Most people don’t think about inheritance tax until someone in the family dies. Then the phone calls start. The solicitor mentions a number. Someone googles “40% tax.” And suddenly the family is doing the maths on a house that took 30 years to pay off.
The thing is, the 40% figure isn’t a scare tactic. It’s what HMRC actually collects when an estate crosses the nil rate band threshold and nothing has been done to plan around it. Most people don’t realise that inheritance tax planning has a time problem: the longer you wait, the fewer tools you have available. The planning options shrink considerably once someone has died.
So let’s get concrete. What does the tax actually look like on real numbers?
Scenario 1: The £400,000 estate
The nil rate band is £325,000. That means the first £325,000 passes to your beneficiaries tax-free. Everything above it gets taxed at 40%.
On a £400,000 estate, the taxable portion is £75,000. The tax bill: £30,000.
That might sound manageable. But if most of that estate is tied up in property, your family may need to sell assets to pay the bill. HMRC doesn’t wait for a convenient time.
Scenario 2: The £700,000 estate
Here’s where it gets harder to absorb.
Taxable portion: £375,000. Tax bill: £150,000.
If there’s a family home involved, the residence nil rate band can help. An additional £175,000 allowance applies when you leave a property to a direct descendant. So for a married couple who each apply their allowances, the combined threshold could reach £1,000,000. But that’s only if the right structure is in place.
A lot of families assume the residence nil rate band applies automatically. It doesn’t always.
Scenario 3: The £1,000,000 estate
Without any planning and assuming no residence nil rate band applies, the taxable portion is £675,000. Tax bill: £270,000.
With a married couple’s full allowances applied correctly: potentially £0 owed.
That difference, £270,000, is roughly what separates a family who planned from a family who didn’t.
Why people put it off
The conversations are uncomfortable. Nobody wants to sit at a dinner table and talk about what happens when they’re gone. There’s also a vague sense that inheritance tax planning is something wealthy people do, not regular homeowners.
That’s changed. The nil rate band has been frozen at £325,000 since 2009. Meanwhile, house prices have roughly doubled in many parts of the UK. A family that bought a modest home in 2005 for £180,000 might find it’s now worth £450,000. They’ve never thought of themselves as wealthy. HMRC doesn’t care.
What actually helps
There isn’t a single fix. It depends on the structure of your estate, what you own, who you want to leave it to, and how soon you want to act. Some of the most common tools include:
Making use of annual gift allowances (£3,000 per year, per person, tax-free). Most people don’t use them consistently.
Setting up trusts to ring-fence assets outside of your taxable estate. Trusts aren’t just for billionaires. A well-structured family trust can be a practical option for estates of £400,000 and above.
Writing a will that actually reflects your wishes and tax position. A surprising number of people have wills that haven’t been updated since before they bought property or had children.
Using life insurance written in trust to cover the anticipated tax bill. This doesn’t reduce the tax owed, but it means your family doesn’t have to sell assets to pay it.
The point isn’t that you need all of these. The point is that knowing which one applies to your situation requires looking at your specific numbers.
The real cost of doing nothing
It’s not just the money. When an estate is hit with a large and unexpected tax bill, families sometimes have to make rushed decisions. A house gets sold below market value because probate is dragging and the family needs cash to pay the bill. Siblings disagree on what to do. Relationships get strained.
None of that is inevitable. Most of it comes from not having a plan.
The maths on inheritance tax is not complicated. The complicated part is getting the right structure in place before you need it. That requires a conversation. The sooner families have it, the more options they have.
If you’ve been meaning to look into this for a while, now is a reasonable time to actually do it.
