Seventy-one percent of UK adults do not understand inheritance tax, according to a survey by investment manager Schroders, a finding that will surprise few who have tried to navigate the system. The tax has long earned a reputation as the “most hated” levy, but the real source of public frustration may be its sheer complexity: a web of allowances, caveats and thresholds that makes even a basic grasp an uphill battle.
The confusion starts with the fundamental allowances. Every individual has a standard nil-rate band (NRB) of £325,000, a figure that has been frozen since the 2009-2010 tax year and is set to remain at that level until at least the end of the 2030-2031 tax year. On top of that, a residence nil-rate band (RNRB) of £175,000 was introduced in 2017 for estates where a main home is passed to direct descendants — children, grandchildren or step-children. For a single person, the combined tax-free allowance can therefore reach £500,000, but only if the estate includes a home and it goes to the right beneficiaries.
The RNRB comes with its own caveats. The allowance begins to taper away for estates valued at more than £2 million. For every £2 above that threshold, £1 of the RNRB is lost; estates worth more than £2.35 million — or £2.7 million for a couple — receive no RNRB at all. The rules become even more intricate when spouses or civil partners are involved. Any unused NRB or RNRB can be transferred between them, meaning a married couple or civil partners can potentially pass on up to £1 million tax-free (£650,000 combined NRB plus £350,000 combined RNRB).
The growing complexity of exceptions and reliefs
Beyond the main allowances, the tax code is littered with reliefs and exemptions that add further layers. Lifetime gifts are classed as potentially exempt transfers (PETs): if the donor survives seven years after making the gift, it falls outside the estate for IHT purposes. If death comes within seven years, taper relief may reduce the tax bill depending on when the gift was given. Gifts into certain trusts, by contrast, are chargeable lifetime transfers (CLTs) and can trigger an immediate IHT charge of 20% if they exceed the available nil-rate band, with further periodic charges of up to 6% every ten years.
There are also a series of narrower exemptions. Individuals can give away up to £3,000 per tax year without inheritance tax implications, with unused allowance carried forward for one year. Small gifts of up to £250 per recipient per year are exempt, as are gifts made in connection with weddings or civil partnerships, up to limits that depend on the giver’s relationship to the couple. Outright gifts to UK charities or Community Amateur Sports Clubs are exempt entirely, and transfers between spouses or civil partners are generally free of IHT — provided both parties are UK domiciled. If one partner is domiciled overseas, the exemption is limited to the nil-rate band. Domicile itself is a complex common-law concept, distinct from residence, and UK domicile brings liability for IHT on worldwide assets.
Two major reliefs for business and agricultural property are also undergoing significant changes. From 6 April 2026, the 100% relief currently available on qualifying agricultural and business property will be capped at £1 million of combined value per estate. Assets above that cap will receive only 50% relief. The cap is transferable between spouses and civil partners, meaning a couple could potentially shield up to £2 million at the full 100% rate. The overall allowance for 100% relief on combined qualifying business or agricultural property — including property held in trust — is also limited to £2.5 million for deaths on or after that date.
Frozen thresholds and rising revenues
The impact of these rules is being magnified by a deliberate policy of freezing the key allowances. With the NRB and RNRB fixed in cash terms while house prices and asset values rise, more estates are being dragged into the IHT net each year — a phenomenon known as fiscal drag. The figures bear this out. In the 2022-2023 tax year, 4.62% of UK deaths — some 31,500 estates — resulted in an inheritance tax charge, a proportion not seen since 2016-2017. HM Revenue & Customs collected a record £6.70 billion in IHT that year, a 12% increase on the previous year. The Office for Budget Responsibility forecasts that IHT receipts will climb further, reaching £14.7 billion by 2030-31.
Despite the headline rate of 40%, the average effective tax rate for taxable estates in 2022-2023 was just 13%, reflecting the cushioning effect of allowances, exemptions and reliefs. At the same time, the burden is heavily concentrated. In the same tax year, approximately 6,400 families with net wealth exceeding £1.5 million paid £4.3 billion in IHT — accounting for 64% of the total tax take.
Two additional changes coming down the track will broaden the tax’s reach further. From April 2027, inherited pension pots will no longer be exempt from IHT and will be brought into the taxable estate — a shift that could affect many families who previously saw pensions as a tax-free inheritance vehicle. And from 6 April 2025, the UK is moving from a domicile-based system to a residence-based system for IHT. Under the new rules, a person who has been resident in the UK for at least 10 of the previous 20 tax years will be considered a “long-term UK resident” and will face UK IHT on their non-UK assets, potentially pulling expatriates and long-term migrants into the tax net for the first time.
The Schroders survey suggests that public understanding has not kept pace with these developments. With more people set to encounter inheritance tax in the years ahead, the gap between what the system does and what people think it does is only likely to widen.
