What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. It's sometimes called "death duty," though that term is outdated.
IHT is charged at 40% on the value of an estate above the tax-free threshold. However, most estates don't pay IHT because of various exemptions and allowances.
The nil-rate band (tax-free threshold)
Everyone has a "nil-rate band" — the amount they can leave tax-free. Currently this is:
£325,000
Standard nil-rate band per person
This threshold has been frozen at £325,000 since 2009 and is set to remain at this level until at least April 2028.
The residence nil-rate band
If you leave your home to direct descendants (children, grandchildren, etc.), you may qualify for an additional allowance:
£175,000
Residence nil-rate band per person
Combined, this means an individual could potentially pass on up to £500,000 tax-free (£325,000 + £175,000).
Important: The residence nil-rate band only applies when leaving your home to direct descendants. It doesn't apply if you leave your home to siblings, nieces/nephews, or friends.
Transferable allowances for couples
Married couples and civil partners can transfer unused allowances to each other. This means a surviving spouse could potentially have:
Combined nil-rate band
£650,000
Combined residence nil-rate band
£350,000
Potential total tax-free amount for a couple
£1,000,000
This is why many couples leave everything to each other first, then to children — maximising the available allowances.
Key exemptions from IHT
Certain gifts and transfers are completely exempt from IHT:
Spouse/civil partner exemption
Everything you leave to your spouse or civil partner is exempt from IHT (provided they're UK-domiciled). This is unlimited.
Charity exemption
Gifts to registered charities are completely exempt. If you leave 10% or more of your estate to charity, the IHT rate on the rest drops from 40% to 36%.
Business relief
Business assets may qualify for 50% or 100% relief, depending on the type of business and how it's structured.
Agricultural relief
Agricultural property may qualify for 50% or 100% relief if certain conditions are met.
Gifts made during your lifetime
Gifts you make while alive can also reduce IHT, but the rules are complex:
The 7-year rule
If you give away assets and survive for 7 years, those gifts become completely exempt from IHT. If you die within 7 years, the gifts may be taxed on a sliding scale (called "taper relief").
Annual exemptions
You can give away the following each year without any IHT implications:
- £3,000 per year (your annual exemption)
- £250 to any number of people (small gifts exemption)
- Wedding gifts up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else
- Regular gifts from surplus income (if you can afford them from normal income)
How your will can help with IHT
A well-drafted will can include provisions to reduce your estate's IHT liability:
- Leaving 10% to charity — Reduces the IHT rate from 40% to 36% on the rest of your estate
- Using trusts — Certain trusts can help protect assets and manage when beneficiaries receive them
- Nil-rate band discretionary trusts — Can be used by couples to protect assets while still providing for a surviving spouse
- Ensuring the residence nil-rate band applies — By leaving your home to direct descendants
- Life interest trusts — Allow a surviving spouse to benefit from assets during their lifetime, with those assets then passing to children
Note: IHT planning can be complex. While a will writer can explain the basics, significant estates may benefit from advice from a tax specialist.
A simple example
Scenario: Margaret is a widow with an estate worth £800,000, including her house worth £400,000. She has two children. Her late husband didn't use any of his allowances.
Her available allowances:
- Her nil-rate band: £325,000
- Husband's transferred nil-rate band: £325,000
- Her residence nil-rate band: £175,000
- Husband's transferred residence nil-rate band: £175,000
Total allowances: £1,000,000
Result: Because Margaret's estate (£800,000) is less than her total allowances (£1,000,000), her children inherit everything with no IHT to pay.
When is IHT due?
IHT must normally be paid within 6 months of the end of the month in which the death occurred. Interest is charged on late payments.
Often, IHT must be paid before probate is granted — meaning before the estate's assets can be accessed. This can create practical difficulties, especially if most of the estate is tied up in property.
IHT on property can be paid in instalments over 10 years, but interest still applies.