Inheritance tax explained

What is inheritance tax?

Inheritance tax is a tax charged on the value of a person's estate when they die. It is also called IHT. Most estates do not pay inheritance tax because they fall below the threshold. However, larger estates may be liable.

Inheritance tax is paid from the estate before money is distributed to beneficiaries. This means beneficiaries may receive less than they would if no tax was due.

The nil-rate band

The nil-rate band is the amount of an estate that is free from inheritance tax. Currently (2026), the nil-rate band is £325,000 for most people.

If the estate is worth less than £325,000, no inheritance tax is payable. If it is worth more, tax is charged on the amount above this threshold at a rate of 40%.

The nil-rate band has been frozen at £325,000 since 2009 and is currently set to remain at this level until at least April 2028. Check gov.uk or HMRC for any changes after that date.

The residence nil-rate band

The residence nil-rate band (RNRB) is an additional allowance if a house is left to direct descendants (children or grandchildren). The current RNRB is £175,000.

This means a person can leave assets worth up to £325,000 plus a house worth up to £175,000 without inheritance tax, provided the house passes to a direct descendant.

The RNRB reduces if the estate exceeds £2 million. Complex calculations are needed. A solicitor or accountant should advise if the RNRB may apply.

Exemptions for spouses and civil partners

Assets left to a spouse or civil partner are generally exempt from inheritance tax, regardless of value. This means if all the estate passes to the surviving spouse, no tax is due.

However, if the surviving spouse dies later, their estate (including inherited assets) will be subject to inheritance tax based on their nil-rate band at that time.

The survivor can use both their own nil-rate band and any unused nil-rate band from their deceased spouse. This doubles the threshold to £650,000 in most cases.

Gifts made before death

Gifts made during the deceased's lifetime (more than seven years before death) are generally excluded from the estate and do not count towards inheritance tax.

Gifts made within seven years of death are included in the estate value. If the person survives the gift by less than seven years, the gift counts against the nil-rate band and may trigger a tax liability.

Some gifts are entirely exempt, such as gifts to spouses, gifts to charities, and small annual gifts (currently £3,000 per person per year).

Calculating the value of an estate

To work out inheritance tax, you must determine the value of all assets the deceased owned at death:

• Property (valued at market value).
• Bank and savings accounts (at the date of death).
• Shares and investments (at market price on the date of death).
• Possessions such as jewellery, furniture, cars, and art.
• Life insurance policies.
• Business interests.
• Anything held in trust for the deceased.

Subtract all debts and liabilities (mortgages, loans, funeral costs) from the total.

How to work out if you owe inheritance tax

Calculate the estate value. Subtract the nil-rate band (£325,000). If there is a remainder, multiply it by 40% to find the tax due.

Example: An estate is worth £400,000. Subtract the nil-rate band of £325,000. The amount subject to tax is £75,000. Tax at 40% is £30,000.

If the estate includes a house left to a direct descendant, add the RNRB allowance to the nil-rate band for a higher threshold.

Who pays inheritance tax?

The executor is responsible for ensuring inheritance tax is paid. The tax must be paid before the estate is distributed to beneficiaries.

The executor may deduct the tax cost from the estate or ask beneficiaries to contribute. The will usually specifies how tax should be allocated.

If the executor fails to pay the tax due, they may be personally liable. This is why professional advice is important for larger estates.

Reduced rate of inheritance tax

If the deceased leaves at least 10% of their net estate to a registered charity, the inheritance tax rate on the remainder reduces from 40% to 36%.

This only applies if at least 10% of the net estate (after debts and funeral costs) goes to the charity. Professional advice is needed to calculate the benefit.

Special situations

Certain assets receive special inheritance tax treatment:

• Agricultural property and business property may qualify for relief from inheritance tax.
• Life insurance policies written in trust are excluded from the estate.
• Defined contribution pension funds are often held in trust and may pass outside the estate to nominated beneficiaries, depending on the scheme rules and trustee decisions. Defined benefit pensions work differently. Check directly with the pension provider.

These are complex areas. An accountant or solicitor should advise if they apply to the estate.

What is a reasonable estimate for inheritance tax?

This guide is informational only. It does not constitute financial or tax advice. For estates where inheritance tax may be due, consult an accountant, solicitor, or HMRC.

The inheritance tax rules are complex. Professional advice is recommended for any estate worth over £325,000 or if the deceased made significant gifts in the seven years before death.

Payment and filing

When applying for probate, the executor must complete an inheritance tax return (Form IHT400). This form asks for details of all assets, debts, and gifts.

If inheritance tax is due, it must be paid to HMRC before (or shortly after) applying for probate. HMRC will issue a receipt, which must be submitted with the probate application.

If no tax is due, the return is still completed and submitted, confirming the nil value.

Getting professional advice

For estates where inheritance tax may be due, or where gifts were made in the seven years before death, professional advice from a solicitor or accountant is worth considering. HMRC also provides guidance at gov.uk.

HMRC also provides guidance on their website and can answer questions about specific circumstances.