How Inheritance Tax works

What Inheritance Tax is

Inheritance Tax (IHT) is a tax on the estate — the property, money and possessions — of someone who has died. It's charged at 40%, but only on the value above the available tax-free allowances, so most estates pay nothing. Two thresholds do the heavy lifting.

The two nil-rate bands

Everyone has a nil-rate band of £325,000 — the amount that passes tax-free. On top of that, the residence nil-rate band of £175,000 applies when a main home is left to direct descendants (children, grandchildren and their partners). Together that's up to £500,000 for one person.

Two catches on the residence band: it can't be more than the value of the home itself, and it tapers away by £1 for every £2 the estate is worth over £2 million, disappearing entirely on large estates.

The spouse and charity exemptions

You can leave anything to a husband, wife or civil partner with no Inheritance Tax at all, however large. Gifts to UK charities are exempt too — and if you leave 10% or more of the estate to charity, the rate on the rest drops from 40% to 36%.

The 7-year rule on gifts

Giving money away during your lifetime can reduce Inheritance Tax — but timing matters. Most gifts are potentially exempt transfers: if you live for seven years after making one, it falls completely outside your estate. Die within seven years and the gift counts back in, using your nil-rate band first.

Where a gift (above the nil-rate band) is taxable, taper relief reduces the tax — not the gift's value — on a sliding scale:

Gifts you can always make tax-free

• £3,000 a year — the annual exemption (you can carry an unused year forward once).
• £250 per person — small gifts to as many different people as you like.
• Wedding gifts — up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Regular gifts from surplus income — gifts you make from spare income (not capital) that don't affect your standard of living.

What counts as the estate

The estate is everything owned at death — property, savings, investments, vehicles and possessions — minus debts like a mortgage, loans and reasonable funeral costs. Jointly owned assets and certain trusts have their own rules. Pensions currently sit mostly outside the estate, but from 6 April 2027 the government plans to bring most unused pension funds in — worth factoring into longer-term planning.

How to reduce a bill — legitimately

• Leave assets to a spouse or civil partner, or to charity (and consider the 36% rate).
• Use your annual gift allowances every year, and make larger gifts early enough to clear the seven-year clock.
• Make sure a home passes to direct descendants to unlock the residence band.
• Keep records of gifts so your executors can show what's exempt.

Inheritance Tax planning is genuinely complex — trusts, business and agricultural relief, and gifts with reservation can all change the answer. For anything significant, take advice from a solicitor or qualified estate planner. This guide is information, not advice.

Who pays, and when

The executors or administrators usually pay the Inheritance Tax from the estate before assets are distributed. It's due by the end of the sixth month after death, and on some assets (like property) it can be paid in instalments. HMRC charges interest on late payments.