How to Understand Your Inheritance Tax Position

With significant changes coming into effect in April 2027 following Labour’s first Budget - most notably the inclusion of many pensions in the value of estates for Inheritance Tax (IHT) - now is a good time to understand what your estate is worth and how the current allowances work.

IHT is charged on the value of your estate when you die, as well as on certain gifts made during your lifetime. Your estate includes the assets you leave behind, such as:

  • Property you own

  • Savings and investments (some pensions remain excluded, but ISAs are taxable)

  • Life insurance policies in your name

  • Other assets of value

How to Work Out the Value of Your Estate

Start by adding up the value of all your assets. From this, you can deduct outstanding debts (loans, mortgages and credit cards). You can also deduct certain lifetime gifts, charitable legacies and reasonable funeral costs.

Once you’ve arrived at a figure, compare it against the standard IHT ‘nil rate band’ threshold:

If your estate is worth less than £325,000:
No IHT is currently due. However, it’s important to keep an eye on rising property, investment and pension values, especially with changes coming in 2027.

If your estate is worth more than £325,000:
Anything above this threshold may be taxed at 40%.
Example: If Robert’s estate is £500,000, the taxable amount is £175,000, creating a £70,000 IHT bill.

How Your Relationship Status Affects IHT

Single: Anything above £325,000 is taxed at 40%.

Married or in a civil partnership: You can pass everything to your spouse tax-free, and this does not use your own nil-rate band. When the second spouse dies, any unused allowance can be transferred, creating a potential combined threshold of up to £650,000.

Unmarried couples: Each partner has their own £325,000 threshold, but these cannot be combined.

The Residence Nil-Rate Band

To help families pass on the family home, an additional allowance of up to £175,000 per person is available when leaving your home to direct descendants. For a couple, this can create a combined allowance of up to £1 million.

However, the rules are specific. The property must have been your home, it must pass to direct descendants, and the allowance tapers for estates over £2 million.

If you are concerned that you may have an IHT issue, either now or with the changes coming next year, consider booking on to one of our free planning seminars about this very topic. Full details can be found here. Call 0117 3636 212 or email office@haroldstephens.co.uk if you have any questions, we’ll be more than happy to help.

Amy Wood