UK Inheritance Tax (IHT) is a growing consideration for many families. Due to “fiscal drag”—where tax-free limits remain frozen while asset values rise—more estates are potentially falling within the tax net. Understanding current IHT rules and planning for potential future changes is essential to help mitigate the impact on your family’s wealth.
This guide explores two main areas of planning:
- Property and Debt: How your home, mortgage, and life insurance can affect your tax position.
- Legal Structures: Using trusts and property ownership methods to help protect assets, particularly in light of proposed reforms announced for 2026 and 2027.
UK Inheritance Tax Rates and Tax-Free Amounts
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UK Inheritance Tax is generally a 40% tax on the value of your estate over certain thresholds. A lower rate of 36% may apply if you leave at least 10% of your net estate to charity.
IHT Measure | Current Tax-Free Amount |
Standard Nil-Rate Band (NRB) | £325,000 |
Residence Nil-Rate Band (RNRB) | £175,000 |
Total Individual Allowance | £500,000 |
Total Couple’s Allowance | £1,000,000 |
Note: The RNRB is tapered for estates worth over £2 million and is currently lost entirely at £2,350,000.
Strategy Example 1: Property, Debt, and Insurance
Mortgages as a Potential Deduction
UK Inheritance Tax is charged on the net value of your estate. A mortgage is typically a debt that can be deducted from your home’s value. However, care must be taken:
- Relief Allocation: If a loan is secured against an asset that already qualifies for 100% relief (like certain business or agricultural property), the debt must usually be deducted from that exempt asset first, which may “waste” the relief and leave the home exposed to tax.
Protecting Your Policy with a Trust
One of the most common planning steps is placing life insurance or mortgage protection policies “in trust.”
- In Trust: The payout is generally not part of your estate for IHT purposes and can be paid out more quickly as it may bypass the probate process.
- Not in Trust: The payout is added to your estate and could be subject to 40% IHT, with payments often delayed by probate.
Equity Release
Releasing equity creates a debt that can reduce the taxable value of your estate while providing cash to spend or gift.
- Important Note: If you gift property but continue to live there without paying market rent, HMRC may apply “Gift with Reservation of Benefit” (GWR) rules, meaning the asset stays in your estate for tax purposes. Standard equity release loans (borrowing against the home) do not typically require rent, but professional advice is essential to ensure the debt is deductible.
Strategy Example 2: Property Ownership and Trusts
Joint Tenants vs. Tenants in Common
- Joint Tenants: Owners own the whole property together. On the first death, ownership passes automatically to the survivor.
- Tenants in Common: Each owner holds a specific share (e.g., 50%). This allows you to leave your share to a trust via your Will rather than it passing automatically to the survivor.
Protective Property Trusts (PPT)
A PPT is a trust established in a Will. On the first death, the deceased’s share of the home enters the trust. The survivor usually retains a “life interest” to stay in the home. This may help mitigate risks such as:
- Sideways Disinheritance: Ensuring children eventually inherit the first spouse’s share if the survivor remarries.
- Care Home Fees: This structure may offer some protection by ensuring the trust’s share of the property is not owned by the survivor, though this is always subject to local authority assessment and “deprivation of assets” rules.
Monitoring Potential Future Changes
The UK government has announced plans for reforms that, if implemented as proposed and subject to legislation, could change the tax landscape from 2026 onwards.
Feature | Current Rules (2025/26) | Proposed Changes (from April 2026/27) |
Nil-Rate Band (NRB) | £325,000 (Frozen until 2030) | No change proposed to the limit. |
Residence Nil-Rate Band (RNRB) | £175,000 (Frozen until 2030) | No change proposed to the limit. |
Business/Agricultural Relief (BPR/APR) | 100% relief (Unlimited amount). | 100% relief capped at first £2.5m (combined); 50% relief thereafter. |
Transferable BPR/APR Allowance | Not available (historically). | Transferable between spouses/civil partners (effectively up to £5m per couple). |
AIM Shares Relief | 100% relief (after 2-year holding). | 50% relief only (The £2.5m 100% cap does not apply to these). |
Pensions (Unspent Pots) | Generally Outside of IHT. | Proposed to be Included in the estate from April 2027. |
Effective Tax Rate on Excess | 0% (if 100% relief applies). | 20% (on relievable assets above the cap). |
As these are proposed reforms, they may change or not be implemented in their current form.
Steps to Consider
Given the potential future changes, it is a sensible time to review your estate. Consider the following actions:
- Review Large Assets: In light of announced plans to cap business and agricultural reliefs, you may wish to discuss the timing of gifts with a professional.
- Evaluate Investments: Review AIM holdings and pension death benefits in anticipation of potential legislative changes.
- Check Property Titles: Consider if moving to “Tenants in Common” aligns with your goals for a Protective Property Trust.
- Audit Your Life Insurance: Verify if your policies are written in trust to ensure efficient payout.
The Bottom Line
Effective estate planning is about mitigation and preparation. By acting on current rules and planning for potential future changes, you can better manage your family’s financial future.
Frequently Asked Questions (FAQs)
What is the standard rate of Inheritance Tax (IHT)?
UK Inheritance Tax is generally a 40% tax on the value of your estate (everything you own) that goes over certain tax-free limits.
What are the main tax-free allowances for UK Inheritance Tax?
There are currently two primary allowances for an individual:
- Standard Nil-Rate Band (NRB): £325,000.
- Residence Nil-Rate Band (RNRB): Up to £175,000 if you leave your main home to your direct descendants.
A couple can often combine their allowances for a total tax-free threshold of up to £1,000,000.
Does the RNRB always apply if I leave my home to my children?
Not necessarily. The RNRB is tapered for estates worth over £2 million. Under current rules, if your total estate is valued at £2,350,000 or more, the RNRB is lost completely.
How can a mortgage affect UK Inheritance Tax?
UK Inheritance Tax is charged on the net value of your estate. A mortgage is typically a debt that can be deducted from your home’s value, which may reduce the taxable value of your estate.
Does equity release require me to pay rent?
No. Standard equity release (like a lifetime mortgage) is a loan and does not require you to pay rent. The requirement to pay “market rent” usually only applies if you gift your home to someone else but continue to live there, to avoid the “Gift with Reservation of Benefit” rules.
Can a Protective Property Trust (PPT) protect my home from care fees?
A PPT can help mitigate risks by ensuring that only the survivor’s share of the property is owned by them. This may offer some protection for the deceased partner’s share, though all such arrangements are subject to local authority assessment.
What are the announced plans for Business and Agricultural Property Relief (BPR/APR)?
The government has announced plans that, from April 6, 2026, 100% tax relief on farms and businesses will be capped at the first £2.5 million per person. Value above this cap would receive 50% relief. These are proposed reforms and may be subject to further legislative amendment.
Is my pension going to be taxed?
The government has proposed that from April 2027, most unspent pension pots will be included in the IHT calculation. As this is an announced plan, it remains subject to legislative approval.
Disclaimer
The information contained within was correct at the time of publication but is subject to change. This information is provided as a general guide and should not be taken as financial or legal advice. Tax treatment depends on individual circumstances and may change. We recommend consulting with a qualified financial advisor or solicitor.