How can you leave the best financial legacy to your loved ones? Inheritance tax (IHT) often looms over this question, and many people are confused about how to address it.
Fortunately, IHT can be simplified without cutting corners on your estate plan. In this guide, we explain how it works, what is changing in 2025-26, and ideas about how to mitigate a needless tax liability on your estate.
What is inheritance tax?
Inheritance tax (IHT) is a tax on your “estate” when you die. Your estate comprises assets like savings, investments and property. Most people get an IHT-free “allowance” called the Nil Rate Band (NRB), which is capped at £325,000 in 2025-26.
An IHT bill must be paid within 6 months after the estate owner’s death. The person responsible for organising the owner’s affairs (and paying the IHT bill) is called the executor.
One or more executors must be named in the will. Otherwise, the estate will be administered under “intestacy” laws, which may not distribute your assets as desired. For instance, if you have an unmarried partner when you die, this person may not receive anything under the intestacy rules. Rather, assets might pass to more distant relatives.
What is changing in 2025-26?
In April 2025, the UK’s “non-dom” regime is coming to an end. This could have significant Inheritance Tax (IHT) implications for certain individuals.
Until recently, your “domicile status” determined which assets would be subject to UK IHT. If you were deemed non-domiciled in the UK at the time of death, then only UK-based assets would face IHT in the UK. Other worldwide assets would fall outside of the IHT “net”.
In 2025-26, however, the long-term residence (LTR) rule has replaced the domicile-based tax regime. In simple terms, if you have been a UK tax resident for 10 of the last 20 years, you would be considered LTR in the UK and subject to UK IHT on worldwide assets.
If you do not meet this test, you will only be subject to UK IHT on UK-situs assets.
This is unlikely to significantly impact individuals who are permanently resident in the UK. However, if you are considering a move abroad (e.g. becoming a digital nomad), the new LTR rule could have important long-term estate planning implications.
For those repatriating, the new rules could create opportunities. For instance, if you have lived abroad for many years and return to the UK, for the first 10 years, your overseas assets will not be subject to UK IHT.
Other IHT changes are arriving in the more distant future:
- From 6 April 2026, changes will arrive to Business Relief (BR) and Agricultural Property Relief (APR). At this point, 100% IHT relief will be available to qualifying assets up to £1 million. Above this amount, landowners will access 50% relief from inheritance tax and will pay inheritance tax at a reduced effective rate up to 20%, rather than the standard 40%.
- From April 2027, pension pots will fall into the value of an individual’s estate for IHT purposes. Currently, unused pension pots are typically not subject to IHT if the pension holder dies before age 75, although conditions apply.
How can I mitigate IHT in 2025?
Your estate plan will be unique depending on your specific financial goals, needs and situation. However, there are some general principles that you can discuss with an adviser to explore your options in 2025.
If you own your home, you can “extend” your £325,000 IHT-free allowance by £175,000 if you leave the property to direct descendants (e.g. children). This is called the Residence Nil Rate Band (RNRB).
If you are married or in a civil partnership, you can also combine your unused IHT allowances upon death. For instance, if you die first and have not used any of your NRB or RNRB, your surviving spouse inherits the combined £500,000 allowance.
Combined with their allowances, this can allow you both to eventually pass down a £1 million estate upon the second death, without IHT.
Other options exist for mitigating IHT. In particular, you can make up to £3,000 in gifts each year without getting counted as part of your estate. In addition to this annual exemption, you can also make as many individual £250 gifts per person as you want each year, as long as you have not used another allowance on the same person.
The “7-year rule” also still exists in 2025-26. This allows you to exempt a gift from IHT if you live more than 7 years after making it. If you die within that 7-year timeframe, a tapered rate might apply – e.g. 24% if death occurs 4 to 5 years after the date of the gift.
Next steps
Building an estate plan is a valuable part of a wider financial plan, helping to ensure your wealth passes down to the people and causes you care about.
Ready to discuss your estate plan? If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
The value of your investments and pensions (and any income from them) can go down as well as up which would have an impact on the level of benefits available
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
The Financial Conduct Authority does not regulate Inheritance Tax Planning, Wills, Power of Attorneys and Trusts
The content in this article was correct on 09/06/2025.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on savings, pensions, investments, mortgages, protection equity release and estate planning for teachers and non-teachers.
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