Guide to IHT Reliefs and Exemptions

Understanding Inheritance Tax (IHT) is crucial for anyone planning their estate or dealing with the transfer of assets after a death. Fortunately, the UK offers a variety of reliefs and exemptions that can significantly reduce the IHT burden. This guide explores the key mechanisms available to help individuals and families preserve wealth across generations.

What is Inheritance Tax?

Inheritance Tax is a levy on the estate of someone who has passed away. As of 2025, the standard rate is 40% and applies to the value of the estate above the tax-free threshold, known as the nil-rate band, which is currently set at £325,000.

However, with proper planning and awareness of available reliefs, it’s often possible to reduce or even eliminate IHT liability.

Main Exemptions from Inheritance Tax

The UK government provides several exemptions that can protect portions of an estate from IHT. These include:

• Spouse or Civil Partner Exemption: Transfers between spouses or civil partners are completely exempt from IHT, regardless of the amount.
• Charity Exemption: Gifts to UK-registered charities are IHT-free. In fact, if 10% or more of the net estate is left to charity, the IHT rate on the rest can reduce to 36%.
• Annual Gift Allowance: You can give away up to £3,000 each tax year without it being added to your estate for IHT purposes.
• Small Gifts Exemption: You may also give gifts of up to £250 to as many people as you like each year, as long as they haven’t benefited from your £3,000 annual exemption.

IHT Reliefs That Can Reduce Liability

Reliefs differ from exemptions in that they reduce the taxable value of specific assets. Some of the most significant include:

Business Relief

Business Relief can reduce the value of a business or its assets for IHT purposes by either 50% or 100%. It applies to:

• Shares in unlisted companies
• Interest in a business
• Business property such as buildings or machinery used in the business

To qualify, the deceased must have owned the business or asset for at least two years before their death. You can find detailed rules on this via GOV.UK’s Business Relief page.

Agricultural Relief

This relief applies to farms or woodland and can reduce their value for IHT purposes by up to 100%. It is available on:

• Land or pasture used to grow crops or rear animals
• Farm buildings and farmhouses (if they’re part of the land being used for agriculture)

Qualifying for Agricultural Relief can be complex, so it’s advisable to seek expert legal or tax advice.

Residence Nil-Rate Band (RNRB)

The Residence Nil-Rate Band is an additional allowance introduced to help families pass on the family home to direct descendants. As of 2025, this relief allows for an extra £175,000 on top of the standard nil-rate band, potentially bringing a couple’s combined allowance up to £1 million.

To qualify, the property must have been your residence and passed on to a direct descendant such as a child or grandchild. You can read more about this exemption at GOV.UK: Residence Nil-Rate Band.

Gifting and the Seven-Year Rule

Gifting is one of the most common IHT planning strategies. If you survive for seven years after making a gift, it usually becomes exempt from IHT. This is known as the Potentially Exempt Transfer (PET).

If you die within seven years, the gift may still be taxed, but taper relief could apply, reducing the amount based on how many years have passed since the gift was made:

• 0–3 years: 40%
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%

Common Pitfalls to Avoid

While IHT reliefs and exemptions are beneficial, there are mistakes that can lead to unexpected tax bills:

• Failing to document gifts or asset ownership clearly
• Incorrectly assuming all family members qualify as direct descendants
• Not accounting for the seven-year rule when making large gifts
• Neglecting to update your will or estate plan regularly

Get Professional Help

Inheritance Tax is a complex area, and the rules can change depending on your circumstances. Consulting a professional tax advisor or solicitor can help you make the most of the available reliefs and ensure compliance.

If you have questions about how IHT might affect your property sale or estate, feel free to contact us for personalised guidance.

Useful External Resources

• GOV.UK – Inheritance Tax Overview
• Citizens Advice – Inheritance Tax
• MoneyHelper – IHT Explained

Understanding your options and planning ahead can help your loved ones avoid unnecessary tax burdens and legal complications. Taking advantage of IHT reliefs and exemptions is a smart step in securing your family’s financial future.