qualifying assets (including private companies and agricultural property), with the remainder eligible for 50% IHT relief (an effective IHT rate of 20%). Any qualifying companies quoted on AIM will be eligible for 50% IHT relief (an effective IHT rate of 20%).

Please note, tax benefits depend on circumstances and tax rules can change.

What companies could qualify for BPR? 

Only companies that are privately owned (unquoted), or quoted on AIM, can qualify. However, not all of them do. A key requirement is that the business must be trading – it can’t simply hold cash, investments or property. 

So, for instance, a furnished holiday letting business would normally be considered a property investment business and hence be excluded from BPR. On the other hand, property development businesses could be eligible.

A company’s BPR-qualifying status may change over time and needs to be regularly monitored. Moreover, HMRC will only confirm if the shares qualify for BPR after the investor’s death, when it’s too late to do anything about it. 

Should you invest in a company that does not qualify for BPR, the value of your shares could be subject to IHT. 

How could I benefit from BPR? 

You can pick BPR-qualifying companies to invest in and put together a portfolio yourself. 

However, if you don’t have the time and resources to build your own portfolio, as well as ensuring the companies are (and remain) BPR-qualifying, there are two main alternatives:

  1. IHT portfolios – investing in unquoted or AIM-listed companies
  2. AIM IHT ISAs – IHT portfolios of AIM-listed companies designed to be held in an ISA

Companies that qualify for EIS and SEIS normally also benefit from IHT relief.

More about AIM IHT ISAs and IHT 

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