Why Inheritance Tax Generates More Anxiety Than Almost Any Other
Inheritance tax is, by most objective measures, a relatively contained tax. In the United Kingdom, fewer than 5% of estates pay it in any given year, according to ICAEW analysis. In the United States, the federal estate tax threshold of $13.99 million in 2025 places it beyond the reach of all but the wealthiest households. In Australia, formal estate or inheritance duties were abolished at the state and federal level decades ago, replaced only by targeted superannuation levies for non-dependent beneficiaries.
And yet, inheritance tax generates more planning anxiety, more family conversations, and more demand for professional advice than any equivalent levy. The reasons are understandable. It falls at a moment of grief. It is often concentrated on illiquid assets such as property. It feels, to many families, like a second taxation of wealth that has already been taxed once during accumulation. And in many jurisdictions, the thresholds have remained static while asset prices, particularly residential property, have risen dramatically, pulling more ordinary estates into scope.
Understanding the allowances and exemptions available within your jurisdiction, and how to use them effectively, is not tax avoidance. It is the baseline knowledge that every family with meaningful assets should have.
The United Kingdom: Frozen Thresholds, Rising Receipts
The UK's inheritance tax framework is among the more complex in the developed world, combining a standard nil-rate band, a residence nil-rate band, a series of lifetime gift exemptions, and structural reliefs for business and agricultural property. Understanding how these interact is the starting point for any UK estate plan.
The nil-rate band
The standard nil-rate band (NRB) is £325,000 per individual. This has been frozen at the same level since April 2009 and will remain frozen until at least April 2030 under current legislation, as confirmed by the UK government's published thresholds guidance. Had the NRB increased in line with inflation since 2009, ICAEW estimates it would now stand above £526,000. The freeze represents a sustained fiscal drag that pulls more estates into the IHT net every year without any change to the nominal rate.
Unused NRB from the first spouse to die can be transferred to the surviving spouse's estate, potentially doubling the available threshold to £650,000. This transfer is not automatic: the executor of the surviving spouse's estate must claim it formally.
The residence nil-rate band
An additional residence nil-rate band (RNRB) of £175,000 per individual applies where a qualifying residential property is passed to direct descendants, meaning children or grandchildren including adopted and stepchildren. For a married couple passing their home to children, the combined RNRB can reach £350,000. Added to the combined NRB, a couple can potentially pass up to £1,000,000 to their children free of IHT.
There is an important taper: the RNRB reduces by £1 for every £2 by which the net estate exceeds £2 million. For an estate valued at £2.35 million, the RNRB is eliminated entirely for that individual. This taper is a significant planning consideration for higher-value estates.
Lifetime gift exemptions
A series of annual exemptions allow individuals to reduce their taxable estate through lifetime gifts:
- The annual exemption of £3,000 per person per year has been frozen at this level since the early 1980s. As ICAEW notes, £3,000 in 1975 would have covered a substantial deposit on an average UK home. Today it covers roughly 1% of average house prices. One unused year's exemption can be carried forward.
- Small gifts of up to £250 to any individual in a tax year are fully exempt with no limit on the number of recipients.
- Marriage gifts allow parents to give up to £5,000 to a child on marriage, grandparents to give up to £2,500, and others to give up to £1,000.
- Gifts out of normal expenditure from income are exempt where they are habitual, made from income rather than capital, and do not reduce the donor's standard of living. This is one of the most powerful and underused exemptions available to higher earners with surplus income, and requires careful documentation to be defensible.
Potentially exempt transfers (PETs)
Outright gifts to individuals that do not fall within an annual exemption are treated as potentially exempt transfers. A PET becomes fully exempt from IHT if the donor survives for seven years from the date of the gift. If the donor dies within seven years, the gift is brought back into the estate for IHT purposes, subject to taper relief that reduces the tax charge in years three to seven. The seven-year clock is a planning tool: for donors in good health, beginning a structured gifting programme earlier rather than later is almost always beneficial.
Business property relief and agricultural property relief
Business property relief (BPR) provides 100% IHT relief on qualifying business assets including shares in unlisted trading companies and certain AIM-listed shares, after a two-year holding period. Agricultural property relief (APR) provides equivalent relief on qualifying agricultural land and property. The Autumn Budget 2024 announced a cap of £1 million on the amount qualifying for 100% relief from April 2026, with 50% relief above that threshold producing an effective 20% IHT rate. This cap represents a significant tightening of both reliefs for farmers and business owners with high-value assets.
The United States: High Threshold, State-Level Complexity
The US federal estate tax framework takes a fundamentally different approach from the UK. Rather than a relatively low threshold applying to a broad range of estates, the federal exemption is set at a level that exempts the vast majority of households entirely.
The federal estate tax exemption
The federal estate tax exemption for 2025 is $13.99 million per individual, or approximately $27.98 million for a married couple using portability, according to SK Financial's estate tax analysis. Only estates above these thresholds face the 40% federal estate tax on the excess. For the overwhelming majority of US households, federal estate tax is not a planning priority.
However, two significant risks apply. First, the elevated exemption introduced by the Tax Cuts and Jobs Act of 2017 is scheduled to sunset at the end of 2025 unless Congress acts to extend it. The exemption could revert to approximately $7 million per individual (inflation-adjusted), potentially bringing a substantially larger number of estates into scope. As of early 2026, the legislative outcome remains uncertain. Second, several US states, including Massachusetts, Oregon, Maryland, and Washington, impose their own estate or inheritance taxes at significantly lower thresholds, sometimes as low as $1 million. Federal planning does not solve state-level exposure.
Annual gift tax exclusion
The US annual gift tax exclusion, which has risen with inflation to $19,000 per person per year in 2025, allows individuals to make annual tax-free gifts to any number of recipients without reducing the lifetime estate and gift tax exemption. A married couple can together give up to $38,000 per recipient per year, meaning a family with three adult children could remove up to $114,000 from their taxable estate annually through gifts alone. This is a straightforward and frequently underused planning mechanism.
The step-up in basis
One of the most valuable features of the US estate system for inherited assets is the step-up in cost basis at death. When an heir inherits an asset, their cost basis for capital gains purposes is generally reset to the fair market value on the date of death, eliminating accrued capital gains accumulated during the deceased's lifetime. For families holding highly appreciated property, equities, or business interests, this step-up can represent substantial tax savings relative to a lifetime sale. This is one reason why the hold-versus-gift analysis for appreciated assets in the US often favours holding until death rather than gifting during lifetime.
Australia: No Formal Inheritance Tax but Real Tax on Inherited Wealth
Australia abolished estate and death duties in all states and territories by 1981, making it one of the few OECD nations with no formal inheritance or estate tax. This is often cited as evidence that inherited wealth is untaxed in Australia. The reality is more nuanced.
Capital gains tax on inherited assets
When an Australian resident inherits a capital asset such as property or shares, they generally acquire it at the deceased's original cost base or at market value at the date of death, depending on when the asset was acquired and how it is used. If the heir subsequently sells the asset, capital gains tax is calculated on the increase in value from the inherited cost base. There is no equivalent of the UK's CGT-free uplift or the US step-up: Australian beneficiaries who sell inherited appreciating assets may face material CGT liabilities.
The superannuation death levy for non-dependants
As discussed in our companion article on pension death benefits, Australian superannuation death benefits paid to non-dependent beneficiaries, principally adult children not financially dependent on the deceased, are subject to tax of 17% to 32% on the taxable component of the superannuation balance. With Australians holding over AUD $4.3 trillion in superannuation, this levy affects a substantial and growing number of families. It functions as a de facto inheritance tax on the largest single financial asset most Australians accumulate, even in the absence of a formal estate tax.
Canada: Provincial Variation and the Deemed Disposition
Canada has no federal inheritance tax, but the concept of a deemed disposition at death creates a significant tax event for many estates.
Deemed disposition
Under Canadian tax law, a taxpayer is deemed to have disposed of all capital property immediately before death at fair market value. Any accrued capital gains are included in the deceased's final income return and taxed accordingly. For a holder of appreciated investment property, a private company shareholding, or a non-registered investment portfolio, this can create a substantial concentrated tax liability in the year of death.
The principal exception is a spousal rollover: assets can transfer to a surviving spouse or common-law partner on a tax-deferred basis, with the deemed disposition deferred until the survivor's death or a future sale. Transfers to anyone other than a qualifying spouse are fully taxed.
Probate fees
While Canada has no inheritance tax, most provinces impose probate fees (sometimes called estate administration taxes) on the value of assets passing through the estate. In Ontario, the rate reaches approximately 1.5% on estate assets above $50,000. This has driven the widespread use of beneficiary designations, joint tenancy, and in-trust accounts to pass assets outside the estate and avoid probate fees.
Registered accounts and RRSP/RRIF on death
As noted in our pension article, Canadian RRSPs and RRIFs are included in the deceased's income for the final year absent a qualifying spousal rollover. For significant balances, this creates an income tax liability that can equal or exceed what a formal inheritance tax would impose in other jurisdictions.
The Allowances Most Families Leave on the Table
Across jurisdictions, a consistent pattern emerges. Most families are broadly aware that estate taxes exist. Far fewer are actively using the available exemptions and allowances to reduce their exposure systematically.
The most commonly underused mechanisms include:
Systematic annual gifting In the UK, the £3,000 annual exemption and gifts out of surplus income are frequently unused by individuals who could apply them every year with no meaningful impact on their financial position. A couple making maximum use of annual exemptions over 20 years removes £120,000 from their taxable estate at zero tax cost. Combined with a structured PET programme, the cumulative impact over a decade can be material.
Spousal asset balancing In jurisdictions with per-person thresholds (UK, US), ensuring that both spouses have sufficient individual assets to make full use of their own allowances on death is a basic optimisation that many couples have not explicitly addressed. An estate entirely in one spouse's name may waste the other's threshold entirely.
Beneficiary designation reviews Retirement accounts, life insurance policies, and in some jurisdictions pension funds pass by beneficiary designation rather than by will. Outdated, suboptimal, or incorrectly structured designations are one of the most common and most correctable sources of avoidable tax in estate planning globally.
Business and agricultural reliefs For business owners and farmers, BPR and APR remain among the most powerful estate planning tools available, even after the 2026 cap changes. Structuring business interests to maximise qualifying status and meeting holding period requirements requires planning, but the tax saving for qualifying estates is substantial.
Charitable giving In the UK, leaving at least 10% of the net estate to charity reduces the IHT rate on the taxable remainder from 40% to 36%. For estates where charitable giving aligns with the family's values, this rate reduction can be designed to leave both charity and family better off than an unplanned estate.
Why Planning Now Matters More Than Ever
The direction of travel in most major jurisdictions is toward greater, not lesser, inheritance tax exposure. In the UK, frozen thresholds combined with rising asset prices mean that the effective real-terms threshold falls every year. The proposed inclusion of pensions within the IHT net from 2027 adds a major new category of taxable wealth. In the US, the potential sunset of elevated exemptions after 2025 creates a window for planning that may narrow.
The allowances and exemptions available today are, in most cases, the most favourable they are likely to be for the foreseeable future. Using them systematically, as part of a coherent estate plan rather than as individual ad hoc decisions, is the difference between an estate that reaches the next generation largely intact and one that transfers a significant portion to the state.
At Celerey, we work with clients globally to map their estate position, understand the specific rules and allowances applicable to their jurisdiction and family structure, and build a plan that makes full and defensible use of what the law permits. The conversation is simpler than most people expect. The impact on what your family ultimately receives can be significant.