Inheritance Tax (IHT) is a UK tax on the estate of a person who has died. It applies to gifts made during life (if within 7 years of death) and assets passed on death, charged at 40% above a threshold (called the nil-rate band).
Inheritance Tax is the largest tax bill most families face. For someone with a £1 million estate, the IHT bill could be £270,000 (everything above £325,000 at 40%). That's money that comes out of what children, spouses, or beneficiaries receive.
For estates, IHT is a compliance requirement. The executor must file an IHT return with HMRC within 12 months of death, calculating the estate's value and the tax owed. IHT itself must be paid within 6 months of the end of the month of death - interest accrues on unpaid tax even before the return is due. If the return is incomplete or incorrect, HMRC can reopen it for up to 20 years in cases of deliberate understatement (4 years in normal cases), creating liability long after the estate was settled.
For families, IHT planning is one of the biggest wealth-preservation opportunities. A little planning during life - gifting to children, writing a clear will, using your spouse's nil-rate band - can save hundreds of thousands in tax. Without planning, families pay the full 40% rate and have less to pass on.
IHT is calculated once, when someone dies, based on the value of their estate at that moment.
Step 1: Define the estate
The estate includes everything the person owned: house, investments, cash, cars, personal possessions, business interests. It also includes gifts made within 7 years of death (called potentially exempt transfers). It excludes pensions (usually), life insurance (if written in trust), and gifts given more than 7 years before death.
Step 2: Calculate tax
Total the estate's value. The first £325,000 (nil-rate band, 2024-25) is tax-free. Apply 40% tax to anything above. Special rates apply to gifts within 7 years (taper relief): full 40% if the donor dies within 3 years, then 32% (3-4 years), 24% (4-5 years), 16% (5-6 years), and 8% (6-7 years). A proportion left to charity can lower the rate to 36%.
Step 3: File and pay
The executor files an IHT return with HMRC. HMRC either accepts the calculation or raises questions. Once HMRC approves, the executor pays the IHT bill (usually from the estate's bank account) and distributes the remaining assets to beneficiaries according to the will.
Step 4: Distribute
Once IHT is paid, the executor distributes the net estate to beneficiaries. Each beneficiary receives their share tax-free - they don't pay additional income tax or CGT on what they inherit.
Real example:
A widow dies with an estate valued at £600,000: a house worth £400,000 and investments worth £200,000. Her will leaves everything to her adult children. IHT calculation: £600,000 estate - £325,000 nil-rate band = £275,000 subject to IHT. Tax owed: £275,000 × 40% = £110,000. The executor pays this from the investments, leaving £490,000 for the children to inherit (net £490,000 instead of gross £600,000). If she had gifted £100,000 to her children 8 years before death, that asset would not be in the estate, the IHT bill would have been lower, and more would pass to her heirs.
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Inheritance Tax is a UK tax on estates when someone dies. The deceased's assets (property, investments, cash, possessions) are added up. The first £325,000 (2024-25 tax year) is tax-free. Anything above that is taxed at 40%. The IHT bill must be paid before the estate can be distributed to beneficiaries. Some gifts made within 7 years before death are also subject to IHT, which is why it's called a tax on inheritances and recent gifts.
The estate pays Inheritance Tax, not the individual beneficiaries. The executor of the will (the person named to manage the estate) calculates the IHT bill and pays it from the estate's assets before distributing money to beneficiaries. If the IHT bill is large, the executor might need to sell assets to cover it. Beneficiaries receive what's left after tax is paid. In some cases, beneficiaries may pay IHT if the estate has no cash to settle it.
The IHT rate is 40% on the portion of the estate above the nil-rate band. The nil-rate band is £325,000 (2024-25). So if an estate is worth £425,000, IHT is calculated on £100,000 (£425,000 - £325,000), which is £40,000. A primary residence passed to direct descendants may qualify for the residence nil-rate band (£175,000 for 2024-25), raising the tax-free threshold to £500,000 for a single person. The RNRB tapers away by £1 for every £2 the estate exceeds £2 million.
Inheritance Tax applies to assets when someone dies and is charged on the estate above the nil-rate band. Capital Gains Tax applies to profit made on the sale of assets during a person's lifetime and is charged on the gain (not the full asset value). When you inherit an asset, you receive a 'step-up' in basis - meaning the asset's value on the date of death becomes your new base value, and no CGT is due on gains that occurred before the death.
Yes. You can reduce IHT by: using the £3,000 annual gift allowance (tax-free every year), making larger lifetime gifts (tax-free if you survive 7 years), writing a will that uses your nil-rate band efficiently, leaving at least 10% of your estate to charity (IHT rate drops from 40% to 36%), and using trusts or life insurance written in trust. Married couples can combine their nil-rate bands, effectively doubling their tax-free threshold.
Speak to a solicitor or estate planning specialist about your circumstances. Review your will to ensure your nil-rate band is used. Consider whether gifting during your lifetime makes sense (if you live 7 years, it becomes tax-free). If you have significant assets, explore whether a trust is appropriate. Review beneficiary designations on life insurance and pensions - these pass outside the estate and may not be subject to IHT. Keep records of all gifts made, including dates.
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