 is often encountered as a single headline figure. For many families, it is framed simply as a 40% charge applied to wealth on death. In reality, the system is far more layered. Beneath the headline rate sits a structure of allowances, thresholds and conditions that have been built up over time and applied in a specific order, and when those layers are not fully understood, the difference between expectation and outcome can be substantial.

Small details often have an outsized impact: how a home is passed on, whether allowances are claimed correctly, or whether 

 made years earlier have already reduced what is available. To explore how inheritance tax works in practice, we spoke with 

, who helps families understand how these layers interact and why decisions made during life can materially change the final outcome.

The Nil Rate Band: A Foundation That Is Often Misread

. Each individual currently has an allowance of £325,000 that can be passed on at death without inheritance tax being due. Anything above that threshold is generally taxed at 40%. While this figure is widely known, the way it operates in practice is frequently underestimated.

The key point is that the nil rate band does not exist in isolation. Gifts made during the seven years before death are taken into account and can reduce the allowance available, meaning families may have less tax-free capacity than they expect 

. The allowance is also transferable between spouses and civil partners, allowing unused amounts from first death to be carried forward and claimed on second death 

Families face £3m inheritance tax bills on ‘failed gifts’

Inheritance tax: Wills and inheritance tax (TaxScape)

As Michelle explains:
“Each person has £325,000 that on their death can be gifted away without inheritance tax being due, but what people often miss is that gifts made in the seven years before death are taken into account.”

The Residence Nil Rate Band and Its Conditions

Alongside the standard nil rate band sits an additional allowance linked to the family home. The 

 provides up to £175,000 per person, but it comes with strict conditions that regularly catch families out.

To qualify, the property must be passed to direct descendants, such as children or grandchildren. Crucially, the allowance is also subject to a taper once the overall estate exceeds £2 million, reducing by £1 for every £2 above that threshold. In practice, this can result in the allowance being reduced or lost entirely.

What makes this particularly complex is that some assets which sit outside the estate for inheritance tax purposes still count towards the £2 million calculation. As Michelle notes,
“Some assets don’t trigger inheritance tax themselves, but they do sit within the calculation for whether the residence nil rate band is reduced.”

For families close to the threshold, this interaction can have a disproportionate effect on the final tax position.

Where Families Most Often Miss Opportunities

In practice, inheritance tax inefficiencies tend to arise not from complexity alone, but from lack of awareness. Many families are simply unaware of how many allowances are available or how they can be used together.

Annual gifting allowances, gifts on marriage and charitable donations are often underused 

. More significant opportunities exist through gifts made from surplus income, where regular excess income can be passed on without using any inheritance tax allowance, provided the gifts are genuinely habitual and properly documented 

Inheritance Tax and pensions 2027 changes — Schroders Personal Wealth

Work out Inheritance Tax due on gifts

 are another frequent blind spot. They are governed by expressions of wish rather than a will, and if left unchanged, pension wealth may be unintentionally channelled to a surviving spouse and later become subject to inheritance tax, particularly as the rules surrounding pensions continue to evolve.

Seeing Inheritance Tax as a Structure, Not a Number

A meaningful shift occurs when families stop viewing inheritance tax as a single charge and start seeing it as a broader structure. When 

, pensions and intergenerational planning are considered together, more flexible and effective solutions often emerge.

Michelle describes scenarios where paying income tax earlier can reduce inheritance tax exposure later. Drawing income at a higher tax rate and passing it down to the next generation can allow that money to be recycled more efficiently, for example through pension contributions in the children’s names.

“If you look at inheritance tax in isolation, you miss opportunities,” Michelle explains. “When you understand how the layers work together, you can often improve outcomes for the whole family.”

Communication, Timing and a Changing Landscape

One of the most persistent challenges in inheritance tax planning is a lack of communication. Financial decisions are often made in isolation, without considering how allowances might be used across generations.

This can result in wasted allowances, duplicated tax exposure and missed planning windows. Timing also matters. With pensions currently sitting outside the estate for inheritance tax purposes but scheduled to be brought into scope under future changes, strategies that work today may not remain effective indefinitely 

Inheritance Tax on pensions: liability, reporting and payment — Summary of responses

As Michelle puts it, “the tax landscape is constantly changing, and wealth planning needs to be adaptable rather than fixed.”

Inheritance tax planning is not a one-off exercise. It sits at the intersection of income tax, 

, pension rules and family dynamics. Treating it as static rarely produces the best outcome 

Inheritance Tax reform: A once-in-a-generation change

By understanding how the allowances fit together and by revisiting plans as circumstances and rules change, families can make more informed decisions and ensure that wealth is passed on intentionally, rather than shaped by default.

Inheritance tax is a layered system, not a single rate

 – The final tax bill depends on how allowances, gifts and thresholds are applied together.

The £325,000 nil rate band can be eroded

 – Gifts made in the seven years before death reduce how much tax-free allowance remains.

The residence nil rate band comes with strict limits

 – Passing a home to direct descendants and staying below £2 million is key to retaining it.

Some non-taxable assets still affect allowances

 – Assets outside the estate can still reduce the residence nil rate band through the £2 million test.

Common gifting allowances are often missed

 – Annual exemptions, surplus income gifts and charitable giving can all reduce inheritance tax if used correctly.

Inheritance tax planning works best holistically

 – Coordinating income tax, pensions and intergenerational planning often improves outcomes.

Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

Michelle has nearly 20 years’ experience specialising in providing financial advice on inheritance tax planning, pensions, investments and trusts to high net worth clients across the UK.

Michelle is a driven people leader with a strong focus on outstanding client and employee experience. She joined RBC Wealth Management from Investec where she was Co-Head of Wealth Advisory for the UK business. She is passionate about creating a diverse and inclusive company culture as a critical foundation.

Director & Wealth Manager

Michelle Holgate

RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. They provide personalised financial advice and investment management services to individuals and families across the country, spanning investments, pensions, tax and estate planning.

RBC Brewin Dolphin’s specialist financial advisers will help you make the most of your financial situation, build a plan to realise your future ambitions, and provide for your loved ones.

The value of investments, and any income from them, can fall and you may get back less than you invested.

RBC Brewin Dolphin can help you prepare for the future and meet your goals with a robust financial plan that’s tailored to you. Whether you need advice on pension and retirement planning, inheritance tax and estate planning, investing, or financial protection, they are here to help.

RBC Brewin Dolphin’s financial planners will take the time to understand what you want to achieve, examine your options, and provide a detailed recommendation. They will ensure you understand the plan and are comfortable with the approach. They will then implement what you have agreed, taking the administrative burden away from you.

Your unique financial plan will give you the information you need to make informed decisions about your future and how to fund your aspirations.

Capital at risk.

RBC Brewin Dolphin can help you make the most of your money with a robust investment management solution that’s tailored to your needs. They will begin by understanding your ambitions, your attitude to risk, and your time horizon. Based on these factors, they will then invest your money across a range of assets, balancing risk and return in a sophisticated way.

RBC Brewin Dolphin can help you invest for growth, generate an income from your investments, and preserve capital for the next generation. They will make sure you are using the tax allowances available to you, so that more of your money goes towards your goals.

Your dedicated investment manager will be available in person, over the phone or by email, and will regularly review your plans to help keep you on track.

Capital at risk.

RBC Brewin Dolphin

Andrew joined Brewin Dolphin as Head of Partnership Business Development in 2018, following 6 years at Kleinwort Hambros. He has spent over 30 years working with private clients and their advisers in London and Channel Islands for Flemings, Dexia BIL, Deutsche Bank and Unigestion, as a private banker, investment manager and latterly in business development. In addition, he was a partner at Absolute Fund Managers where he assisted in the management of range of hedge funds.

Michelle Holgate

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Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

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Michelle Holgate

Bio

Articles from author

Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

Start your journey to your Financial well-being

FIND OUT MORE

LEGAL

CONTACT US

Start your journey to your
Financial well-being