Inheritance tax is simultaneously one of the most-discussed and least-understood taxes in Britain. It affects relatively few estates — around 4% in any given year — but generates enormous anxiety among a far wider population who wrongly believe it will apply to them.
The Basic Rules
Inheritance tax is charged at 40% on the value of an estate above the nil-rate band of £325,000. An additional residence nil-rate band of £175,000 applies when a main residence is passed to direct descendants. A married couple can combine their allowances, meaning a jointly owned estate worth up to £1 million can be passed to children tax-free.
The Reliefs
Several reliefs significantly reduce or eliminate IHT on qualifying assets. Business Property Relief (BPR) provides 100% relief on shares in qualifying trading businesses and certain business assets. Agricultural Property Relief (APR) provides equivalent relief on agricultural land and farm buildings.
The Changes in the Budget
The Budget confirmed that AIM-listed shares — previously qualifying for BPR — will from April 2026 receive only 50% relief rather than full relief. This affects investors who have used AIM portfolios specifically for IHT planning.
What You Can Do
Seven-year gifting rules mean that gifts made more than seven years before death are entirely outside the estate. Annual exemptions of £3,000 per person, plus additional exemptions for wedding gifts, small gifts, and normal expenditure out of income, allow significant wealth to be transferred tax-efficiently over time.
