Your 2025 Guide to UK Inheritance Tax: What You Need to Know

Understanding inheritance tax basics

Inheritance tax (IHT) applies to your estate, including property, money, and possessions, after you die. Currently, the standard rate sits at 40%, but this only applies to the portion of your estate that exceeds your tax-free allowances.

Your tax-free allowances

Everyone has a basic inheritance tax threshold - known as the Nil Rate Band (NRB) - of £325,000. This means the first £325,000 of your estate passes to beneficiaries without any tax liability. If you're leaving your home to your children or grandchildren, you'll benefit from an additional allowance called the Residence Nil Rate Band (RNRB), which provides an extra £175,000 of tax-free threshold.

For married couples and civil partners, these allowances can be combined, potentially allowing you to pass on up to £1 million tax-free to your loved ones.

Significant changes in April 2025

From 6 April 2025, the UK implemented major changes to how inheritance tax applies, particularly for individuals with connections abroad. The domicile-based system was replaced by new long-term UK resident rules. Under these changes, if you've been a UK tax resident for 10 or more of the past 20 tax years, you'll be classified as a long-term resident and your worldwide assets, not just UK-based ones, may become subject to inheritance tax.

Even after leaving the UK, your worldwide assets could remain subject to IHT for up to 10 years, depending on how long you lived in the country previously.

Will you pay tax on your parents' house?

Whether inheritance tax applies to your parents' home depends on a few factors. First, if it falls below the combined NRB, no tax would be due. Second, who inherits the property matters. The RNRB only applies when a home is left to 'direct descendants' of the deceased, including children, stepchildren, adopted children, foster children, and grandchildren.

If they downsized to a smaller property or sold their home completely after 8 July 2015, the RNRB can still apply to assets of equal value passed to direct descendants.

Smart estate planning for 2025

Consider making lifetime gifts to reduce your taxable estate. If you survive seven years after making the gift, it typically becomes exempt from inheritance tax. For married couples, assets passed between spouses are usually exempt from IHT.

For the most up-to-date information, visit the official GOV.UK website or consult HMRC's Inheritance Tax Manual. Or, for detailed advice tailored to your situation, talk to one of our experienced financial advisers.

Inheritance tax planning is not regulated by the Financial Conduct Authority.