Understanding how inheritance tax works, how much your estate could be worth and what steps you can take now to reduce a future tax bill can make a meaningful difference to the money you pass on.
Why Inheritance Tax is back in the spotlight
Inheritance Tax (IHT) is rarely far from the headlines – and for good reason. HMRC data shows that IHT receipts reached £0.8 billion in April 2025 alone, underlining how many families are affected1.
Recent policy changes, including the confirmed decision to bring most unused pension funds and death benefits into the inheritance tax net from April 2027, have prompted many people to review their plans more urgently.
For years, pensions played a useful role in estate planning. Those who didn’t need the income could pass pension wealth on efficiently, often to help settle a family IHT bill. With that option now under threat, families are exploring other ways to ensure there’s enough ready cash to cover the tax when it falls due – including reviewing or arranging life assurance.
It’s also important to remember timing. An IHT bill must usually be paid within six months of the end of the month of death. If payment is delayed beyond this, HMRC charge interest.
What does Inheritance Tax mean for you?
Inheritance Tax is charged on the value of your estate after certain allowances are applied. In broad terms:
- The Nil Rate Band (NRB) allows the first £325,000 to pass tax free2
- The Main Residence Nil Rate Band (MRNRB) can increase this by up to £175,000 when a main home is left to direct descendants2
Anything above these allowances is usually taxed at **40%**2.
Note: Different rules can apply to agricultural or business property, where reliefs may reduce the rate or increase exemptions.
A simple example – before the rule change
Under current rules
- A married couple owns a £500,000 home
- Each has a pension worth £500,000
- They hold £300,000 in investments
Pensions don’t count towards the estate under pre‑2027 rules.
Allowances available:
- 2 × £325,000 NRB
- 2 × £175,000 MRNRB
The estate value for IHT purposes is £800,000, with combined allowances of £1 million. In this scenario, no Inheritance Tax would be due.
How things change from April 2027
Under rules taking effect from April 2027
- Same assets as above
- Pensions are now included in the estate
Total estate value: £1.8 million
Allowances remain:
- 2 × £325,000 NRB
- 2 × £175,000 MRNRB
Taxable estate: £800,000
Inheritance Tax at 40%: £320,000
This single change could dramatically increase the tax bill for some families. It’s no surprise that many people have been seeking clarity and advice since the announcement.
Reviewing your estate – and your options
Inheritance Tax is based on the value of what you own when you die. Adding pensions into the calculation increases the total, which in turn increases the potential bill.
As a result, many people are reviewing their estate plans and looking at legitimate ways to reduce the impact – including gifting. While some gifts fall outside IHT rules immediately, larger gifts usually remain within the estate for seven years under the well‑established seven‑year rule3.
Using protection to manage the risk
One option is a whole of life insurance policy, designed to help cover an estimated IHT liability. These policies last for life and pay out when you die. If written in trust, the proceeds can sit outside your estate and be used by beneficiaries to help meet the tax bill.
However, premiums can be high and are usually paid over the long term. It’s important to consider whether they’ll remain affordable for you over time. Whole of life cover is just one approach – other planning options may also be worth exploring, depending on your circumstances.
For couples, a joint life, second death policy can often be more cost effective. It pays out when the second partner dies – typically the point at which Inheritance Tax becomes payable.
For those making larger gifts, specialist cover such as Gift Inter Vivos insurance can help. This protects against the risk of inheritance tax becoming due if death occurs within seven years, with cover reducing over time as the tax risk falls.
Cost is an important consideration. The price of cover can vary widely depending on the policy, the level of protection and your circumstances. While whole of live cover can help provide funds to meet an IHT bill, it’s still important to weigh this against the long-term cost and affordability. We’d also recommend getting professional advice to help you work out what’s most cost effective for you and your family.
Taking the next step – and more support
There’s rarely a single, perfect solution. For many families, the best outcome comes from combining tools – careful planning, gifting strategies and appropriate protection.
Inheritance Tax planning has become more complex, particularly following the Autumn Budget announcements and Finance Act changes confirmed in 2026. That makes robust, professional financial advice more valuable than ever. A well‑built financial plan should make your money works hard for you during your lifetime – and supports the people you care about long after. If you need advice, get in touch.
Sources
1HMRC – Inheritance Tax receipts statistics, April 2025 (HMRC monthly tax receipts data)
2HMRC – Nil Rate Band (£325,000) and Residence Nil Rate Band (£175,000) (GOV.UK guidance)
3HMRC – Lifetime gifts and the seven‑year rule (IHT Manual, GOV.UK)
Important information
The information in this article is provided for general guidance only and is not personal financial, tax or legal advice. Tax rules and allowances can change, and the impact of inheritance tax will depend on your individual circumstances.
The Financial Conduct Authority does not regulate tax or inheritance tax advice.
Any examples are illustrative and may not reflect your own position. Before making any changes to your financial or estate planning arrangements, you should seek appropriate professional advice.
