2025 UK Inheritance Tax & Gifting Rules: How to Protect Your Family Wealth
2025 UK Inheritance Tax & Gifting Rules: How to Protect Your Family Wealth
Inheritance Tax (IHT) continues to affect more UK families in 2025 as frozen thresholds and rising property values push estates above the tax-free limits. For households in London, the South East and high-growth regions, even modest family homes now risk falling into IHT. Understanding nil-rate bands, spouse exemptions, gifting rules and long-term estate planning can help protect more of your assets for your children and grandchildren.
This guide explains the full 2025 UK inheritance tax system, key allowances, how gifting works, and practical estate planning strategies. For wider global comparisons, see 2025 Global High-Net-Worth Tax Strategies and 2025 Global Real Estate Investment Tax Comparison. For investment and pension-related planning, revisit your Best ISA Accounts UK 2025 and 2025 UK Investment Tax Guide.
What is Inheritance Tax in the UK?
IHT is a tax on the value of a person’s estate when they die. It may also apply to certain lifetime gifts made within seven years before death.
Standard IHT rate: 40%
The 40% rate applies to the value of the estate above the available tax-free thresholds.
The Nil-Rate Band (NRB)
Every individual has a tax-free allowance called the nil-rate band.
Nil-rate band (NRB) 2025/26: £325,000
This threshold has been frozen for years, bringing more estates into IHT. Anything above £325,000 may be taxed at 40% unless other allowances apply.
The Residence Nil-Rate Band (RNRB)
The residence nil-rate band is an additional allowance available if you leave your main home to direct descendants (children, stepchildren, adopted children, or grandchildren).
Residence nil-rate band (RNRB) 2025/26: £175,000
Combined with the main NRB, an individual can pass on up to £500,000 tax-free if leaving a property to descendants.
Married couples or civil partners can potentially pass up to £1 million tax-free, because unused allowances transfer to the surviving spouse.
Spouse & Civil Partner Exemption
Transfers between spouses or civil partners are completely exempt from inheritance tax, regardless of amount.
This applies to both UK-domiciled partners. If one partner is non-UK-domiciled, special limits and elections may apply.
Passing allowances between spouses
If the first spouse dies without using their allowances, the unused portion can be transferred to the surviving spouse. This means:
- Up to £325,000 NRB × 2 = £650,000
- Up to £175,000 RNRB × 2 = £350,000
- Total possible allowance = £1 million
Who pays IHT? Children, grandchildren & jumping a generation
Leaving assets to children
Children are the most common recipients of estates. Standard NRB and RNRB usually apply.
Leaving assets to grandchildren (“generation-skipping”)
Skipping a generation does not incur extra UK tax, but:
- Your estate still uses the same NRB/RNRB
- It may reduce the heirs' future IHT liabilities by avoiding two layers of IHT (parent → child → grandchild)
This is a common tax-planning technique in high-value estates.
Lifetime Gifting Rules (UK Gift Tax Rules)
The UK does not have a standalone “gift tax”, but gifts can become taxable if made shortly before death.
The 7-Year Rule
Most lifetime gifts become fully exempt if you survive for seven years after making them.
- 0–3 years: 40% IHT
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
- 7+ years: 0%
(These percentages apply only if the gift exceeds the nil-rate band.)
Annual gift allowance
You can gift up to £3,000 per year without affecting your estate. Unused allowance can be carried over for one tax year.
Small gifts exemption
You can give up to £250 per person per tax year, to as many people as you like.
Wedding & civil partnership gifts
- £5,000 to a child
- £2,500 to a grandchild
- £1,000 to anyone else
Gifts from excess income
Regular gifts made from surplus income (not savings) can be fully exempt if you can prove they are sustainable.
Property & Investment Strategy for IHT Planning
Owning multiple properties
- Your main home benefits from the RNRB.
- Second homes and buy-to-let properties do not.
- Investors sometimes gift or sell lower-yield or high-CGT-risk properties first.
Investments: shares, funds & ISAs
- General Investment Accounts (GIAs): part of your taxable estate.
- Stocks & Shares ISAs: still included in your estate for IHT purposes.
- Premium Bonds: included in estate.
- Onshore/Offshore bonds: can aid planning in some cases.
For investment tax details, see your 2025 UK Investment Tax Guide.
Pensions (a crucial advantage)
Pensions are usually outside your estate for inheritance tax purposes.
If you die before age 75:
- Beneficiaries can usually take pension funds tax-free.
If you die after 75:
- Beneficiaries pay income tax at their marginal rate.
Because pensions sit outside IHT, many families use ISAs first during retirement, leaving the pension untouched for inheritance purposes.
Wills, Trusts & Basic Estate Planning
Wills
A valid Will ensures assets pass according to your wishes and helps reduce administrative costs and delays.
Trusts
Trusts can protect assets, support family members and manage inheritance for younger generations. However, they have complex tax rules and may involve entry, periodic and exit charges.
Lasting Power of Attorney (LPA)
LPAs ensure your financial and health decisions are managed by someone you trust if you lose capacity.
Summary of Key Allowances
| Allowance |
Amount (2025/26) |
Notes |
| Nil-rate band |
£325,000 |
Per person |
| Residence nil-rate band |
£175,000 |
For passing main home to descendants |
| Annual gifting allowance |
£3,000 |
Can carry forward 1 year |
| Small gifts |
£250 per person |
No limit on number of recipients |
| Wedding gifts |
£1,000–£5,000 |
Depending on relationship |
FAQ: UK Inheritance Tax 2025
Do I pay inheritance tax on gifts?
Only if you die within seven years of giving them, unless they fall under an exemption.
Is my ISA exempt from inheritance tax?
No. ISAs are tax-free during your lifetime, but they form part of your estate for IHT.
Does my pension count toward inheritance tax?
Usually no, as pensions are generally outside your estate.
Do grandchildren pay more tax than children?
No. The same allowances apply regardless of generation.
How can I reduce my inheritance tax liability?
Use allowances, make lifetime gifts, consider pensions and keep your Will up to date.
Conclusion
With frozen thresholds and rising asset values, inheritance tax planning is more important than ever for UK families. By using the nil-rate band, residence nil-rate band and lifetime gifting rules strategically, you can significantly reduce the tax paid on your estate. Combining property planning, investment structure and pensions can further protect generational wealth.
For more international perspectives, see 2025 Global High-Net-Worth Tax Strategies and 2025 Global Comparison of Digital Inheritance Taxes.
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