Over 55s Inheritance Tax Risk: What You Need to Know

Are You One of the Millions of Over-55s Unknowingly Facing an Inheritance Tax Bill?

Research suggests that around a third of over-55s have never checked whether their estate could be liable for Inheritance Tax. Yet according to HMRC figures, receipts from IHT have been rising steadily year on year, with more ordinary families being caught by a tax that was once associated only with the very wealthy.

If you own a home, have savings, hold a pension, or have built up assets over a working lifetime, there is a real chance your estate could face a tax bill your family is not expecting. This page explains why the risk is greater than many people realise, what the rules actually are, and what you can do about it.

Why So Many Over-55s Are Exposed Without Knowing It

Inheritance Tax was designed to apply to large, wealthy estates. For most of the twentieth century, that is exactly what it did. But the nil-rate band, the threshold below which no IHT is charged, has been frozen at £325,000 since 2009. It is set to remain frozen until at least 2030.

Over the same period, house prices have risen dramatically. The average UK property is now worth significantly more than it was when the threshold was last updated. The result is that millions of people who consider themselves comfortably off, rather than wealthy, now have estates that exceed the IHT threshold simply because of the home they live in.

Add in savings, ISAs, investments and a pension pot, and the numbers can climb quickly. A couple who bought their home decades ago, saved diligently and built up pension wealth may be sitting on an estate worth well over £1 million, with little awareness that IHT could take a significant slice of it.

The awareness gap is striking. Studies have found that over 16 million families could face an unexpected IHT bill, yet a large proportion of over-55s have never reviewed their exposure. Many assume IHT only applies to the very rich, or that their spouse will automatically inherit everything tax-free. Both assumptions can be costly.

The Sibling Tax Trap and Jointly Owned Property

One scenario that catches many over-55s off guard is what has become known as the sibling tax trap. This applies when two or more siblings, or other relatives, own a property jointly and one of them dies.

Unlike married couples, siblings do not benefit from the spousal exemption. There is no automatic transfer of assets between them free of IHT. If one sibling dies and leaves their share of the jointly owned property to the other, that inheritance could be subject to IHT at 40% on anything above the nil-rate band.

For siblings who have lived together in a family home for years, sometimes decades, this can result in the surviving sibling facing a substantial tax bill on a property they have always considered their home. In some cases, they may be forced to sell to pay it.

If you own property jointly with a sibling or another person who is not your spouse or civil partner, this is a risk worth taking seriously.

Care Costs, IHT and the Double Worry for Over-55s

For many over-55s, Inheritance Tax is not the only financial concern. The potential cost of long-term care is equally pressing, and the two issues are closely linked.

Research consistently shows that care costs are the primary financial worry for people in this age group, often ranking above IHT. The average cost of residential care in the UK runs to tens of thousands of pounds per year, and those costs are largely self-funded until assets fall below a certain threshold.

The connection to IHT is direct. If you spend down your estate on care costs, the IHT liability may reduce naturally. But if you give assets away to reduce your IHT exposure and then need care within a few years, local authorities may treat those gifts as deliberate deprivation of assets and still count them when assessing your care funding eligibility.

Planning for both risks at the same time, rather than treating them separately, is one of the most important things a financial adviser can help you with. Getting the balance right requires a clear picture of your full financial position.

How Inheritance Tax Is Actually Calculated

Understanding your personal exposure starts with understanding how IHT is calculated. The rules are more nuanced than the headline 40% rate suggests.

The Nil-Rate Band

Every individual has a nil-rate band of £325,000. This is the amount your estate can be worth before any IHT becomes due. Anything above this threshold is taxed at 40%.

The Residence Nil-Rate Band

If you own a home and leave it to a direct descendant, such as a child or grandchild, you may be entitled to an additional allowance called the residence nil-rate band (RNRB). This is currently worth £175,000 per person.

Combined with the standard nil-rate band, this gives an individual homeowner a potential threshold of £500,000 before IHT applies. However, the RNRB tapers away for estates worth more than £2 million, reducing by £1 for every £2 above that figure.

The Spousal Exemption

Assets passed between married couples or civil partners are exempt from IHT, regardless of value. This is known as the spousal exemption. Importantly, any unused nil-rate band and residence nil-rate band can be transferred to the surviving spouse, meaning a married couple could have a combined threshold of up to £1 million before IHT applies to their estate.

This exemption does not apply to unmarried couples, no matter how long they have been together. Cohabiting partners have no automatic IHT exemption, which is one of the most significant and least understood risks for people in long-term relationships who have not married or entered a civil partnership.

Taper Relief

If you make a gift to someone and survive for more than three years, taper relief begins to reduce the IHT due on that gift. After seven years, the gift falls outside your estate entirely. Gifts made within seven years of death are known as potentially exempt transfers (PETs), and they can still attract IHT if you die before the seven years are up.

The taper relief schedule works as follows: gifts made three to four years before death are taxed at 32%, four to five years at 24%, five to six years at 16%, and six to seven years at 8%. After seven years, no IHT applies.

A Worked Example

Suppose you are a widower with an estate worth £900,000, including your home. You have the full nil-rate band of £325,000 and the residence nil-rate band of £175,000, giving a combined threshold of £500,000. The taxable portion of your estate is £400,000. At 40%, the IHT bill would be £160,000.

If you were married and your spouse had already died, their unused allowances could be transferred to your estate, potentially doubling the threshold to £1 million and eliminating the IHT liability entirely. This is why understanding the rules, rather than assuming, matters so much.

The Reduced Rate for Charitable Giving

If you leave at least 10% of your net estate to charity, the IHT rate on the remainder reduces from 40% to 36%. For larger estates, this can represent a meaningful saving while also supporting causes you care about.

Which Assets Count Towards Your Estate?

Your estate includes everything you own at the time of your death. If an asset is jointly owned, only your share is included.

Assets subject to IHT include:

• Your home and any other property you own
• Bank accounts, savings and cash ISAs
• Stocks, shares and investment ISAs
• Antiques, jewellery, vehicles and personal possessions
• Life insurance policies not held in trust
• Gifts made within the last seven years (potentially exempt transfers)
• From April 2027: most pension funds will also be included

Assets generally excluded from your estate include:

• Assets passed to a spouse or civil partner
• Life insurance held in a suitable trust
• Assets in certain types of trust, depending on their structure
• Pension funds (until April 2027, under current rules)
• Outstanding debts, mortgages and liabilities, which reduce the taxable value
• Funeral expenses, which can also be deducted

Gifts You Can Make During Your Lifetime

One of the most practical ways to reduce your estate’s IHT exposure is to give assets away during your lifetime. Several exemptions allow you to do this without triggering an IHT liability.

The Annual Gift Exemption

You can give away up to £3,000 per tax year free of IHT. This is known as the annual gift exemption. If you did not use it in the previous tax year, you can carry it forward once, giving you up to £6,000 in a single year. For a couple, this doubles to £12,000.

Small Gifts Exemption

You can also make any number of small gifts of up to £250 per person per tax year, as long as you have not used another exemption for the same person.

Wedding and Civil Partnership Gifts

Gifts made on the occasion of a wedding or civil partnership are exempt up to certain limits: £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.

Normal Expenditure Out of Income

This is one of the most powerful and least used exemptions. If you can demonstrate that you are making regular gifts out of your income, rather than your capital, and that those gifts do not affect your standard of living, they can be entirely exempt from IHT with no upper limit. This is known as the normal expenditure out of income exemption. It requires careful record-keeping but can be highly effective for people with pension income or other regular income streams that exceed their living costs.

The Seven-Year Rule

Any gift that does not fall within one of the above exemptions is treated as a potentially exempt transfer. It will be free of IHT if you survive for seven years after making it. If you die within seven years, the gift may be brought back into your estate and taxed, though taper relief reduces the rate after three years.

What Changed in the October 2024 Budget?

The October 2024 Budget introduced changes that significantly increase the IHT risk for over-55s, particularly those with pension wealth or business interests. If you have not reviewed your estate plan since October 2024, there is a real chance your position has changed.

Pensions Will Be Included in Your Estate from April 2027

This is the most significant change for most people. Until now, pension funds have sat outside your estate for IHT purposes, making them one of the most tax-efficient ways to pass on wealth. From April 2027, most defined contribution pension funds will be brought within the scope of IHT.

The implications are substantial:

• If you die before age 75, your pension will no longer be automatically tax-free for your beneficiaries. It will be counted as part of your estate and subject to IHT at 40% on anything above the nil-rate band.
• If you die after age 75, your beneficiaries could face a double tax charge. The pension fund will be subject to IHT at 40%, and when they draw the money down, they will also pay income tax on it at their marginal rate. For a higher-rate taxpayer, the combined effective tax rate could exceed 60%.
• Many people have deliberately left their pension untouched, treating it as a legacy vehicle. That strategy now needs to be reconsidered.

Why This Matters for Typical Over-55 Estates

Consider someone aged 60 with a home worth £450,000, savings of £100,000 and a pension pot of £300,000. Before April 2027, their estate for IHT purposes would be £550,000. After April 2027, it becomes £850,000. With a single person’s threshold of £500,000 (nil-rate band plus residence nil-rate band), the taxable portion jumps from £50,000 to £350,000, and the IHT bill rises from £20,000 to £140,000.

This is not a hypothetical edge case. It is the financial reality for a large number of ordinary over-55s who have saved responsibly throughout their working lives.

Business Relief and Agricultural Relief Capped

Previously, qualifying business assets and agricultural property could attract 100% IHT relief, meaning they passed to beneficiaries entirely free of tax. From April 2026, this full relief is capped at £2.5 million per estate. Any qualifying assets above that value will only attract 50% relief, meaning they are effectively taxed at 20%.

This affects business owners, farmers and those who hold AIM shares as part of an IHT planning strategy.

AIM Investments Face Higher Tax

AIM shares were previously 100% exempt from IHT after being held for two years, making AIM portfolios a popular planning tool. From April 2026, this full exemption is removed. AIM shares will instead attract 50% relief, resulting in an effective IHT rate of 20% rather than zero.

If you hold AIM investments specifically for IHT planning purposes, this change materially affects the value of that strategy and warrants a review.

What You Can Do: Practical Planning Steps

Strategic Pension Withdrawal

Given the April 2027 changes, it may make sense to draw down from your pension earlier than you had planned, particularly if you are in a lower income tax bracket now than your beneficiaries would be. Withdrawing pension funds and either spending them, gifting them within the exemptions, or reinvesting them in other structures can reduce the IHT exposure on your estate.

This needs to be balanced carefully against your own income needs and the income tax you would pay on withdrawals. A financial adviser can help you review your withdrawal and estate planning strategy for your specific situation.

Spousal Bypass Trust

A spousal bypass trust is a structure that allows pension death benefits to be paid into a trust rather than directly to your spouse. This means the pension funds do not form part of your spouse’s estate when they later die, avoiding a second IHT charge on the same money.

Under the new rules, this type of planning becomes more important, not less. If pension funds are going to be subject to IHT, ensuring they are structured to avoid being taxed twice, once in your estate and once in your spouse’s, is a priority.

Making a Will and Using It Effectively

A will is the foundation of any estate plan. Without one, your estate is distributed according to intestacy rules, which may not reflect your wishes and could result in a higher IHT bill. Intestacy rules do not recognise unmarried partners, meaning a long-term partner could receive nothing while the estate passes to more distant relatives.

A well-drafted will, combined with wider financial planning to minimise IHT by making use of allowances, exemptions, and trusts, can do several things to reduce your bill:

• Direct assets to exempt beneficiaries, such as a spouse or civil partner, to make use of the spousal exemption and defer IHT until the second death.
• Include charitable bequests to reduce the IHT rate to 36% if you leave at least 10% of your net estate to charity.
• Establish a discretionary trust within the will, giving trustees flexibility to distribute assets in the most tax-efficient way depending on circumstances at the time of death.
• Place life insurance in trust, so that the payout falls outside your estate and reaches your beneficiaries without being subject to IHT.

Deed of Variation

Even after someone has died, it is possible to redirect their estate using a deed of variation. This allows beneficiaries to alter the terms of a will, or the intestacy rules, within two years of the death. The variation is treated as if the deceased had made it themselves, which can reduce the IHT liability on the estate.

For example, if a child inherits assets they do not need, they could redirect them to their own children, skipping a generation and potentially avoiding IHT being charged twice on the same wealth.

Discretionary Trusts

A discretionary trust gives trustees the power to decide how and when assets are distributed among a defined group of beneficiaries. Assets placed in a discretionary trust are generally outside your estate for IHT purposes after seven years, and the trust can provide flexibility that a direct gift cannot.

Trusts are subject to their own tax rules, including periodic charges every ten years and exit charges when assets leave the trust, so they need to be set up and managed carefully. However, for larger estates, they remain one of the most effective planning tools available.

When Should You Take Professional Advice?

Not everyone needs to act urgently, but there are clear trigger points that suggest your situation warrants a proper review with a financial adviser.

Consider seeking advice if any of the following apply to you:

• Your estate, including your home, savings and pension, is worth more than £325,000 as a single person, or more than £650,000 as a couple
• You own property jointly with someone who is not your spouse or civil partner
• You are in a long-term relationship but are not married or in a civil partnership
• You have a pension pot worth more than £100,000 and have not reviewed your nominations since October 2024
• You hold AIM shares or business assets as part of an IHT planning strategy
• You have made significant gifts in the last seven years and are unsure how they affect your estate
• You do not have a will, or your will has not been reviewed in the last five years
• You are concerned about both IHT and the potential cost of long-term care

If more than one of these applies, the case for a review is strong. The good news is that with the right planning, most people can significantly reduce their exposure, often without giving anything away that they need during their lifetime.

How Frazer James Can Help

At Frazer James, we work with over-55s who want to understand their IHT position clearly and make informed decisions about their estate. We do not use jargon, we do not push products, and we do not start with solutions before we understand your situation.

A conversation with one of our financial advisers typically starts with a straightforward review of your estate, your pension, your property and your goals. From there, we can show you exactly where your exposure lies and what your options are, in plain English, with no obligation to proceed.

If you would like to understand your own inheritance tax risk, we would be glad to help.

About The Author