What is the Inheritance Tax Act 1984?
The Inheritance Tax Act 1984 (IHTA 1984) is the primary piece of legislation that governs how inheritance tax (IHT) is charged on estates, lifetime gifts, and certain trusts in England and Wales. It replaced the Capital Transfer Tax Act 1984 and has been amended numerous times since — most significantly by the Finance Act 2006 (which overhauled trust taxation) and the Finance Act 2017 (which introduced the residence nil-rate band).
Despite its name, the Act covers far more than just what happens when someone dies. It also governs lifetime gifts, transfers into and out of trusts, and the ongoing taxation of certain trust structures. Understanding its key provisions is essential for anyone with an estate worth more than £325,000 — or anyone who wants to ensure their wealth passes to the next generation as efficiently as possible.
Important note: The 2024 Autumn Budget announced significant changes to IHT, including reforms to business and agricultural property reliefs from April 2026, and the inclusion of pension funds within the IHT net from April 2027. This guide reflects the law as it currently stands, but professional advice is essential given the changing landscape.
Key Provisions of the Inheritance Tax Act
The Act contains dozens of provisions, but these six are the ones most likely to affect your estate planning.
Every individual has a tax-free threshold of £325,000. Anything above this is taxed at 40%. The NRB has been frozen at this level since 2009 and is set to remain frozen until at least 2030.
An additional allowance when you leave your main residence to direct descendants (children, stepchildren, grandchildren). Combined with the NRB, a single person can shelter up to £500,000 from IHT.
Transfers between spouses and civil partners are completely exempt from IHT. Unused nil-rate bands are transferable, meaning a surviving spouse can shelter up to £1 million from tax.
Lifetime gifts become fully exempt from IHT if the donor survives seven years after making them. Gifts made within seven years of death may be subject to taper relief, reducing the tax owed.
Qualifying business assets — including shares in unlisted companies and interests in trading partnerships — can attract up to 100% relief from IHT, protecting family businesses from forced sale.
Agricultural land and buildings used for farming can qualify for up to 100% relief. This is vital for farming families who might otherwise face a devastating tax bill on the family farm.
The Seven-Year Rule and Taper Relief
One of the most important planning tools under the IHTA 1984 is the ability to make lifetime gifts that fall outside your estate after seven years. These are known as Potentially Exempt Transfers (PETs). If you survive seven years after making the gift, it becomes fully exempt from IHT. If you die within seven years, taper relief reduces the tax owed on a sliding scale.
Taper Relief on Lifetime Gifts
| Years Survived After Gift | Effective IHT Rate | Taper Relief |
|---|---|---|
| 0–3 years | 40% | 0% |
| 3–4 years | 32% | 20% |
| 4–5 years | 24% | 40% |
| 5–6 years | 16% | 60% |
| 6–7 years | 8% | 80% |
| 7+ years | 0% | 100% |
Note: Taper relief only applies where the total value of gifts in the seven years before death exceeds the nil-rate band. The relief reduces the tax on the gift, not the value of the gift itself.
Annual Exemptions and Small Gifts
Not all lifetime gifts are Potentially Exempt Transfers. The IHTA 1984 provides a number of annual exemptions that allow you to give away money and assets completely free of IHT, regardless of how long you survive:
Annual Exemption
£3,000 per yearYou can give away up to £3,000 each tax year completely free of IHT. Any unused allowance can be carried forward one year only.
Small Gifts Exemption
£250 per personYou can give up to £250 to any number of individuals each tax year, as long as you have not used another exemption for the same person.
Wedding / Civil Partnership Gifts
Up to £5,000Gifts on the occasion of a marriage or civil partnership are exempt: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
Normal Expenditure Out of Income
UnlimitedRegular gifts made out of surplus income (not capital) that do not affect your standard of living are fully exempt — but must be habitual and documented.
Gifts with Reservation of Benefit
A Common and Costly Mistake
Many people try to reduce their IHT bill by giving away assets — particularly their home — while continuing to benefit from them. HMRC has specific rules to prevent this, known as the "gifts with reservation of benefit" (GROB) rules under s.102 IHTA 1984.
If you give away an asset but continue to benefit from it — for example, giving your house to your children but living in it rent-free — HMRC treats the asset as still forming part of your estate for IHT purposes. The gift is simply ignored for tax purposes.
To avoid the GROB rules applying to a gifted property, you must pay a full market rent to the new owner. This has income tax implications for the recipient and is rarely a practical solution. The pre-owned assets tax (POAT) regime adds a further layer of complexity for those who have tried to sidestep the GROB rules.
Planning tip: If you want to reduce IHT on your property, the most effective strategies are making genuine outright gifts (and surviving seven years), using a properly structured trust, or ensuring your will maximises the residence nil-rate band. Always take professional advice before acting.
Executor Responsibilities Under the Act
Executors have a legal duty to calculate and pay any IHT due on the estate. Failure to meet HMRC's deadlines can result in interest charges and penalties. Here are the key steps:
Value the Estate
Identify and value all assets — property, savings, investments, business interests, and personal possessions — as at the date of death.
Identify Chargeable Gifts
Review all gifts made in the seven years before death. These may reduce the available nil-rate band or be subject to taper relief.
Calculate IHT Due
Apply the nil-rate band, residence nil-rate band, and any available reliefs to determine the taxable estate and the tax owed.
Pay IHT Within 6 Months
HMRC requires inheritance tax to be paid within six months of the end of the month in which the person died. Interest accrues on late payments.
Submit IHT Return Within 12 Months
A full IHT account (form IHT400) must be submitted to HMRC within 12 months of death. Failure to do so can result in penalties.
How Inheritance Tax Has Changed Since 1984
The IHTA 1984 has been significantly amended over the decades. Understanding these changes helps explain why IHT planning has become increasingly important — and increasingly complex.
Inheritance Tax Act 1984 enacted, replacing Capital Transfer Tax. The nil-rate band was set at £64,000.
Finance Act 2006 fundamentally reformed the taxation of trusts, making most trusts subject to the "relevant property" regime and periodic/exit charges.
Transferable nil-rate band introduced, allowing unused NRB to pass to a surviving spouse or civil partner — effectively doubling the threshold for couples.
Nil-rate band frozen at £325,000 — a level it has remained at ever since, meaning fiscal drag has brought more estates into the IHT net.
Residence nil-rate band introduced at £100,000, rising to £175,000 by 2020. This allowed couples to shelter up to £1 million from IHT when leaving the family home to direct descendants.
Autumn Budget announced reforms to BPR and APR (capping 100% relief at £1 million from April 2026) and inclusion of pension funds in IHT from April 2027.
Your Inheritance Tax Planning Roadmap
You do not need to be wealthy to benefit from IHT planning. Here are three practical steps anyone can take to ensure their estate is as tax-efficient as possible.
Step 1: Track Your Gifts
Keep a record of all gifts you make, including the date, recipient, and value. This is essential for executors to calculate IHT correctly and to demonstrate that gifts qualify for exemptions.
Step 2: Review Your Estate Annually
Property values change. Review the total value of your estate each year against the available nil-rate bands and consider whether lifetime gifts or trust planning could reduce your exposure.
Step 3: Update Your Will
Ensure your will is structured to maximise the residence nil-rate band, make use of spousal exemptions, and reflect any changes in your family circumstances or estate value.
Related Guides
Frequently Asked Questions
What is the Inheritance Tax Act 1984?
Do most people pay inheritance tax?
What is the nil-rate band and how does it work?
What is the residence nil-rate band?
How does the 7-year rule work?
What are gifts with reservation of benefit?
What is business property relief?
When should I take professional advice on inheritance tax?
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