‘Why you need to have an inheritance tax conversation with your family now’

Two things in life are guaranteed: death and taxes. Some of us have to deal with both at the same time.

You earn money and income tax takes its cut, with National Insurance following suit. You spend some of what’s left and VAT takes its share. Buying a house? Stamp duty. You sell an asset that’s grown in value, capital gains tax. You take a dividend from the company you built, dividend tax. Fuel duty, vehicle tax, insurance premium tax, council tax. Then HMRC comes in with the final punch combination when you die. Beneficiaries are at risk of inheritance tax. Forty percent of everything above the threshold.

With every other tax, you can do something about it on your own. Put more into the pension, use the ISA allowance, time a disposal, restructure how you take income. With inheritance tax, the planning that reduces the bill has to be done by the person you’re inheriting from, and for larger estates, it has to be done years before they die. You cannot fix it afterwards. The bill comes out of the estate, which means it comes out of what would have been yours.

There are ways to reduce an inheritance tax bill though, such as making use of allowances and gifting during one’s lifetime. Often, the inheritance tax problem becomes a communication problem rather than a tax problem. Only 30% of over-55s have ever discussed inheritance with their children, according to research by law firm Irwin Mitchell. Ask people why not and 15% say it’s awkward, 12% think it’s rude, a Moneybox survey said. But the powerful determinant of an inheritance tax bill is whether a family can sit through that one uncomfortable conversation.

How inheritance tax thresholds work

Everyone gets a tax-free allowance when they die called the nil-rate band (NRB). It’s £325,000, and anything above it is usually taxed at 40%. If the main home is left to children or grandchildren, and your estate is worth less than £2 million, a second allowance stacks on top: the residence nil-rate band (RNRB), worth another £175,000. So one person can pass on £500,000 before HMRC takes a penny. Anything you leave to your husband, wife or civil partner is completely exempt. If they die, you inherit whatever slice of their allowances they didn’t use. Stack two sets together and a married couple can pass on up to £1 million tax-free – although this isn’t marriage advice.

The problem

The Institute for Fiscal Studies, a think tank, projects that if you were born in the 1980s, you probably won’t inherit until your mid-sixties, and for roughly a third of that cohort, it won’t be until their seventies or later.

The average person expects to inherit £62,500, according to interactive investor’s Great British Retirement Report 2026, which polls almost 8,000 savers in the UK. I don’t know about you, but I think £60k would go a lot further for me at 29 than it would at 64. For a lot of high earners, the money is inherited after they’ve paid a house deposit or after the school fees mattered.

Then there’s how much of it gets taken on the way. Roughly one in twenty deaths in the UK results in an inheritance tax charge, and in 2023/24 the average bill among them was £231,000, HMRC data shows. More people will get pulled into the hole every year, and one of the reasons is fiscal drag. The NRB tax-free threshold has been £325,000 since 2009 and it’s now frozen until April 2031. Had it simply risen with inflation, AJ Bell reckons it would be worth close to £555,000 by the end of this decade. So while this threshold stands still, families are being dragged into the tax net as house prices rise.

Adding more fuel to the fire, from 6 April 2027, most unused pension pots will come into the estate for inheritance tax purposes. HMRC’s own estimate is that around 10,500 estates will pay inheritance tax for the first time because of it, and another 38,500 will pay more than they otherwise would, at roughly £34,000 extra each.

How talking can reduce an inheritance tax bill

Changing the conversation and framing from “let’s reduce an inheritance tax bill” to “when would gifting this money actually do the most good,” and you’re having a completely different conversation with the same people about the same money. The second one leads to lifetime gifting. Lifetime gifting is also the thing that reduces the inheritance tax bill.

We want our parents around as long as possible. The conversation is about the money doing some good while everyone is still here to see it.

The headline rate for inheritance tax is 40%. The average effective rate those estates actually paid inheritance tax in 2023/24 was 13%. That is due to exemptions, allowances and gifts and every single one of them was a decision someone made while they were still alive to make it.

The bottom line: speak to your family about inheritance

If you’re expecting some sort of inheritance, talk to your family. The potential alternative is that some of this hard-earned money goes to the taxman. If your family is anywhere near those thresholds and with the pension change coming in 2027. If you need help, consider speaking to a financial adviser – the fee for regulated advice could end up a rounding error against a £231,000 average bill.