Inheritance tax is the tax your family pays when you die — money that otherwise would have passed to the people you care about. The rules differ sharply by country. In the UK, it is 40% on everything above £325,000, rising to £500,000 if you are leaving a home to your children. In the US, it is 40% on estates over $13.61 million. In Canada there is no inheritance tax at all — but the bill can still be brutal because of how capital gains are treated at death. Understanding how these systems work, and planning for them in advance, can save your family tens of thousands of pounds, dollars, or the equivalent in peace of mind.
How inheritance tax works
United Kingdom
The UK system is straightforward but punishing if you leave it unplanned. The nil-rate band shields the first £325,000 of your estate at 0%, and everything above that is charged at 40%. This threshold has been frozen since 2009 and is set to remain frozen until 2028. On top of it sits the residence nil-rate band, an additional £175,000 if you leave your main home to a direct descendant such as a child or grandchild, which means a couple leaving their home to children can shelter up to £1,000,000 tax-free between them. The rate drops to 36% if you leave 10% or more of your estate to charity.
Several exemptions keep much of the tax at bay for ordinary families. Spouses and civil partners inherit tax-free with no limit. Gifts made more than seven years before death fall outside your estate. There is an annual gift allowance of £3,000, plus £250 small gifts and further allowances for wedding and birthday gifts. And gifts from surplus income are exempt if you can genuinely afford them from your normal income.
United States
The US federal estate tax is less of a worry for most people because the exemption is so high — $13.61 million per individual as of the 2024 figure, projected to rise with inflation through 2026, with a 40% rate on everything above it. Married couples can combine their exemptions to shelter up to $27.22 million, and a feature called portability lets the unused portion of a deceased spouse’s exemption transfer to the surviving spouse.
Where Americans most often get caught out is at the state level. Twelve states and Washington D.C. impose their own estate taxes with much lower exemptions: Massachusetts and Oregon start at $1 million, New York around $7 million, and Washington around $2.2 million. Separate from the estate tax is the gift tax — the annual exclusion is $18,000 per recipient as of 2024, and the lifetime gift tax exemption matches the estate tax exemption at $13.61 million, with gifts above the annual exclusion reducing that lifetime figure.
Canada
Canada has no inheritance tax, but that does not mean your family escapes taxation — instead, the system works through a deemed disposition at death. When you die, the CRA treats you as if you had sold all your assets at fair market value, so capital gains tax is owed on any increase in value. The inclusion rate for capital gains above $250,000 is 66.67% as of 2024, while the first $250,000 of capital gains each year is taxed at the 50% inclusion rate.
Registered accounts add another layer. RRSPs and RRIFs are fully taxable on death, with the entire balance added to your income, while TFSAs pass to your beneficiary tax-free. If a spouse is named beneficiary, RRSPs and RRIFs transfer tax-free. On top of the income tax sit provincial probate fees — Ontario charges 1.5% on estate value over $50,000 and British Columbia 1.4%, separate from any income tax owed. So even without an inheritance tax, a Canadian estate can still face a substantial combined bill.
Planning to reduce the tax bill
1. Gift during your lifetime
The single most powerful tool is giving money away while you are alive, because assets no longer in your estate do not attract tax when you die. In the UK, you have an annual gift allowance of £3,000 per year, which can be carried forward one year so that £6,000 is possible in year one, plus small gifts of up to £250 per person to an unlimited number of recipients, wedding gifts of £5,000 for a child, £2,500 for a grandchild, and £1,000 for anyone else, and unlimited gifts from surplus income if you can show they come from your regular income.
In the US, the annual exclusion is $18,000 per recipient per year as of 2024, with married couples able to give $36,000 jointly. Tuition and medical expenses paid directly to the institution are exempt from the gift tax, and gifts to your spouse are unlimited. In Canada there is no gift tax at all — you can give money freely during your lifetime — though capital gains still apply if you gift appreciated assets, and gifting to a spouse is tax-neutral thanks to the spousal rollover.
2. Trust funds
Trusts can hold assets outside your estate, though they are among the more complex planning tools and are not right for everyone. In the UK, a discretionary trust lets trustees decide who gets what and when, which is effective for inheritance tax but complicated to set up. A bare trust gives the beneficiary an immediate right to the assets, remains part of your estate, but is useful for gifting to children. An interest in possession trust gives the beneficiary the income but not the capital, and a pilot trust starts with a small amount so additional assets can be added later — though you need to watch the “gift with reservation” rules closely.
In the US, a revocable living trust lets you keep control during your lifetime and avoid probate but does not reduce estate tax. An irrevocable life insurance trust, or ILIT, takes life insurance proceeds out of your estate. A generation-skipping trust passes wealth to grandchildren while skipping the estate tax on your children’s estates. And a qualified personal residence trust, or QPRT, lets you transfer your home out of your estate at a reduced gift tax value. In Canada, trusts are taxed at the top marginal rate, so they are mainly useful for asset protection rather than tax reduction — though an alter ego trust for those aged 65 and over, and a joint partner trust for married couples, can hold assets outside the estate.
3. Life insurance
Life insurance can pay the inheritance tax bill directly, so your family does not have to sell assets to settle it. In the UK, write the policy in trust so the payout does not form part of your estate; level term assurance can be timed to cover a potential liability, and while premiums are not tax-deductible, the payout is tax-free if held in trust.
In the US, life insurance proceeds are generally tax-free to beneficiaries, but if you own the policy the proceeds are included in your estate — so transferring ownership to an ILIT is a common fix. Second-to-die policies, which pay out when the second spouse dies, are popular with married couples for covering the estate tax bill. In Canada, life insurance proceeds are tax-free to the beneficiary and can be used to offset the tax hit from the deemed disposition of an RRSP or RRIF. Worth noting too: the CPP death benefit of $2,500 is taxable, while life insurance is not.
4. Pension nominations
In the UK, pensions sit outside your estate for inheritance tax purposes, making them one of the most tax-efficient ways to pass on wealth. If you die before age 75, the pension passes tax-free to your nominated beneficiaries; die after 75 and they pay income tax on withdrawals at their marginal rate. The nomination is crucial — without it, the pension scheme decides who receives the money, and you can nominate anyone, from a spouse or children to friends or a charity.
The same principle of keeping designations current applies in the US, where beneficiary designations on a 401(k) or IRA override your will. Spousal beneficiaries can roll the account into their own IRA tax-deferred, while non-spousal beneficiaries must usually withdraw within ten years under the SECURE Act, and naming your estate as beneficiary simply triggers probate and delay. In Canada, a spousal designation allows a tax-free transfer of an RRSP or RRIF, minor children can receive income until age 18 with some tax advantages, and a charitable designation earns the estate a tax credit for the donation.
A worked example: £500,000 estate in the UK
To see how it all fits together, take an estate of £500,000 left to adult children who are direct descendants. Imagine it is made up of a main home worth £350,000, savings and investments of £100,000, and personal possessions of £50,000. Against that total, you apply the nil-rate band of £325,000 and the residence nil-rate band of £175,000, which applies because you are leaving the home to children. That shelters the entire £500,000, so no inheritance tax is payable at all.
Now push the estate up to £600,000. The £325,000 nil-rate band and the £175,000 residence nil-rate band still apply, leaving a taxable amount of £100,000, and 40% of that is £40,000 of tax. But change the picture by leaving £60,000 to charity. The charitable bequest reduces the net estate to £540,000; after the two bands the taxable amount is £40,000, and because the charity donation exceeds 10% of the estate, the rate drops to 36%, producing tax of £14,400. The charitable bequest saves £25,600 compared with leaving nothing to charity — a striking demonstration that the 10% charity rule does real work.
When to start planning
The earlier you start, the more options you have, and in the UK the seven-year rule on gifts means time is genuinely on your side — a gift made more than seven years before death drops out of your estate entirely. Start now if your estate is close to or above the threshold, you are over 55 and have not made a will, you own property with significant equity, you have savings, investments, or pensions, you want to leave money to people other than a spouse or children, or you own a business. Once you have a plan, review it every three to five years or after any major life event — marriage, divorce, the birth of children, an inheritance, a property purchase, or a change in health.
The common mistakes are worth flagging so you avoid them: not making a will, which hands control of the tax planning to the default intestacy rules; forgetting pension nominations, so the wrong person may inherit; giving away too much too late, since gifts within seven years of death are still counted in a UK estate; ignoring US state-level taxes, where exemptions can fall as low as $1 million; keeping life insurance outside a trust; and overlooking Canadian capital gains tax, which can create a large bill even without an inheritance tax.
Bottom line
Inheritance tax planning is not about dodging tax. It is about making sure your family keeps as much of your hard-earned money as possible rather than handing it to the government at the worst possible moment. A good plan starts with valuing your estate, comparing it against your country’s threshold, using your annual gifting allowances while you can, reviewing pension and insurance nominations, and writing or updating your will so the plan is actually enforced. For estates that sit above the threshold, professional advice from a financial adviser or tax specialist usually costs far less than the savings it protects — and the peace of mind it buys your family is worth more than any number.