Inheritance tax (IHT) is often seen as something that only affects the wealthy. But thanks to rising house prices, inflation, and a tax system that hasn’t kept pace with economic growth, more families are finding themselves caught in its grip. If you want to pass on your estate without handing over a hefty chunk to HMRC, it’s essential to understand how IHT works – and what you can do to reduce your liability. Your Questa inheritance tax guide is here to help.

Why More People Are Paying Inheritance Tax

The key issue with IHT is something called fiscal drag. This happens when tax thresholds stay the same while asset values, salaries, and savings increase. As a result, more people end up paying tax, even though the rules haven’t technically changed.

IHT has one of the longest-standing fiscal drag problems. The basic tax-free threshold (or “nil-rate band”) has been stuck at £325,000 since 2009 – and it’s not due to change until at least 2028. Meanwhile, property prices and savings have soared, pushing more estates over the limit.

• In the nine months to December 2024, the government collected £6.3 billion in IHT – an 11% increase on the previous year.
• Currently, only 4% of estates pay IHT, but this is expected to rise to 10% by 2030.

So, how can you protect your estate from excessive tax?

Understanding the Tax-Free Allowances

The standard nil-rate band means that the first £325,000 of your estate is tax-free. Anything above that is taxed at 40%.

However, there are extra allowances that can help reduce or eliminate IHT liability:

1. Residential Nil-Rate Band – If you pass on your main home to direct descendants (children or grandchildren), you get an extra £175,000 allowance. This means an individual can leave £500,000 tax-free.

1. Spouse and Civil Partner Exemption – If you leave everything to your spouse or civil partner, there’s no IHT to pay at all. Even better, they can inherit your unused allowances, allowing a couple to pass on up to £1 million tax-free.

If your estate is worth more than these limits, IHT planning becomes even more important.

Gifting: A Key Strategy to Reduce IHT

Giving away assets before you die is a common way to reduce IHT liability. However, there are rules you need to follow.

The Seven-Year Rule

Gifts you make during your lifetime are considered ‘potentially exempt transfers’ (PETs). If you live for seven years after making a gift, it becomes fully tax-free. If you pass away before that, the gift may still be subject to tax – but at a reduced rate depending on how many years have passed:

• 0-3 years – Full 40% IHT applies
• 3-4 years – 20% tax
• 4-5 years – 40% reduction
• 5-6 years – 60% reduction
• 6-7 years – 80% reduction

There’s ongoing speculation that the government could extend or even scrap the seven-year rule in a bid to raise more tax, so acting sooner rather than later might be wise.

Annual Gift Allowances

You can also take advantage of smaller tax-free gift allowances, including:

• £3,000 per year – You can give this amount to one person or split it between multiple people.
• £250 per person – Unlimited small gifts as long as you haven’t used another allowance for the same person.
• Wedding Gifts – £5,000 for a child, £2,500 for a grandchild, or £1,000 for anyone else.
• Regular Gifts from Income – If you can afford it, you can make regular tax-free payments to help with a child’s rent, savings, or an elderly relative’s living costs.

Why Planning Ahead is Crucial

IHT is one of the most complicated taxes in the UK, and the rules often change. Without proper planning, your loved ones could face an unexpected and significant tax bill at an already difficult time. Seeking financial advice can help you put a solid plan in place, ensuring you make the most of tax allowances while keeping control over your estate.

By understanding the rules and acting early, you can make sure that more of your hard-earned wealth goes to your family – and not to the taxman.