UK Inheritance Tax is charged at 40% on the value of a person’s estate above £325,000 when they die. An extra £175,000 allowance can apply if a home passes to children or other direct descendants, and a surviving spouse or civil partner can inherit any unused allowance from the first to die, so a couple can potentially pass on up to £1 million tax-free. The tax covers everything the person owned worldwide (if they were UK domiciled or a long-term UK resident) minus debts and reliefs, and it is the responsibility of the executor or administrator to value the estate, report it to HMRC, and pay any tax due before beneficiaries receive their inheritance.
The Tax-Free Thresholds
Every estate has a nil rate band of £325,000 under section 7 of the Inheritance Tax Act 1984. The figure has not moved since 2009, and the government has frozen it through the end of the 2029–2030 tax year, with CPI-linked increases scheduled from 2030.1GOV.UK. Inheritance Tax Nil-Rate Band and Residence Nil-Rate Band from 6 April 2028 As property values rise, the freeze pulls more estates above the taxable line each year.
The Residence Nil Rate Band
A further £175,000 allowance — the residence nil rate band — applies when a qualifying home is left to a direct descendant. Direct descendants include children, grandchildren, stepchildren, adopted children, and the spouses or civil partners of any of those people.2GOV.UK. Work out and Apply the Residence Nil Rate Band for Inheritance Tax Together with the nil rate band, one person can pass on up to £500,000 tax-free where a home forms part of the transfer.
Larger estates lose this extra allowance. It tapers away by £1 for every £2 the estate exceeds £2 million, so an estate worth £2.35 million loses the whole £175,000. The taper is based on the gross estate after debts but before reliefs such as business property relief, which means the residence nil rate band can vanish even when the final taxable estate ends up well below £2 million.2GOV.UK. Work out and Apply the Residence Nil Rate Band for Inheritance Tax
Transferring Unused Allowances Between Spouses
Section 8A of the Inheritance Tax Act 1984 lets a surviving spouse or civil partner claim whatever nil rate band their late partner did not use.3Legislation.gov.uk. Inheritance Tax Act 1984 – Section 8A If the first spouse left everything to the survivor under the spouse exemption, none of their £325,000 was used and the full amount transfers, giving the survivor a doubled band of £650,000. The residence nil rate band works the same way, which is how a couple can shelter up to £1 million in total.4GOV.UK. Inheritance Tax
The transfer is not automatic. Executors must file form IHT402 with HMRC no later than 24 months after the end of the month in which the surviving spouse died, along with the first spouse’s grant of representation, their will if there was one, and details of gifts made in the seven years before their death.5GOV.UK. IHT402 – Claim to Transfer Unused Nil Rate Band Missing the deadline forfeits the extra allowance, and it is one of the most common oversights in estate administration.
The 40% Rate and the Charity Discount
Everything above the available thresholds is taxed at a flat 40%.4GOV.UK. Inheritance Tax On an estate worth £600,000 with a £500,000 combined threshold, the tax is 40% of £100,000, or £40,000.
Estates that leave at least 10% of their net value to qualifying charities pay a reduced rate of 36% under Schedule 1A of the Inheritance Tax Act 1984.6Legislation.gov.uk. Inheritance Tax Act 1984 – Schedule 1A The 10% is measured against a “baseline amount” that is broadly the taxable portion of the estate after thresholds. Four percentage points sounds small, but on a taxable estate of £500,000 it saves £20,000, partly offsetting the charitable gift itself.
What Counts as the Estate
The estate includes every asset the person owned worldwide: property, bank balances, investments, vehicles, jewellery, and anything else with a market value. Each item is valued at its open market price on the date of death — the price a willing buyer would pay a willing seller. Property and unusual items such as art or antiques almost always need professional valuations, and HMRC routinely challenges figures that look low.
From the gross total, executors deduct real debts existing at the date of death: mortgages, personal loans, credit card balances, utility bills, and similar obligations. Reasonable funeral costs also reduce the taxable figure. Every deduction needs documentation; HMRC will not accept claimed debts on trust.
Joint assets deserve special attention. Property held as joint tenants passes automatically to the surviving owner, and the deceased’s share is still valued for Inheritance Tax. Property held as tenants in common passes under the will or intestacy rules instead. That distinction changes the outcome, because a joint tenancy share going to a surviving spouse usually falls under the spouse exemption, while a tenancy in common share left to someone else counts toward the taxable estate. Life insurance is another trap: policies written in trust sit outside the estate, but policies not in trust form part of it and can push an estate over the threshold unexpectedly.
The Spouse and Civil Partner Exemption
Transfers between spouses or civil partners are entirely exempt from Inheritance Tax under section 18 of the Inheritance Tax Act 1984, whether made during lifetime or on death, provided both are UK domiciled or, from April 2025, long-term UK residents.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 18 A surviving spouse can inherit the entire estate with no tax charge. In practice that means Inheritance Tax usually surfaces on the second death, when assets pass to children or others.
Where the receiving spouse is not UK domiciled or a long-term UK resident, the exemption is capped rather than unlimited. Couples in that position should get specialist advice, because the interaction between domicile rules, the limited exemption, and the nil rate band transfer can produce unexpected results.
Lifetime Gifts and the Seven-Year Rule
Under section 3A of the Inheritance Tax Act 1984, most lifetime gifts are treated as “potentially exempt transfers.” The gift escapes tax entirely if the person who made it lives for another seven years.8Legislation.gov.uk. Inheritance Tax Act 1984 – Section 3A If they die within seven years, the gift is added back to the estate for tax purposes. Without this rule, people could give everything away on their deathbed and pay nothing.
When a gift falls back into the estate, taper relief reduces the tax rate on a sliding scale. Nothing changes in the first three years. After that:
- 3 to 4 years before death: 32% effective rate (20% relief on the full 40%)
- 4 to 5 years: 24% (40% relief)
- 5 to 6 years: 16% (60% relief)
- 6 to 7 years: 8% (80% relief)
Taper relief only matters when the total value of gifts exceeds the nil rate band. Someone who gave away £200,000 and died four years later would owe no tax, because the gift sits inside the £325,000 band. Taper relief reduces the rate applied, not the value of the gift itself, and that distinction trips up many families.
Annual Exemptions and Small Gifts
Each individual can give away £3,000 per tax year with no Inheritance Tax consequences. Any unused portion of the previous year’s £3,000 can be carried forward for one year only, allowing a maximum of £6,000 in a single year. On top of that, gifts of up to £250 per recipient can go to any number of people each year, as long as the recipient did not also share in the £3,000 annual exemption.9GOV.UK. How Inheritance Tax Works – Rules on Giving Gifts Wedding gifts have their own separate exemption: up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
Normal Expenditure Out of Income
One of the most underused exemptions is the normal expenditure out of income rule in section 21 of the Inheritance Tax Act 1984. Gifts that form part of a person’s regular spending pattern, come from income rather than capital, and leave the donor with enough income to maintain their usual standard of living are fully exempt, with no monetary cap.10Legislation.gov.uk. Inheritance Tax Act 1984 – Section 21 A grandparent paying £1,000 a month into a grandchild’s savings account from pension income, and able to show this is habitual and affordable, can shelter £12,000 a year without touching the £3,000 annual exemption.
The key word is “normal.” HMRC looks for a settled pattern of giving, though even a single gift can qualify if there is strong evidence it was intended to be the first of a recurring commitment. Detailed records of income, expenditure, and gifting patterns are essential; HMRC’s form IHT403 sets out what they expect to see.
Gifts With Reservation of Benefit
Section 102 of the Finance Act 1986 stops people giving assets away on paper while continuing to enjoy them.11Legislation.gov.uk. Finance Act 1986 – Section 102 The classic example is a parent who transfers their house to their children but keeps living there rent-free. HMRC treats that house as still part of the parent’s estate at death, whenever the legal transfer happened. For the gift to work, the donor must genuinely give up possession and benefit, or pay a full market rent to the new owners.
Business and Agricultural Property Relief
Qualifying business and agricultural assets attract relief that can sharply reduce or eliminate the Inheritance Tax bill. From 6 April 2026, the rules work in two tiers:
- First £2.5 million of qualifying assets: 100% relief, so no tax
- Above £2.5 million: 50% relief, giving an effective 20% rate
The £2.5 million allowance is transferable between spouses, so a surviving partner can potentially shelter up to £5 million of qualifying business or agricultural property.12GOV.UK. Inheritance Tax Reliefs Threshold to Rise to 2.5m for Farmers and Businesses
For 100% business property relief, the asset must be a business, an interest in a business, or shares in an unlisted company, and the deceased must have owned it for at least two years before death. Businesses mainly dealing in investments, securities, or property development do not qualify.13GOV.UK. Business Relief for Inheritance Tax – What Qualifies for Business Relief Agricultural property relief covers farmland and farm buildings, including farmhouses occupied for agricultural purposes. A farmhouse where the owner lives while actively farming the surrounding land will generally qualify; a farmhouse retained for private use while tenants farm the land will not.
The 2026 cap is a significant change for farming families and business owners whose qualifying assets previously attracted unlimited 100% relief. Estates with substantial holdings should review succession plans against the new ceiling.
Pensions Come Into the Estate From April 2027
Under current rules, most unused pension funds sit outside the estate for Inheritance Tax. That changes on 6 April 2027, when undrawn pension pots will generally be included in the estate’s value. Amounts above the available thresholds will be taxed at 40%, or 36% where the charity condition is met. Funds passing to a surviving spouse or civil partner stay exempt, so the practical impact falls on the second death or on single people with large pension balances.
Anyone who has been treating a pension as a tax-efficient wealth-transfer vehicle may want to reconsider how much to draw during their lifetime, the balance between pension and non-pension assets, and whether lifetime gifts from pension income could reduce the eventual bill.
International Assets and Long-Term UK Residents
Inheritance Tax applies to worldwide assets for anyone UK domiciled or classified as a long-term UK resident. From 6 April 2025, the old “deemed domicile” rules were replaced with a residence-based test: you are a long-term UK resident if you have been tax resident in the UK for 10 consecutive years or for 10 out of the previous 20 years.14GOV.UK. Inheritance Tax if You’re a Long-Term UK Resident Once caught by the test, leaving the UK does not immediately end the worldwide charge; long-term UK resident status can persist for up to 10 years after departure, depending on how long the person lived here.
People who are neither UK domiciled nor long-term UK residents pay Inheritance Tax only on assets physically situated in the UK, typically UK property, accounts with UK banks, and shares in UK-incorporated companies.
The UK has Inheritance Tax treaties with only a handful of countries: the Republic of Ireland, South Africa, the United States, the Netherlands, Sweden, and Switzerland. These treaties use a credit system to prevent double taxation. For everywhere else, HMRC offers unilateral relief, a credit against UK tax for any foreign tax paid on assets in that foreign country.15GOV.UK. Inheritance Tax – Double Taxation Relief Estates with meaningful cross-border holdings should budget for professional advice, because interactions between two tax systems are rarely straightforward.
Reporting the Estate and Paying the Tax
Before paying anything, executors need a payment reference number from HMRC, requested at least three weeks before the intended payment date.16GOV.UK. Pay Your Inheritance Tax Bill – Get a Payment Reference Number
Estates that owe tax, or that are complex enough to need a full account, must complete form IHT400 with its supporting schedules. IHT400 must reach HMRC within 12 months of the date of death.17GOV.UK. IHT400 – Inheritance Tax Account It calls for a full inventory of assets, liabilities, lifetime gifts, trusts, and relief claims. Simpler estates where no tax is due (excepted estates) report the relevant information directly on the probate application itself, form PA1A or PA1P in England and Wales.18HM Revenue and Customs. IHT400 Notes – Guide to Completing Your Inheritance Tax Account
The tax itself is due six months after the end of the month of death. A death in January means the deadline falls at the end of July.19HM Revenue & Customs. Inheritance Tax Manual – IHTM30151 – Due Date for Payment: Death Transfers Interest accrues daily on any unpaid balance from that date, currently at 7.75%.20GOV.UK. HMRC Interest Rates for Late and Early Payments
Paying From the Deceased’s Bank Accounts
Most executors face a circular problem: you cannot usually access the deceased’s bank accounts until probate is granted, but probate is not usually granted until the tax is paid. The Direct Payment Scheme breaks the cycle. Executors send form IHT423 to each bank, building society, or investment provider holding the deceased’s funds, and those institutions pay some or all of the tax directly to HMRC.21GOV.UK. Pay Your Inheritance Tax Bill – From the Deceased’s Bank, Savings or Building Society Account Not every institution participates, so check with each provider early.
Paying by Instalments
Some assets are hard to sell quickly, particularly property, business interests, farmland, and qualifying shareholdings. HMRC lets the tax on these be paid in 10 equal annual instalments.22GOV.UK. Pay Your Inheritance Tax Bill – In Yearly Instalments Interest still runs on the outstanding balance, so this is a cash-flow tool, not a saving. For a family home the beneficiaries want to keep, it spreads the cost over a decade and avoids a forced sale.
Getting the Return Right
HMRC treats innocent mistakes and deliberate understatement differently. Careless inaccuracies on IHT400 attract penalties based on the tax underpaid. Deliberate inaccuracies, meaning knowingly understating asset values or failing to declare gifts, carry penalties of 20% to 70% of the additional tax due, rising to 30% to 100% where concealment is involved.23GOV.UK. Penalties – An Overview for Agents and Advisers Cooperating with HMRC and disclosing errors voluntarily pushes penalties toward the lower end, but the starting position for deliberate non-disclosure is severe enough that getting IHT400 right the first time is worth the professional cost.