When Is There Inheritance Tax? Understanding When IHT Applies and Who Needs to Pay It

Inheritance tax (IHT) is one of the most misunderstood areas of personal finance in the UK.

With rules that vary depending on the value of the estate, the relationship of the beneficiaries, and the types of assets involved, it’s no wonder people are left asking:

“When is there inheritance tax?”

At Belgravia Capital Wealth Management, we help individuals and families answer that question with confidence.

Whether you’re planning your estate or dealing with the estate of a loved one, this guide will help you understand exactly when inheritance tax applies, and how to minimise or eliminate it.

What Is Inheritance Tax?

Inheritance tax is a tax charged on the estate (property, money, and possessions) of someone who has died. In the UK, it is typically charged at a rate of 40% on the value of an estate that exceeds certain thresholds.

The tax is paid by the estate, not by individual beneficiaries - although there are exceptions, especially when dealing with lifetime gifts.

When Does Inheritance Tax Apply?

IHT applies when the value of an estate exceeds the tax-free allowances available at the time of death.

Here’s when IHT becomes due:

1. The Estate Value Exceeds £325,000 (the Nil-Rate Band)

Every individual in the UK has a nil-rate band (NRB) of £325,000.

If the total value of their estate exceeds this, the portion above that threshold is taxed at 40% (subject to reliefs and exemptions).

2. The Estate Does Not Qualify for the Residence Nil-Rate Band

If the deceased owned a home and is passing it to direct descendants (e.g. children or grandchildren), an additional £175,000 exemption - the residence nil-rate band (RNRB) - may apply.

If not, the taxable estate starts at £325,000 instead of £500,000.

3. The Estate Is Not Left to a Spouse or Civil Partner

Transfers between UK-domiciled spouses and civil partners are 100% exempt from IHT.

If the deceased leaves their estate to a non-spouse (e.g. children, siblings, friends), and the estate exceeds the allowances, inheritance tax is likely due.

4. Lifetime Gifts Within 7 Years of Death

If the deceased made gifts of money or assets in the 7 years before their death, those may be added back into the estate and become taxable, especially if the total value exceeds £325,000.

Taper relief may reduce the tax owed, depending on how long before death the gift was made.

5. Trusts, Pensions, and Other Structures

In some cases, assets held in certain trusts, or pension death benefits (from April 2027), may be included in the estate and subject to IHT.

Key Exemptions That Prevent Inheritance Tax

Inheritance tax does not apply in the following situations:

• The estate is below £325,000

• The estate is passed entirely to a UK-domiciled spouse or civil partner

• The estate is passed to charities or other exempt organisations

• The deceased used gifting allowances or transferred assets more than 7 years before death

• The estate qualifies for Business Property Relief (BPR) or Agricultural Property Relief (APR) (up to 100%)

With the right planning, many families can avoid inheritance tax altogether - or reduce it significantly.

Examples: When Is There Inheritance Tax?

Example 1: No IHT Owed

• Mr. Evans dies with an estate worth £300,000

• Leaves everything to his daughter

• Value is under the £325,000 nil-rate band

Result: No inheritance tax owed

Example 2: IHT Applies

• Mrs. Patel dies with an estate worth £950,000

• Leaves £400,000 to her husband and £550,000 to her children

• Her residence is worth £400,000 and qualifies for the residence nil-rate band

Calculation:

• NRB: £325,000

• RNRB: £175,000

• Total allowance: £500,000

Taxable amount = £950,000 – £500,000 = £450,000

IHT owed = £450,000 x 40% = £180,000

Example 3: Married Couple Planning

• Mr. and Mrs. Thompson jointly own a £1.2 million estate

• Mr. Thompson dies first and leaves everything to Mrs. Thompson

• No tax is due on first death

When Mrs. Thompson dies, she has access to both nil-rate bands and residence bands (up to £1 million total).

If estate value remains below £1 million, no inheritance tax is due.

Situations That Often Trigger Unexpected Inheritance Tax

1. Unmarried couples: There’s no spousal exemption, so inheritance between partners may be taxable.

2. No will in place: Intestacy rules may lead to assets passing to taxable beneficiaries.

3. Estates over £2 million: The residence nil-rate band is tapered and eventually lost, reducing exemptions.

4. Gifts made within 7 years: These gifts could be added back into the estate and increase IHT liability.

5. Pensions from April 2027: Unused pension pots will count toward the estate and may trigger IHT.

How to Reduce or Eliminate Inheritance Tax

• Make use of gifting allowances each year

• Equalise estates between spouses to maximise reliefs

• Use trusts strategically to remove assets from the estate

• Take out a life insurance policy in trust to cover the tax bill

• Act before April 2026 to take advantage of full BPR and APR before relief caps are introduced

How Belgravia Capital Wealth Management Can Help with IHT

We help individuals and families:

• Understand when inheritance tax applies to them

• Minimise their estate’s exposure to tax

• Create and update wills to reflect current IHT law

• Structure gifts, trusts, and insurance policies effectively

• Plan for the upcoming 2026 and 2027 tax changes

Whether your estate is large or modest, timely planning makes all the difference.

Conclusion: When Is There Inheritance Tax?

Inheritance tax applies when the value of the estate exceeds the available allowances, unless it’s passed to a spouse or exempt organisation.

With strategic planning, you can either avoid IHT altogether or dramatically reduce what your estate will owe.

But timing is everything.

Contact us at contact@belgraviacapital.co.uk for a personalised estate review and step-by-step inheritance tax planning support.