What Is Inheritance Tax and How Does It Work?

Inheritance Tax (IHT) is a tax that may be payable on someone’s estate when they die. An estate can include property, money, savings, investments and other possessions.

Inheritance Tax rules apply across the UK, including Wales.

How Much Can You Leave Tax-Free?

The standard Inheritance Tax threshold is £325,000 per person.

This is known as the Nil Rate Band. If the value of your estate is below this amount, there will normally be no Inheritance Tax to pay.

If your estate exceeds your available tax-free allowances, the standard rate of Inheritance Tax is 40% on the taxable portion, rather than 40% of the entire estate.

What About Your Home?

An additional Residence Nil Rate Band of up to £175,000 may be available when you leave a qualifying home to direct descendants, such as your children or grandchildren.

This means a qualifying individual could potentially pass on up to £500,000 without Inheritance Tax.

For estates worth more than £2 million, the additional residence allowance is gradually reduced.

What About Married Couples and Civil Partners?

Assets can generally be passed to a spouse or civil partner without Inheritance Tax.

Unused Nil Rate Band and Residence Nil Rate Band allowances can also potentially be transferred to a surviving spouse or civil partner.

This means a qualifying married couple or civil partnership could potentially pass on an estate worth up to £1 million without Inheritance Tax.

Can Giving to Charity Reduce Inheritance Tax?

Yes. Gifts left to qualifying charities are generally exempt from Inheritance Tax.

If at least 10% of the relevant net estate is left to charity, the Inheritance Tax rate applying to the qualifying part of the estate may also be reduced from 40% to 36%.

What About Pensions?

The treatment of pensions is changing.

Under rules taking effect from 6 April 2027, most unused pension funds and death benefits are due to be brought within the estate for Inheritance Tax purposes.

Because pension and estate rules can be complicated, it’s important to get professional advice when planning an estate.

When Does Inheritance Tax Have to Be Paid?

The person dealing with the estate, usually the executor or administrator, is responsible for arranging payment of any Inheritance Tax due.

Inheritance Tax will generally need to be paid by the end of the sixth month after the person’s death before interest begins to apply.

For certain assets, including property, HMRC may allow the tax to be paid in annual instalments over as many as 10 years, although interest may apply and the outstanding tax will generally become payable if the property is sold.

If a property forms part of an estate, getting an accurate valuation early can help executors understand the value of the estate and decide what to do with the property.