Inheritance tax: thresholds, rates and who pays

Inheritance tax is a tax on the estate of someone who has died: their property, money and possessions¹. Each person can pass on £325,000 tax-free, called the nil-rate band, and anything above that is normally taxed at 40%². Most estates pay nothing at all, because most are worth less than the threshold or pass to a spouse or charity³.

The threshold can rise much higher. Leaving a home that was the deceased's main residence to children or grandchildren adds a £175,000 allowance, taking the tax-free figure to £500,000⁴, and a surviving spouse or civil partner can inherit their partner's unused allowances, which can take a couple's combined tax-free amount to £1 million⁴. From 6 April 2027, most unused pension funds will also count towards the estate, a change expected to bring more families into the tax for the first time⁵.

What inheritance tax is and when an estate owes it

Inheritance tax is charged on the estate of someone who has died, where the estate's value is above the threshold. The estate is everything the person owned: property, money, possessions, and in some cases gifts they made while alive. If the value of the estate is below the threshold, no inheritance tax is owed and the estate is described as an excepted estate⁷. Even where no tax is due, HMRC forms may still need to be completed⁷.

Most estates are not taxed³. Fewer than 10% of estates annually are forecast to have an inheritance tax liability in the coming years⁸. Where tax is owed, the personal representative dealing with the estate must normally start paying it before probate is granted³, and must report the estate's value within one year using form IHT400³.

There are circumstances in which no tax is payable even for a larger estate. An estate left entirely to a spouse, civil partner or charity pays no inheritance tax⁹. Where a member of the armed forces, certain associated services or the emergency services dies from injury or disease on active service, there is a complete exemption from inheritance tax on the estate passing on death, though the exemption does not cover lifetime gifts¹⁰.

The £325,000 threshold and how it rises to £1 million

The starting point is the nil-rate band of £325,000 per person². Anything above it is taxed at 40%¹¹. For married couples and civil partners the effective threshold is £650,000, because a surviving partner can inherit their deceased partner's unused allowance¹².

Two further elements can raise the threshold substantially:

• The residence nil-rate band. Where a home that was the deceased's main residence is left to direct descendants such as children or grandchildren, the threshold increases to £500,000⁴. This works through an additional £175,000 allowance⁴. The dedicated guide to the residence nil-rate band explains how it is claimed and when it is tapered away.
• Transfer of unused allowances. If one partner dies without using their tax-free allowance, it can be passed to the surviving partner⁴. Combined with the residence allowance, this is what allows a couple to pass on up to £1 million entirely tax-free⁴.

The nil-rate band has been frozen at £325,000, which matters because rising house prices and savings balances pull more estates above it over time. Which? has reported that more families risk paying inheritance tax on their savings as a result¹³. The guide to inheritance tax for married couples and civil partners covers how the transfer of unused allowances works in practice.

Rates: 40%, or 36% with 10% to charity

The standard rate of inheritance tax is 40% on the value of the estate above the threshold¹⁴. If the threshold is passed, everything above it is taxed at 40%¹¹.

A reduced rate of 36% applies where at least 10% of the net estate is left to charity². The calculation is based on the taxable estate, the amount over the inheritance tax allowance¹⁵, and only donations in a will representing 10% or more of the taxable estate qualify for the reduced rate¹⁶. Gifts to charity in a will, whether a fixed amount, a specific item or a percentage of what is left over, are generally exempt from inheritance tax and reduce the taxable value of the estate¹⁷.

The charity must be registered in the UK for the reduced rate to apply¹². Remember A Charity sets out the effect plainly:

¹¹

Because the 36% rate applies only to the part of the estate that is actually taxed, the saving is modest, but the charity gift itself also leaves the estate untaxed, so a will that includes a charitable legacy can reduce the overall bill in two ways at once¹⁷.

Everything left to a spouse or civil partner is tax-free

Assets left to a spouse or civil partner are exempt from inheritance tax, provided both partners are domiciled in the UK¹⁴. A surviving spouse or civil partner never pays inheritance tax on anything left to them, regardless of the amount, as long as both partners are domiciled in the UK¹⁸. There is no inheritance tax to pay on estates left entirely to a spouse, civil partner or charity⁹.

This exemption is one of the largest in the tax: HMRC's tax relief statistics note that those who benefit from it are likely to be aged 65 and above at the time of their death, and the estate that benefits tends to be that of someone who is male¹⁹.

The exemption does not extend to unmarried partners. Unmarried partners cannot inherit each other's unused nil-rate bands, which in effect is what doubles the amount a married couple can pass on²⁰. Partners who live together but are not married or in a civil partnership do not inherit from one another tax-free²¹. Money in a joint bank account is treated differently too: unless you were married or in a civil partnership, you might have to pay tax on some or all of the money in the account²².

Gifts and the seven-year rule

Gifts made during a person's lifetime can be brought back into the inheritance tax calculation if the giver dies within seven years. Any property or money given away up to seven years before death counts towards the estate's valuation¹¹. If the giver survives the full seven years, the gift becomes completely exempt from inheritance tax⁴.

A gift of a home during lifetime is classed as a potentially exempt transfer: inheritance tax may be charged if the giver dies within seven years of making the gift, and if there is a tax bill, the new owner is liable to pay it²¹. The same principle applies to smaller gifts, including a gifted deposit for a first home: a child might need to pay inheritance tax on it if the parent dies within seven years of handing over the money²³.

Where a gift is large enough to be taxed, the rate depends on how long the giver survived:

The taper applies only to gifts that exceed the available allowance. The nil-rate band is allocated to gifts made within seven years of death before it is used against the rest of the estate²⁴. Gifts made more than seven years before death do not form part of the estate, regardless of their value, but they must be made without reservation, so the giver cannot continue to benefit from what was given²⁴.

Some gifts are exempt from the outset, without waiting seven years:

• Annual exemption: up to £3,000 in total each tax year, in cash or gifts⁴, with one year's unused allowance carried forward, allowing up to £6,000 in a single year¹⁴. As a couple that usually means £6,000 a year, and potentially £12,000 if nothing was gifted the year before²⁵.
• Small gifts: up to £250 a year to any number of individuals who have not already benefited from your annual exemption²⁶.
• Gifts from surplus income: gifts that are part of the giver's normal expenditure, made out of income taking one year with another, and leaving enough income to maintain the giver's usual standard of living, are exempt transfers under section 21 of the Inheritance Tax Act 1984²⁷. The narrow guide to regular gifts from surplus income covers this in detail.

The full guide to gifts and the seven-year rule explains the rules, and the narrow guide to annual gift limits sets out the exemptions year by year.

Reliefs, exemptions and how the estate is valued

Working out whether inheritance tax is owed starts with valuing the estate: everything the person owned at death, plus any gifts that fall within the seven-year rule. If the estate owes inheritance tax, its value must be reported to HMRC within one year on form IHT400³. If the valuations are not accurate, penalties may be payable²⁸.

The main exemptions and reliefs are:

• Spouse or civil partner exemption: assets transferred from one spouse or civil partner to another after death are exempt²⁹.
• Charity exemption: gifts to a registered UK charity are exempt²⁹, and gifts to charity in a will reduce the taxable value of the estate¹⁷.
• Agricultural relief and business relief: these reduce the taxable value of farms and businesses, and affect how the tax is calculated. HMRC's grossing-up calculator notes that interaction rules apply where the estate gets agricultural or business relief, the will has at least one specific gift of property, the will has property subject to tax relief that is not given as a specific gift, and some of the estate is exempt from inheritance tax³⁰.
• Gifts from surplus income: exempt under the normal expenditure rules described above²⁷.

Where no tax is due, a simpler process may be available. An estate can be treated as an excepted estate where the gross value does not exceed the nil-rate band³¹, and a reduced form of the IHT400 can be delivered where the gross value of the estate does not exceed £3 million and there is no tax to pay because, for example, everything passes to a spouse or charity¹⁰.

Inherited assets can also carry other taxes. Property left to you in a will does not trigger a Stamp Duty Land Tax return³², but you may have to pay Income Tax on profit the assets generate, such as dividends on shares or rental income from a property, and Capital Gains Tax can apply when you later sell¹. The guides to Capital Gains Tax and how rental income is taxed cover these.

Unused pensions are being brought into inheritance tax

The biggest change to inheritance tax in a generation is already legislated and on its way. As announced at Autumn Budget 2024, the government will bring most unused pension funds and death benefits into the scope of inheritance tax from 6 April 2027⁵. From that date, any unspent pensions will count towards the value of a person's estate when inheritance tax is calculated¹⁸.

The change is significant because unused pension funds have not previously counted towards the estate. The government's consultation on how the tax will be reported and paid expects that around 38,500 estates a year will pay more inheritance tax than would previously have been the case, of which 10,500 estates, around 1.5% of total UK deaths, will become liable where they would not have been before⁸. More than three quarters of the estimated 213,000 estates a year with inherited pension wealth will be affected⁸.

Not everything is caught. All death in service benefits payable from a registered pension scheme will be excluded from the value of an individual's estate for inheritance tax purposes from 6 April 2027⁵. Where a joint life annuity pays a survivor, the survivor's rights are not part of the member's estate and are not in scope of inheritance tax, though if the chosen survivor was a spouse or civil partner the usual spousal exemption would apply anyway⁸.

Responsibility for the tax also shifts. From 6 April 2027, personal representatives will be liable to report and pay any inheritance tax due on unused pension funds or death benefits⁵, and pension beneficiaries will become jointly and severally liable for any inheritance tax due on the benefits to which they are entitled⁸. Pension scheme administrators would likely make payments on account of the maximum possible amount of inheritance tax, 40% of the value of any unused funds⁸. Separately, beneficiaries may still pay Income Tax to receive pension money, depending on the age of the person who died³³. The pensions guide covers how pension death benefits work.

Who pays: the executor, and when beneficiaries are liable

The personal representative for the estate, the executor named in the will or the administrator where there is no will, usually pays any inheritance tax due before the beneficiaries receive their inheritance³². Any inheritance tax due will usually be paid before you receive the inheritance¹.

A beneficiary can become liable for the tax themselves in a small number of cases³²:

• The person who died gave you a gift in the seven years before they died, and the gift is above the available allowance³².
• Your inheritance is put into a trust and the trust does not or cannot pay³².
• The personal representative could not or did not pay before you got your inheritance³².

HMRC will contact you if you have to pay any inheritance tax yourself³². Where a gifted property attracts a tax bill, the new owner of the property is liable to pay it²⁰.

Paying the bill: the six-month deadline, instalments and interest

Inheritance tax must be paid by the end of the sixth month after the person died⁶. If the person died in January, for example, the tax must be paid by 31 July⁶. Interest is charged from the first day of the seventh month after the month in which the person died¹⁰, and HMRC will charge interest if you do not pay all of the inheritance tax by the due date⁶.

Where the estate includes assets that may take time to sell, the tax on them can be paid in equal annual instalments over 10 years³⁴. The first instalment is due at the end of the sixth month after the death, with payments then due every year on that date³⁴. You can also pay in instalments if at least 20% of the total inheritance tax the estate owes is on assets that qualify for payment by instalments, or if paying in one lump sum would cause financial difficulties³⁴. Instalments are also available where shares or securities allowed the deceased to control more than 50% of a company³⁴.

Interest rules for instalments changed for new assets. For any new assets inherited from 6 April 2026 onwards, instalments are interest-free if the asset qualifies for Agricultural Relief or Business Relief, and no interest is payable on the outstanding tax balance, though a late instalment still attracts interest from its due date³⁴. On each later instalment for other assets, interest is payable on both the full outstanding tax balance and the instalment itself if paid late³⁴. These rules do not apply to assets you were already paying instalments on before 6 April 2026³⁴. The full tax and interest can be paid off at any time by writing to HMRC asking for a final assessment³⁴, and the tax must be paid in full once the deceased's assets, such as their house or shares, are sold³⁴.

Paying before probate can create a cash-flow problem, since banks usually freeze the deceased's accounts. You can pay inheritance tax from your own bank account, or from a joint bank account you held with the deceased, and claim it back from the estate³⁵. Payments can be made at a branch to the account named HMRC Inheritance Tax³⁵, and cheques need the name of the deceased and your inheritance tax payment reference number written on the back³⁵. HMRC also operates a scheme for applying for a grant on credit where the estate's own funds cannot be released in time⁶.

Good record keeping matters throughout: inheritance tax generally needs to be paid within six months of the end of the month in which the person died, and records should be kept for six years¹⁴.

Scotland, Wales and Northern Ireland

Inheritance tax itself is the same across the UK: the £325,000 nil-rate band, the 40% rate and the rules on gifts and spouses apply wherever in Britain or Northern Ireland the person lived. What differs between the nations is income tax on money the estate's assets generate. Scottish Income Tax applies to wages, pensions and most other taxable income, including self-employed profits, rental income and taxable benefits such as the State Pension³⁶, while the rest of the UK has its own rates for England, Wales and Northern Ireland³⁷. Dividends and savings interest are taxed the same as in the rest of the UK³⁸. The nations guide covers where the rules diverge more broadly.

Where to get free help

Dealing with an estate and its tax can be complicated, and free, impartial help is available. Citizens Advice publishes guidance on dealing with an estate after a death, including the inheritance tax rules⁷, and Age UK covers what to do when someone dies, what probate is and how the tax-free thresholds work⁹. MoneyHelper, the government-backed money guidance service, explains how joint accounts are treated when an account holder dies²². HMRC's own guidance covers valuing an estate, paying the tax and the instalment option³. For wider context on how tax fits together, see the personal tax guide.