Inheritance Tax Manual: Rules, Reliefs and Thresholds

The Inheritance Tax Manual is the internal guidance His Majesty’s Revenue and Customs (HMRC) publishes to explain how its officers should interpret and apply the Inheritance Tax Act 1984. Although written for caseworkers, the full text sits openly on GOV.UK, which makes it the most detailed public reference for how inheritance tax actually works in practice.¹ The headline rate it applies is 40% on the portion of an estate above the tax-free threshold of £325,000, a figure frozen since 2009 and set to stay frozen until at least April 2030.²

What the Manual Is and How to Use It

The manual bridges the gap between the statute and the daily work of tax administration. It tells caseworkers how to value assets, apply reliefs, investigate returns, and calculate what is owed. Because it reflects HMRC’s own reading of the law, advisers and executors routinely consult it when preparing an IHT400 or challenging an assessment.

It uses an alphanumeric coding system to organise topics. The IHTM04000 series covers how the tax is charged, IHTM09000 deals with valuation principles, IHTM11000 handles exemptions, IHTM24000 and IHTM25000 cover agricultural and business relief, and IHTM42000 addresses trusts. Each series breaks down into individual pages, and internal cross-references let you trace how one rule affects another.¹

How Inheritance Tax Is Charged

Inheritance tax applies to the total value of a person’s estate at death, minus debts, funeral expenses, and any qualifying exemptions or reliefs. The estate includes property, bank accounts, investments, personal belongings, and certain gifts made within seven years before death. Anything above the tax-free threshold is taxed at 40%.³

The rate drops to 36% where an estate leaves at least 10% of its net value to charity.⁴ The manual gives a full section, IHTM45000, to working out whether an estate qualifies, because the 10% test is applied to individual components of the estate rather than one lump sum. That mechanic catches many executors off guard.

Transfers between spouses or civil partners are exempt regardless of amount. Gifts to qualifying charities and registered political parties are also fully exempt.

Nil Rate Band and Residence Nil Rate Band

Every individual has a nil rate band of £325,000, so the first £325,000 of their estate passes tax-free. A separate residence nil rate band of £175,000 is available when you leave your home directly to your children or grandchildren, taking the potential tax-free amount to £500,000 per person.³ Both thresholds are frozen at these levels until 5 April 2030.²

The residence nil rate band tapers away on larger estates. For every £2 the estate’s net value exceeds £2 million, the residence band shrinks by £1. An estate worth £2.35 million or more loses it entirely.⁵

Transferring Unused Allowances Between Spouses

If the first spouse to die did not use their full nil rate band, the unused percentage carries over to the surviving spouse’s estate. The same applies to the residence nil rate band. A couple who both qualify could reach a combined tax-free threshold of up to £1 million. The IHTM43000 series walks through the calculation.

The claim must be made by the personal representatives of the second estate within 24 months after the end of the month in which the second spouse died. HMRC has discretion to extend that period, but missing the deadline without good reason can forfeit the transfer entirely.⁶

Valuing the Estate

The Act defines value as the price the property could reasonably be expected to fetch on the open market. That price is not reduced on the assumption that everything in the estate would be dumped on the market at once.⁷ In practice, that means professional appraisals for land, closing prices from the stock exchange for listed shares, and reasonable estimates for personal items like cars and jewellery.

Liabilities such as outstanding mortgages, credit card balances, and household bills are subtracted from the gross value to arrive at the taxable total. Executors report all of this on form IHT400, which requires supporting evidence like bank statements and formal balance confirmations from financial institutions dated as of the day of death.⁸

Getting the valuation wrong carries real consequences. Where HMRC considers an undervaluation deliberate, penalties range from 20% to 70% of the underpaid tax. Deliberate undervaluation with concealment pushes the penalty to between 30% and 100% of the unpaid amount.⁹

Lifetime Gifts and the Seven-Year Rule

Gifts made during your lifetime are treated as potentially exempt transfers. Survive seven years after making a gift and it drops out of your estate completely. Die within seven years and it gets pulled back into the calculation.¹⁰

Gifts made in the final three years before death are taxed at the full 40% rate. Between three and seven years, taper relief gradually reduces the tax rate on the gift: 32% at three to four years, 24% at four to five, 16% at five to six, and 8% at six to seven. Taper relief only matters when the total value of gifts in the seven years before death exceeds the £325,000 nil rate band. Below that threshold, the gifts are covered by the band anyway.¹⁰

Annual and Small Gift Exemptions

Separate from the seven-year rule, several fixed exemptions let you give money away each year without it ever counting toward your estate. You can give up to £3,000 per tax year in total under the annual exemption. On top of that, you can make gifts of up to £250 to as many individuals as you like, provided you haven’t used another exemption on the same person. Wedding or civil partnership gifts have their own limits: £5,000 to a child, £2,500 to a grandchild, and £1,000 to anyone else.¹⁰

Business and Agricultural Property Relief

Business property relief can reduce the taxable value of qualifying business assets by either 100% or 50%, depending on the type of asset. A sole trader’s business or a partner’s share in a trading partnership qualifies for 100% relief, while a controlling shareholding in a listed company qualifies for 50%. The deceased must have owned the asset for at least two years before death.¹¹

Agricultural property relief works similarly, reducing the agricultural value of farmland and buildings. Where the owner farmed the land themselves, the relief is generally 100%.

The April 2026 Cap

From April 2026, a combined allowance of £2.5 million applies to the total value of property qualifying for 100% business property relief and 100% agricultural property relief. Any qualifying value above that cap receives relief at 50% instead of 100%. The £2.5 million allowance is transferable between spouses and civil partners, so a surviving spouse could potentially shelter up to £5 million in combined business and agricultural property.¹² Before April 2026, 100% relief had no upper limit.

Trusts

The manual devotes substantial sections to how inheritance tax applies to trusts. Most property held in trust is classified as “relevant property” and faces two recurring tax events: a charge every ten years, the periodic charge, and a charge whenever assets leave the trust, the exit charge.¹³

The ten-year periodic charge applies to the net value of trust assets above the £325,000 nil rate band. Trustees pay at an effective rate of up to 6% on that excess. Exit charges are also capped at 6% and are calculated proportionally based on how many complete quarters have passed since the last ten-year anniversary. A distribution shortly after a periodic charge attracts a small exit charge; one made just before the next anniversary is closer to the full 6%.¹³

Trustees report these events to HMRC on form IHT100 and must pay any tax due by the end of the sixth month after the chargeable event. The IHTM42000 series covers the mechanics, including how business and agricultural relief interact with the periodic charge.

Reporting and Paying

Where an estate owes inheritance tax, the executor must complete form IHT400 and send it by post to HMRC. The form must be filed within 12 months of the death, but the tax payment deadline is earlier: you must pay by the end of the sixth month after the person died. Someone who dies in January has a payment deadline of 31 July. HMRC charges interest from that date on anything unpaid.¹⁴

Executors often hit a practical problem here. You typically need to pay the tax before the probate registry will grant you the legal authority to access the deceased’s assets. Banks may release funds directly to HMRC from the deceased’s accounts under a special arrangement, but for illiquid assets like property, you face a timing gap.

Paying by Instalments

For assets that take time to sell, the Act allows payment in ten equal yearly instalments. Qualifying assets include land, businesses, controlling shareholdings, and certain unlisted shares or securities.¹⁵ You elect for instalments on the IHT400 itself. The first instalment is due at the same six-month deadline as a normal payment, with subsequent instalments falling annually on that same date.¹⁶

Interest accrues on most instalment arrangements. You won’t pay interest on the first instalment if you pay on time, but each subsequent instalment carries interest on the outstanding balance. Selling the asset before finishing the instalments makes the remaining tax due immediately.

Consequences of Late Payment

Missing the payment deadline does not just mean interest. HMRC can also impose penalties for failure to deliver accounts on time, and the manual’s IHTM36000 series sets out how caseworkers should approach these situations. Interest compounds on top of any outstanding tax, so delays in gathering valuations or resolving disputes can significantly increase the final bill. Executors who anticipate complications should consider applying for the instalment option early rather than hoping the probate process will move faster than it usually does.

1
GOV.UK. Inheritance Tax Manual – HMRC Internal Manual
2
GOV.UK. Inheritance Tax Thresholds and Interest Rates
3
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
4
GOV.UK. Inheritance Tax Reduced Rate Calculator
5
HM Revenue & Customs. Inheritance Tax Nil-Rate Band, Residence Nil-Rate Band From 6 April 2028
6
GOV.UK. IHTM43007 – Claims and Time Limits
7
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 160
8
GOV.UK. How to Value an Estate for Inheritance Tax and Report Its Value
9
GOV.UK. Penalties: An Overview for Agents and Advisers
10
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Gifts
11
GOV.UK. Business Relief for Inheritance Tax
12
GOV.UK. Agricultural Property Relief and Business Property Relief Changes
13
GOV.UK. Trusts and Inheritance Tax
14
GOV.UK. Pay Your Inheritance Tax Bill
15
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 227
16
GOV.UK. Pay Your Inheritance Tax Bill: In Yearly Instalments