More families risk paying inheritance tax on savings – here's how to reduce the bill

HMRC has collected £2.2bn in inheritance tax (IHT) so far this financial year, according to the latest figures.

The tax is charged on the value of an estate – including savings, property, investments and, from April 2027, pensions – above certain thresholds. 

For many people, these allowances mean savings can be passed on without a bill, but rising asset values and frozen thresholds mean more estates are being brought into scope.

Here, Which? explains how IHT rules apply to savings, what happens to accounts when someone dies, and the steps you can take if you want to reduce a potential bill

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What happens to savings when you die?

Savings, like other assets, can be passed on to a spouse, civil partner or anybody named as a beneficiary once your estate has been administered. The executor of your will is responsible for closing accounts and distributing the funds. 

In most cases the process is straightforward. The executor contacts the bank or building society, which will release the funds. 

If your money is in a fixed-term account that hasn’t matured, it can still be closed immediately, with interest paid up to the date of death.

Many banks and building societies are signed up to the free Death Notification Service, so the executor can notify several institutions at the same time.

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Do you pay inheritance tax on savings?

Inheritance tax (IHT) is a tax payable on the estate of someone who has died. The value of an estate includes all of the deceased's property and possessions, and any money saved or invested.

But the answer to whether HMRC will take a chunk of your savings depends on a number of factors. 

Anything over £325,000 in your estate after death is subject to IHT, charged at 40%. The £325,000 allowance – called the 'nil-rate band' – rises to £500,000 for direct descendants such as children, if a property that was the deceased's main home is included in the estate.

Married couples and civil partners are allowed to pass their possessions and assets – including savings and Isas – to each other tax-free, regardless of the amount. 

If you're the surviving partner, your spouse's tax-free allowance will be added to your own. In 2025-26, most married couples or civil partners can pass on up to £650,000, or £1m if your estate includes your home. That's also providing beneficiaries are direct descendants. 

This effectively doubles the amount the surviving partner can leave behind tax-free without the need for special tax planning.

It's worth remembering that relatively few estates are actually subject to IHT and most people's savings can be passed on to loved ones without facing a tax bill. The latest HMRC data for 2022-23 shows that just 4.62% of UK deaths resulted in an IHT charge. 

The same report showed a record £6.7bn was paid in IHT in 2022-23 – a 12% increase on the previous year. This rise is partly due to frozen tax-free thresholds, which have remained unchanged for more than a decade and are set to stay in place until 2030, bringing more estates into scope.

This, coupled with rising property prices and new rules bringing unused pension funds into the scope of IHT from April 2027, means a growing number of people who were previously unaffected by the levy may soon find their estates exceed their tax-free allowances. 

• Find out more: IHT rates and allowances

Are cash Isas exempt from IHT?

Cash Isas are a popular way to avoid tax on savings income. You can deposit up to £20,000 a year in Isas without paying a penny to HMRC on any interest earned.

Like money in traditional savings accounts, Isas form part of your estate when you pass away. Again, the surviving spouse can inherit the funds invested in these accounts without triggering an IHT bill.

The difference is that your surviving spouse can still benefit from the extra tax protections these accounts offer.

Since 3 December 2014, bereaved spouses and civil partners have been allowed to re-invest cash and investments held in their partner's Isa.

The allowance is called an Additional Permitted Subscription (APS). Be aware that not all Isa providers let people use it, so you'll need to check with your provider that they accept these extra deposits before transferring.

If not, you're free to open another one that does, even if you've used part of your Isa subscription in the current tax year.

Unfortunately the APS only applies to spouses and civil partners. So if you inherited your mother's Isas, for example, the money would lose its tax-free status.

Isas aren't excluded from IHT, so while you can inherit your partner's Isas tax-free, for everyone else Isas form part of the estate for IHT purposes.

• Find out more: can you inherit an Isa?

Gifting cash can beat the taxman

If your estate is likely to come under the scope of IHT, gifting money during your lifetime is a simple step you can take to reduce the potential tax burden. 

A new Paragon Bank survey revealed that 17% of those aged 65 and over have begun gifting money specifically in response to recent government reforms to IHT, with 25% stating they have increased the amount they give. The majority of gifts are directed towards immediate family, with 71% of respondents giving to children and 46% to grandchildren.

However, the rules can be complicated and there are various exemptions to watch out for:

• No tax is due on any gifts you give: That's as long as you live for seven years after giving them. If you were to pass away within that time frame, the IHT amount may instead be reduced due to 'taper relief', so long as you survived at least three years after giving the gift.
• You can give up to £3,000 worth of IHT-free gifts: You can split this allowance between however many people you like over the course of the financial year. This is known as your 'annual exemption'. 
• Make unlimited gifts of up to £250 to others, too: This is possible, as long as you have not used another allowance on the same person. You can also carry any unused annual exemption forward to the next tax year, but only for one tax year.
• Avoid IHT on wedding gifts: You can give cash, without paying IHT, up to £5,000 for your child's wedding, up to £2,500 for a grandchild or great-grandchild, and up to £1,000 for anyone else.
• No IHT on donations: There is no charge on money given to UK charities, political parties, the National Trust, registered housing associations, national museums and universities. If you leave more than 10% of your taxable estate to one of these groups in your will, the IHT rate for the rest of your estate will fall from 40% to 36%. 

Find out more: tax-free gifts

Other ways to reduce IHT

You can also reduce inheritance tax by putting your life insurance policy under trust, drawing up a deed of variation that allows your heirs to alter your will after death, or using an equity release scheme to make use of money tied up in property. 

There's a lot to consider for each of these options, so it might be worth consulting a specialist before you go ahead. 

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