The Complete Guide to Inheritance Tax in the UK — and How to Legally Reduce Your Bill

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.

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The Basic Rules

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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.

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The Reliefs

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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.

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The Changes in the Budget

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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.

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What You Can Do

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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.

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