Leaving a legacy

Inheritance tax: What it is and how to manage it

Getting to grips with Inheritance Tax (IHT) is essential for effective estate planning, enabling you to make use of available reliefs and exemptions when leaving a legacy.

IHT is a tax on the estate of a person who has died, which includes their property, possessions and money. It is charged at a rate of 40% of the value of assets above the threshold known as the 'nil-rate band' – the boundary beyond which IHT becomes payable. It is paid out of the deceased’s estate, rather than by the beneficiaries who inherit from it, and the executor of the estate is responsible for administering the payment. 

The nil-rate band

The current ‘nil-rate band’ for IHT is £325,000. This threshold has been frozen since the 2009/2010 tax year, while house prices and wages have risen. That means more families are finding that estates are liable for the tax.

Main residence allowance

As well as the £325,000 threshold there is a separate main residence allowance, also known as the residence nil-rate band. This allows you to pass on your home to your children (including adopted, foster or stepchildren) or grandchildren with no IHT to pay up to £175,000 of its value. Your overall allowance for IHT could therefore increase to £500,000 when including the value of your home. 

Inheriting from a spouse or civil partner

When a spouse or civil partner dies, the estate can be transferred between the couple without incurring any IHT, and they also inherit both the nil-rate bands for the whole estate and for the main residence. Because of this, some families can pass down an estate worth a total of £1 million without paying any IHT. 

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to that of your partner when you die. 

When the nil-rate band starts to taper

For estates with a net value of more than £2 million, the £175,000 residence nil-rate band is reduced by £1 for every £2 the estate value exceeds £2 million. The same applies to the second nil-rate band if applicable.

When does IHT need to be paid?

If IHT is due, it must generally be paid six months after the person’s death. If not, HMRC can start to charge interest on the tax owed. If assets such as property need to be sold to pay the bill, the tax can be paid in equal annual instalments over a 10-year period, but interest usually applies.

What’s taxed? 

Almost everything – including money in the bank, any investments and property you own, and even some gifts you have recently given away – is counted when totting up the value of your estate for IHT purposes. Your pension is not currently included in this figure, but the government intends to bring pensions into scope for IHT from April 2027.

All of this means that investors, as well as those who have the bulk of their money in property, need to understand how IHT works and plan for it. It also means that the role of pensions in passing on wealth is changing.

Reducing your family’s IHT bill 

Planning with a professional tax adviser can help you to bring down a potential IHT bill and maximise the amount you can leave to the next generation.  

Ways to protect your estate from IHT may include:  

1. Giving money away 

Money or assets that are given away more than seven years before you die are not counted as part of your estate for IHT purposes.  

You can also make use of an annual allowance to give away money each year that will not be included in IHT calculations, even if you die before seven years is up. You can currently give away a total of £3,000 per year that will not attract IHT. 

2. Leaving assets to a spouse

As mentioned above, leaving your estate to a spouse or civil partner does not attract IHT and allows them to inherit your IHT allowances, increasing their ability to pass down money later. 

3. Leaving your main home to direct descendants

The main residence nil-rate band adds £175,000 to the untaxed portion of your estate, but only if you leave your home to a child or grandchild, including foster, adopted or stepchildren. 

4. Investing using a pension

Assets remaining in your pension are not currently counted as part of your estate for IHT purposes and can be passed down to your children or other beneficiaries IHT-free, depending on the amount passed down and the age at death. As mentioned above, the government plans to bring pensions into scope for IHT from 2027.

5. Giving to charity

By giving money to charity, you can reduce the IHT bill and support a good cause at the same time. Not only are gifts to qualifying charities exempt from IHT, if you leave at least 10% of your net estate to charity the rate at which you pay IHT on the remainder can be reduced to 36%. 

What should you do when you receive an inheritance?

It can be difficult to know what’s best to do with an inheritance. This is often a challenging period in people's lives, so it pays to take some time over the choices available to you. When you are ready to engage with this process, a financial adviser may be able to help you navigate IHT. J.P. Morgan Personal Investing offers a paid restricted financial advice service that offers investment recommendations on our products and services, as well as a free financial guidance service. If you would like to discuss your financial goals, you can book a free call with one of our experts.    

1. Take stock of your finances 

When presented with an unexpected amount of cash, it’s human nature to start imagining how to spend it.

It's best to pause and review your finances more critically first. Start by considering any debt you have, beginning with any loans, credit cards or similar products that are costing you money in interest. If you’re being stung by interest, paying off some or all of this debt could have an immediate positive impact on your financial situation.

If you’re buying a home on a mortgage, it may not be possible or sensible to pay off the whole balance. You could consider paying off some of the mortgage, if you feel the result would ease pressure on your household finances, either by reducing your monthly payments or moving you significantly closer to paying the mortgage off altogether. Remember to check whether your mortgage provider will charge any early repayment charges, though.

Next, consider how prepared you are should something unexpected happen, causing a need for extra money urgently. For example, what would happen if you were to be made redundant, or you had to pay out for emergency repairs to your home?

We suggest that people work out how much their monthly outgoings are and hold at least three months’ worth of these outgoings in cash separate from any investments, for situations just like these. 

2. Research your cash options

Take some time to think about what proportion of your existing cash and the inheritance money you’d like to keep in cash, and do some research into the places you could leave it. You might want to put some into a ‘fixed saver’ account for a set number of years to ensure that you don't spend the money too quickly, while another portion is in an easy access account so it stays at your fingertips.

Remember that money kept in cash is vulnerable to rising prices, otherwise known as inflation, which means that your returns could be reduced in real terms. You could also miss out on any potential returns earned on investing in equities, or income provided by bonds. Historically, equities have outperformed cash over the long-term. Remember that past performance isn't a reliable guide to future performance and that with investing, you may not get back the amount you invest.

3. Put your inheritance to work

Once you’ve decided what to spend and what to save in cash, you can start to think about what to do with the rest of your money – what it can really achieve over the long term if you put it to work.

There are many different ways you can choose to invest your money, and it’s worth doing your research. A stocks and shares ISA is often the first port of call to access the markets, because it’s accessible and tax-efficient.

If you’re thinking about retirement – and with retirement, it’s always a good idea to start early – then a personal pension could be a good choice. Pensions benefit from tax relief, meaning the government effectively tops it up for you.

Passing on wealth

A shrewd combination of gifting money and making use of investment products can be an effective way to build a legacy.

Gifting

Making gifts in the UK is complicated and requires an understanding of both IHT and Capital Gains Tax (CGT). 

CGT is a tax on gains, or profits arising from the 'disposal' of certain capital assets. For example, shares or other investments held outside of tax wrappers, or personal possessions worth over £3,000 (excluding personal cars). The term ‘disposal’ has a wide meaning for CGT purposes – it includes any transfer of ownership to someone else or 'being compensated' for the asset. It covers sales and gifts (including through a trust), and exchanges of property. CGT is not charged on death, but should be considered when giving gifts during your lifetime.

Tax rates

IHT is payable on transfers in excess of a nil rate band, which is currently £325,000. This will remain unchanged until 5 April 2030. The tax above the nil rate band is paid at a rate of:

• 40% on or within seven years of death (a reduced rate of 36% applies to an estate where at least 10% is left to charity).
• 20% on chargeable lifetime transfers.

The residence nil rate band is available on death and not something we will cover in depth here as we are focusing on lifetime transfers.

You only pay CGT if your overall capital gains for the tax year (after deducting any losses and applying any reliefs) are above the annual exempt amount of £3,000. The rate of tax you pay depends on the asset you’ve sold and your annual income.

If your annual taxable income is:

• £50,270 or less, then the CGT rate is normally 18%.
• Above £50,270, then a higher CGT rate of 24% normally applies.

Lifetime transfers

A lifetime transfer is a transfer of assets during your lifetime, rather than on your death. For IHT purposes these can be classified as either:

• Exempt
• Potentially Exempt Transfer (PET)
• Chargeable but not taxable
• Chargeable and taxable

1. Exempt transfers:

The impact of IHT is reduced by a number of exemptions and reliefs, which we'll outline here:

An exemption means that the transfer does not count as a chargeable transfer and is neither taxed, nor included, in the overall calculation of chargeable assets for the future.

A relief reduces the value of a chargeable transfer. It does not remove the transfer from the tax regime but reduces its value, which therefore potentially reduces any tax payable.

Transfers exempt from IHT are outlined below (please note CGT has other rules):

• Transfers between spouses (or civil partners) who both live (are permanently domiciled) in the UK. They do not need to be living together when the disposal is made, but to be treated in this way they must live together at some point during the tax year. A disposal by one spouse to the other is not considered a chargeable gain. However when the asset is eventually disposed of, the tax liability is calculated by reference to the first spouse's acquisition cost. A disposal between spouses is a 'no gain no loss' disposal. 
• Annual exemption: currently £3,000. This means that a transferor can make lifetime transfers exempt from IHT up to a total value of £3,000 in any one tax year. If the whole amount is not used in the tax year, the balance can be carried forward to the next year. Any unused balance is lost if it is not used in the next tax year, meaning it cannot be carried forward to year three. The exemption only applies to gifts made during your lifetime.
• Small gifts: up to £250 to any person in any one tax year are exempt. The gift must be outright and not into a trust. There's no limit to how many gifts can be given, but they can't go to the same person. The exemption cannot be used as part of a larger gift.
• Gifts from normal expenditure: A lifetime transfer is exempt if it is made out of income and not capital and is part of the transferor's normal expenditure. For example, a grandparent paying school fees or premiums into a life policy for the benefit of their grandchild is exempt. Payments do not have to be fixed amounts to be considered normal expenditure.
• Gifts for weddings: £5,000 if made by a parent, £2,500 if made by a grandparent or great grandparent. £1,000 by any other person.
• Other: Gifts for education and maintenance (for a child up until 18 or the end of their full-time education); gifts to charities and political parties; gifts of national benefit; death on active service.

2. Potentially Exempt Transfers (PET)

A PET is a lifetime transfer by an individual to another individual.

No tax is charged at the date of the gift, the gift does not need to be reported to HMRC and if the donor survives the seven years, the gift becomes fully exempt and escapes tax entirely.

If the donor dies within seven years from the date of the PET, the gift becomes chargeable. The donee is liable to pay the tax, tax is chargeable on the value of the PET at the date it was made, rather than possible higher value at date of death. If the PET that has become chargeable is fully within the nil rate band then the tax is nil. If the PET is greater than the nil rate band and at least three years have passed then the tax rate is reduced by a taper relief.

3. Chargeable Lifetime Transfers (CLT)

A CLT is one that is not exempt nor potentially exempt. The most common chargeable transfers occur on lifetime gifts to trusts. For instance, moving the family home, another property, or family wealth into a trust to look after your adult children in the future is a CLT.

A CLT results in a tax charge if it takes the donor's total chargeable assets over the nil rate band, in a seven year period. Tax is payable at 20% on everything over the nil rate band and there will be no further IHT to pay if the donor lives for the next seven years.

If the donor dies within seven years of making a CLT, further tax will apply to the transfer, with the tax already paid allowed as a credit against the tax payable on death.

Be careful

Please note, gifts must be given in full and you should not keep any benefit from the asset in question.

An example of this might be parents putting the family home in their children’s name, thinking they have started the seven year clock and made progress with their IHT planning. However HMRC may deem this a gift with reservation if you do not pay market rent to the donee.

This may also be the case should you have second homes or holiday homes. If these are gifted to your children, and you do not pay a fee to visit these homes, they may be deemed as remaining in your estate.

What should you do to make a gift?

Once you decide that you want to make a gift, you need to think about what you want to give. The easiest way to gift is to write a cheque or transfer money to a donee. As long as the amount gifted during the tax year does not exceed the annual exemption, you do not need to do anything else. No one owes any tax on the transfer and no one needs to report the gift. However, if the amount gifted throughout the tax year does exceed the annual exemption (or other exempt or potentially exempt transfer rules) you will have to keep track of any gifts given to ensure they stay below your available nil rate band within a seven year cumulation. If this is exceeded or the transfer is not exempt, you may have to pay an initial IHT charge and/or CGT.

Be sure to speak with your tax adviser prior to making gifts to ensure you understand the rules. It's also important to keep a record of gifts – including what you gave and who you gave it to, the value of the gift, and when you gave it.

Final thoughts for your gifting strategy

The best assets to give are often those that you expect to go up in value. In some instances, if you gift someone an asset that has grown in value since you acquired it, there may be CGT to pay – you can find more information on this here. In addition, be sure to consider what future benefit you may receive from the gift to ensure it does not fall victim to the 'gift with reservation' rules.

Products

You can also make use of J.P. Morgan Personal Investing products to help build your legacy.

One place to start might be the Junior ISA (JISA). Our Stocks and Shares JISA lets you invest for your child until they’re 18, while protecting returns from UK Income and Capital Gains Tax. Crucially, the JISA allows you to invest up to £9,000 per child every tax year on top of your own ISA allowance, which for the 2025/26 tax year stood at £20,000.

The money in a JISA belongs to the child, but cannot be withdrawn until they are 18 apart from in special circumstances. When they turn 18, the account is automatically transferred into an adult ISA. Unlike other investment products such as a conventional Stocks and Shares ISA or a Lifetime ISA (LISA), anyone can pay into a JISA on behalf of a child.

Given that in most cases the money cannot be withdrawn until the child is 18, some people may want more flexible access to their investments to fund outgoings like holidays or school fees for children. In this scenario, it might make sense to use up your own ISA allowance before contributing towards a JISA. Once your child is 18 they could also benefit from J.P. Morgan Personal Investing products.

Looking after yourself

Striking a balance between being able to afford the lifestyle you want, funding a comfortable retirement and passing on wealth is critical. As well as having enough money to enjoy the present, it’s a good idea to plan for future obligations and external factors, such as inflation, tax increases, changing policy or healthcare costs.

Your primary focus should be on your own financial security. Pensions UK – the trade body formerly known as the Pensions and Lifetime Savings Association – estimates that a one-person household would spend £43,900 a year to enjoy a comfortable retirement of financial freedom and some luxuries. This rises to £60,600 a year for a two-person household.

Review your will and form a plan as soon as possible. It can be a very good idea to work with a financial adviser, who can help you structure your wealth, maximise your use of tax wrappers and navigate tax rules, and come up with a roadmap to ensure that you have enough money for your needs, and your legacy.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. ISA/JISA/Pension eligibility rules apply. Seek financial advice if you're unsure if a pension is right for you. Tax rules vary by individual status and may change. This is general information, not personalised tax advice.

We provide 'restricted advice', which means we will only make investment recommendations on the products and services that we offer.