£5.8B – the value of inheritance tax receipts paid to HMRC in the first 8-months of 2025.  That isn’t a small number!  Over a full year, this equates to £8.7bn.

This blog aims to help shed a little light on the emotive subject of inheritance tax, what it is, how it’s calculated and applied.

IHT – A Capital Tax

Inheritance tax is a capital tax. That means it’s charged based on the value of your assets, not your income, and that can add up. A 40% tax paid, by beneficiaries, on everything you own. This is a problem for a lot of people because this is tax paid on capital, which isn’t always liquid, and after you’ve paid income tax all your life.

We know this is an emotive subject because it’s one that we have with many clients, many of whom feeling it’s an unfair tax.

The good news, though, is that not everyone has to pay inheritance tax.

The allowances

Whilst inheritance tax does apply to all individuals and to all of their assets, everybody gets an allowance, commonly known as the inheritance tax nil rate band (NRB). What that means is if the value of your estate, the value of your assets, the value of the things that you own, is less than £325,000, you do not have to pay inheritance tax.

There’s better news still for married couples (and civil partners), because married couples can transfer their nil rate band between themselves. For example, I’m married, something happens to me, I leave everything to my wife, she will inherit my nil rate band as well. That means if something happens to her after I’m gone, she has £650,000 worth of nil rate band, which can be passed on without inheritance tax.

So that’s the good news. Obviously, it’s bad news if your assets are in excess of £650,000 for a married couple or £325,000 for an individual. Because this is where you are looking at paying tax.

As an extra bonus there is an additional allowance – your Residence Nil Rate Band (RNRB), and there’s a big clue in the name. This allowance is directly related to the residence where you live (or have lived), and offers an additional £175,000 worth of assets, that can be passed on exempt from IHT.   This means an individual, can pass on potentially £500,000, and a married couple can pass on potentially £1 million worth of assets (if they qualify for RNRB), before inheritance tax is due.

IHT’s 40% tax rate

Beneficiaries will pay a 40% tax, via your executors, on the capital value over your allowance.

Simple example: (Assuming RNRB does not apply)

A married couple have an estate worth £750,000

Their combined NRB is £650,000

The surplus £100,000 is subject inheritance tax at a rate of 40%

There is £40,000 worth of IHT to pay

RNRB Example:

A married couple have an estate worth £750,000

Their combined NRB is £650,000

Their property will be “closely inherited” – so they qualify for RNRB.

There is no IHT to pay.

(This is because the total of NRB and RNRD is greater than the value of their assets:  £750,000 is less then £1m.)

Larger Estate Example

A married couple have an estate worth £1,500,000

Their allowance is £650,000

Their property will be “closely inherited” – so they qualify for RNRB.

This adds a further £350,000 to their allowances

Total allowances – £1,000,000 (2 x NRB, + 2 X RNRB)

The element of the estate subject to IHT is £500,000

There is £200,000 IHT to pay.

As an extra hurdle, it is the executors who have to settle the IHT tax bill before they can distribute the estate to the beneficiaries.

Is Inherence Tax a problem for you? If it is, you might want to consider seeking professional advice to explore strategies which can help you mitigate that tax Bill and pass on more to your children.

Taylormade Financial Management is a long established Independent Financial Advisory practice and well equipped to help clients chart the turbulent waters that surround budget announcements.  Our mission is to provide first-class financial planning advice to individuals, companies and trustees.

Important Disclosure: content provided does not consider individual circumstances and does not constitute personal advice.  The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.