Inheritance Tax Guide

Inheritance tax (IHT) is a one-off tax paid on the value of the estate, above certain levels, after someone dies. The estate is made up of money, property and any other assets they owned, less any debts.

The tax is paid by the beneficiaries. It can, in many circumstances, be paid from the estate, but doesn’t have to be paid on all estates.

Typically, there’s no inheritance tax to pay if:

The value of your estate is below £325,000 or below £500,000 when leaving your home to your children or grandchildren

You leave your estate to your spouse, civil partner or a charity or amateur sports club.

If you’re concerned about inheritance tax, or wonder if you need to pay it, contact a tax advisor or solicitor.

Fundamentally, the earlier you face up to inheritance tax, the more chance you have of cutting the bill paid by your loved ones.

When someone dies, the government needs to know the total value of their assets, less their liabilities (any outstanding debts they have).

Assets include:

Money in the bank

Property, including property owned abroad

Possessions such as furniture, jewellery and antiques

Business interests and investments – depending on the circumstances, these could be eligible for business relief

Vehicles

Any insurance policies not in trust (includes death in service and some older pension schemes)

Inheritance tax is then calculated and, if applicable, paid from the estate, which is what’s left once debts are subtracted from the assets.

The inheritance tax threshold is £325,000. This amount has remained unchanged since 2010-11 and will continue to stay the same up to April 2026.

Inheritance tax is currently charged at 40% on anything above £325,000 (the current IHT threshold). Anything below £325,000 is known as the nil rate band.

For example, let’s say you left behind assets of £400,000. Your estate pays no tax on the first £325,000, but 40% is charged on the remaining £75,000. So in this case, your estate would have to pay £30,000 in inheritance tax.

If you leave your home to your children or grandchildren, your threshold can increase to £500,000.

If you’re married or in a civil partnership, any unused inheritance tax thresholds can be passed to your other half when you die. This means your combined thresholds can reach as high as £1 million before any IHT is due.

If your estate exceeds the inheritance tax thresholds in value after you’ve passed away, your estate may have to pay 40% on anything above that. The payment is made by the executor of your will from the estate’s assets.

Any assets left to your spouse or civil partner, or to a charity, escape inheritance tax.

Otherwise, you can’t avoid inheritance tax, but there’s a few ways to reduce the cost:

Charitable donation – you can cut your inheritance tax rate from 40% to 36% by leaving 10% of your ‘net’ estate – that is, the value of your estate above the thresholds – to a charity in your will.

Residence nil rate band (RNRB) – if you leave your home to a direct descendant, you’re entitled to the RNRB allowance (more details below) of £175,000 per person. This is in addition to the IHT threshold of £325,000 – so your combined IHT threshold would be £500,000.

A direct descendant includes children and grandchildren, as well as step, adopted and foster children. Other family members, like siblings, cousins, nieces and nephews, don’t count.

Passing on your threshold – married couples, or civil partners, can pass any unused threshold to their partner when they die. So if none of the £325,000 threshold was used when the first partner in the couple died, the widow or widower could pass on an estate worth up to £650,000 tax-free, or up to £1 million when leaving their home to children or grandchildren.

Business relief – if you own a business or held shares in one for two years when you die, that will be considered part of your estate so could be hit by inheritance tax. Depending on the circumstances, there’s potential to get up to 100% business relief. This can be passed on while the owner is still alive or as part of the will.

Making what are called ‘potentially exempt transfers’, such as gifts.

If you’re in doubt, seek the help of a professional. Inheritance tax can be a complicated area.

Introduced in April 2017, the residence nil rate band (RNRB) allowance means that couples can potentially leave property worth up to £1 million before paying any inheritance tax.

The RNRB is only valid when a main property is passed on to a direct descendant.

The way the rule works means that on top of your existing allowance of £325,000, your direct descendants could get an extra £175,000 of tax-free allowance.

One thing to bear in mind is that the RNRB is capped at £175,000, or the value of equity in the property if it’s lower than that. So if you only had £50,000 equity in the property, the allowance would be £50,000, not £175,000.

However, if the estate is worth more than £2 million, the RNRB is reduced, or ‘tapered’, by £1 for every £2 over £2 million. This means that for estates worth more than £2.35 million, the RNRB disappears completely.

As part of the 2021 Budget, a measure was introduced to keep inheritance tax thresholds at their 2020-2021 levels up to April 2026. The following thresholds will stay the same:

The nil-rate band for inheritance tax at £325,000

RNRB at £175,000

RNRB taper, starting at £2 million.

This means qualifying estates can continue to pass on up to £500,000 tax-free, and surviving spouses or civil partners can pass on up to £1 million tax-free.

The decision to keep thresholds at their current levels is “part of the fair and sustainable approach to rebuilding the public finances and continuing to fund excellent public services,” according to an HM Revenue & Customs policy paper on inheritance tax.

Many people question why they’re effectively being taxed twice on their assets – once when earning them and then again when they die. The idea of inheritance tax is that it helps to redistribute wealth for the general good. So, rather than the rich getting exponentially richer through large inheritances, a portion of their wealth is redistributed to the public through tax.

Inheritance tax must be paid within six months of the end of the month in which the person died. For example, if they died at any time in January, the inheritance tax must be paid by the end of July.

In certain circumstances, it’s possible to pay off the tax in equal yearly instalments over a 10-year period, but you’ll normally have to pay interest on top. The first instalment is payable within six months after the death. The remaining instalments then become payable every year by that date.

You won’t pay any interest on the first instalment unless you pay late. After that, you'll pay interest on both of the following:

the full outstanding tax balance – currently 3%

the instalment itself, from the date it’s due to the date of payment (if it’s paid late) at 0.5%

If all the person’s assets have been sold, the tax must be paid in full.

Married couples and civil partners still need to think about inheritance tax.

When you die, assets left to your other half are excluded from inheritance tax, so you can leave everything to them, tax free, if you want to. What’s more, married couples, or people in a civil partnership, can pass on any unused IHT threshold, as well as any RNRB, to their partner when they die. So, by the time the second person dies, they could potentially pass on as much as £1,000,000 before getting hit by inheritance tax.

(Threshold type) (Amount)

Inheritance tax threshold for partner one - £325,000

Residence nil rate band threshold for partner one - £175,000

Inheritance tax threshold for partner two - £325,000

Residence nil rate band threshold for partner two - £175,000

Total: £1,000,000

If your husband, wife or civil partner died before the residence nil rate band was introduced, or before a rise in the inheritance tax threshold, you’ll still be entitled to today’s thresholds, as long as they passed all their assets on to you.

An example

James and Emma are a married couple with two children. If James died first, he could pass all his assets to Emma, along with his £325,000 inheritance tax allowance and £175,000 residence nil rate band allowance for the home they share.

Emma, who has inherited James’ assets, keeps their home and other possessions, but has now effectively doubled her own allowances, taking her combined total, including James’ allowances, to £1,000,000.

This allows Emma to pass on up to £1,000,000 in assets, including the value of their home, to her two children when she dies.

But if James left assets to anyone besides Emma, his allowance would be impacted. For example, if James decided to leave £50,000 to his sister, then the unused inheritance tax threshold passed on to Emma would fall to £275,000. This would then leave her combined allowance at £950,000.

Unmarried couples don’t have the same IHT benefits as married ones or people in a civil partnership.

If you don’t name your partner as a beneficiary in your will, they won’t automatically inherit anything that you don’t jointly own. You should both make a will leaving your assets to each other, otherwise the surviving partner may have to go to court to make a claim on the estate.

But even if you’re named in each other’s wills, unmarried couples aren’t exempt from inheritance tax. Any unused nil rate band amount is also lost when the first partner dies.

There’s a few things unmarried couples can do to reduce the taxable amount:

Transferring assets – it may sound morbid, but if you know which of you is likely to outlive the other, you could transfer joint assets to the other partner. Those assets will then no longer be part of your estate and inheritance tax threshold, provided you live for at least seven years afterwards.

Gifting your assets – simply giving your assets to your partner – or your friends and family – is a good way of avoiding inheritance tax, although again you might need to live for as long as seven years afterwards for the gift to escape inheritance tax. It’s important to learn how to gift things properly to avoid unpleasant surprises.

Put your assets in trust – if your assets are in trust, they no longer make up part of your estate. For example, you could leave assets in a trust to your children, giving them access once they turn 18. Many trusts are still subject to inheritance tax rules and you may be charged various fees, including entry, exit or rolling charges.

Take out life insurance – this won’t reduce your inheritance tax bill, but it could help cover the cost.

Leave a portion of your estate to charity – if you leave a minimum of 10% of your ‘net’ estate above the inheritance tax thresholds to a charitable cause, the inheritance tax rate will be reduced from 40% to 36%.

When inheriting property that you owned with a person who has died, you don’t have to pay any stamp duty or tax in most cases. What you pay will depend on whether you were ‘joint tenants’ or ‘tenants in common’.

Joint tenants (or ‘joint owners’ in Scotland) – partners who own the property entirely. The surviving partner will automatically inherit the property you owned together. Any assets that exceed the IHT threshold will still be subject to inheritance tax. This should come out of the deceased’s estate, but if the estate can’t pay it you’ll have to.

Tenants in common (or ‘common owners’ in Scotland and ‘coparceners’ in Northern Ireland) – partners own a set share of the property. This can be equal or a specified percentage. When one dies they can leave their share of the property to another family member, like a child, while the other continues to live in the property.

If the deceased left you with a share of the property, or any other assets, the executor of the will or administrator of their estate should pay any IHT owing. If the estate doesn’t cover it, or the executor doesn’t pay, you’ll have to foot the bill instead.

Unfortunately, you can’t just give your money away and avoid an inheritance tax charge entirely – but if your gifts stay within certain rules you can reduce IHT.

The seven-year rule: if you die within seven years of giving away money or valuable assets, the recipient may still be subject to inheritance tax.

But if you die after seven years have passed, the gift escapes inheritance tax. Gifts above the inheritance tax threshold made between three and seven years before your death are taxed on a sliding scale. So it’s important to plan ahead if you’re considering giving your assets away.

Gifts should also be made ‘without reservation’. This means that you have no investment in, or right to, the gift once it’s given. An example of this is parents wanting to support their child with money for a house deposit. If the money is given without reservation, it means the parents have no stake in the house, despite helping pay for it. Similarly, you can’t just claim you’ve given away your home to your offspring while still happily living there, unless you pay the market rent.

The amount you gift: certain gifts are exempt from inheritance tax straight away. For example, there’s no IHT on gifts between spouses and civil partners.

You can also give away £3,000 per year, whether to one person or split between several, without it being added to the value of your estate. You can carry this limit forward into the next year, but not any further. This £3,000 is known as your ‘annual exemption’ and is excluded from any inheritance tax.

You can also give away as many ‘small gifts’ of up to £250 per person as you want each year, provided you haven’t already used another allowance on the same person. Birthday and Christmas gifts from your regular income are exempt from IHT, as are regular payments to help with another person’s living costs, provided you can afford the payments after covering your own usual living costs.

Gifts to charities and certain other organisations, such as museums or political parties, are entirely inheritance tax-free. You can also give away wedding gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, or £5,000 for a child).

Premiums paid for whole of life insurance can become potentially exempt transfers in their own right, if they’re over £3,000 per annum and not paid from regular income.

If you give certain valuable gifts while you’re alive, they can be taxed after your death. Gifts that could be liable for inheritance tax include:

Money

Household and personal goods, including furniture, jewellery or antiques

Property, land or buildings

Stocks and shares listed on the London Stock Exchange

Unlisted shares held for less than two years before death

Apart from the allowances on gifts discussed in the section above, you may also be eligible for ‘taper relief’ on other gifts. This might mean the inheritance tax charged on the gift is less than 40%.

The seven-year rule means no tax is due on any gifts you give if you live for seven years after giving them. But gifts given within the seven years before you die are subject to varying amounts of tax, depending on when the gift was received.

Gifts given outside of the nil rate band in the three to seven-year period before a person’s death are taxed on a sliding scale known as taper relief:

(Years between gift and death) (Rate of tax on gifts) (Example gift value) (Amount of tax)

Three to four - 32% - Antiques worth £2,000 - £640

Four to five - 24% - Jewellery worth £5,000 - £1,200

Five to six - 16% - Cash gift of £10,000 - £1,600

Six to seven - 8% - A car worth £12,000 - £960

Seven - 0 - Any gift - No tax

There are three key steps to valuing a deceased person’s estate. This process can take several months and includes:

Reaching out to organisations – executors will need to contact any organisations the deceased dealt with. This can include banks, loan providers, mortgage lenders, insurance providers, utility suppliers and more. They may need to provide a death certificate, alongside requests for information about the value of the deceased’s assets and debts.

Valuing assets – once the executor has this information, they must also get values for the deceased’s physical property. This includes everything from their home, vehicles and jewellery, all the way to their furniture and other personal belongings. These values should be based on the item’s price on the open market. Gifts given away within seven years of death must be considered too.

Reporting to HM Revenue & Customs (HMRC) – once the executor has the total values for the estate, they must inform HMRC so the inheritance tax can be calculated.

Before your estate can be distributed to your heirs, inheritance tax and other debts must be paid first.

Your heirs may also need to pay:

Income tax – if they inherit something that produces a regular income, like a business or rental property, your heirs may have to fork out income tax.

Capital gains tax – if your heir sells their inheritance for more than it was worth when you died, they’ll have to pay capital gains tax on any gains above the capital gains tax allowance, set at £12,300 a year until April 2026. The amount will depend on whether they’re a basic or higher rate tax payer.

You can't avoid inheritance tax if your estate is over the threshold. However, there are ways you can reduce how much inheritance tax needs to be paid from your estate. As mentioned above, one way is by leaving at least 10% of your ‘net’ estate above the inheritance tax threshold to a charity, as this will reduce the inheritance tax rate from 40% to 36%.

Another way to mitigate inheritance tax is by considering life insurance options, like placing a ‘whole of life’ insurance policy 'in trust'. The pay-out from policies held in trust is kept separate from your estate. For more information, read our guide to putting life insurance in trust.

A carefully structured life insurance plan, placed in trust, will provide your beneficiaries with money to cover IHT.

Unlike a mortgage policy or level term life insurance, these policies can be arranged to match the estate’s short and long-term liabilities, and pay out when they need to be paid. These policies will also cater for any changes in the law over the years.

Do I still qualify for the residence nil rate band (RNRB) allowance if I downsized my home?

Later in life, people might choose to downsize to smaller, more manageable homes.

However, this doesn’t mean you’ll miss out on your RNRB. If your former home would’ve qualified, then it’s preserved if, when you die:

You’ve downsized to a less valuable home after 8 July 2015 and that property (along with assets of an equivalent value to the RNRB allowance) is left to direct descendants.

You’ve sold your only home and the proceeds of the sale or other assets of equivalent value have been left to direct descendants.

You no longer own a home, but have left other assets of equivalent value to the RNRB allowance to direct descendants.

A claim for the allowance must be made within two years of the death. Keep the details of the move so that the estate’s personal representative can get the necessary information when they make the claim.

See how to work out the RNRB if downsizing has happened on GOV.UK

Can I claim the extra property allowance on a second home?

The RNRB is only available on one home. If someone owned and lived in more than one property before they died, the executor is allowed to nominate which property benefits from the RNRB. It’s generally beneficial to choose the most valuable property, which could potentially be a second home. However, the RNRB isn’t available for properties the deceased never lived in, including buy-to-let and other investment properties.

If the nominated property didn’t use all of the RNRB allowance, the remaining allowance cannot be used on another property.

How does inheritance tax on overseas property work?

Inheritance tax applies whether assets, including property, are located in the UK or elsewhere.

But if your permanent home (your domicile) is abroad, inheritance tax will only be owed on your UK assets. Inheritance tax isn’t paid on excluded assets, including:

Your permanent overseas residence

Any overseas pensions

Foreign currency accouunts

Holdings in authorised unit trusts and open-ended investment companies

How does inheritance tax work if I remarry?

If you remarry after your partner has died, you can still use their unused inheritance tax allowance. But you’re typically only allowed to benefit from two nil-rate bands, including your own, no matter how many times you’ve been married – so that’s a total of £650,000, plus any additional property allowance.

There is an exception, though, if your deceased partner had used part of their allowance. You can then use the remainder of their allowance and the unused bands of other partners so long as the total doesn’t stack up to more than £325,000.

What if my partner dies without a will?

There is an exception, though, if your deceased partner had used part of their allowance. You can then use the remainder of their allowance and the unused bands of other partners so long as the total doesn’t stack up to more than £325,000.

If the deceased had children, then:

The first £270,000 of the estate goes to the husband, wife or civil partner

This spouse gets an absolute interest in half of the remainder

The other half is then divided equally between the surviving children

The portion of the estate that passes to the spouse would be exempt from inheritance tax. But the part that goes to children would use up some of the deceased’s nil-rate band and may be subject to inheritance tax.

These are the intestacy rules in England and Wales. The rules are different in Northern Ireland and Scotland.

How can you claim your partner's unused nil-rate band?

If someone’s nil-rate threshold hasn’t been fully used when they die, it passes to the surviving husband, wife or civil partner. This can mean that when the second person dies, inheritance tax is only charged on anything above £650,000 if none of the £325,000 was originally used, or on anything over £1 million including both residence nil rate bands. If some of the threshold was used, then the percentage that wasn’t used can increase the second partner’s basic threshold when they die.

Sadly, couples who aren’t married or in a civil partnership can’t claim their partner’s unused inheritance tax allowances.

Do you have an example of how unused nil-rate bands work?

A woman who rents rather than owns her home dies with an estate worth £750,000. She leaves £260,000 to her children and grandchildren and the rest to her husband. The inheritance tax threshold was £325,000 at the time.

The amount left to children and grandchildren would have used up 80% (£260,000 ÷ £325,000 x 100) of the threshold. 20% of the inheritance tax threshold is therefore unused.

When the husband dies, the threshold is still £325,000. His executors are able to add the unused 20%, worth £65,000 ((20 ÷ 100) × 325,000) to his own threshold, meaning inheritance tax would only be paid on anything above £390,000.

The estate’s executor only has to claim any unused nil rate band when the surviving husband, wife or civil partner dies.

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