Inheritance tax explained

What is Inheritance Tax? 

Inheritance Tax (IHT) is a tax on the estate of someone who has passed away. This includes all property, possessions and money. 

The value of an estate includes: 

• savings 
• pension funds 
• possessions including property 

How does Inheritance Tax work? 

Inheritance Tax is charged at a rate of 40%. It only applies when the estate exceeds the tax-free threshold of £325,000. The tax-free threshold is also known as the Nil Rate Band (NRB). 

You do not need to pay tax if:  

• the value of your estate is below the threshold 
• you leave everything above the threshold to your spouse or civil partner or 
• you leave everything above the threshold to an exempt beneficiary like a charity or community group 

An example of how this works 

Kate’s estate is worth £625,000. Inheritance Tax threshold: £325,000. Amount that is taxable: £300,000. 40% tax = £120,000. Amount inherited from Kate’s estate: £505,000.

How does it work if my children inherit my home? 

If you leave your home to your children (including adopted, foster and stepchildren) or grandchildren, there are two tax-free allowances:  

• Basic IHT allowance: £325,000  
• Main residence allowance: £175,000 - an additional allowance you receive alongside the basic IHT allowance if you pass on your main residence to your children or grandchildren.  

The combined tax-free allowances increase the threshold to £500,000. 

Main residence allowance only applies if your estate is worth less than £2 million.  
 

Example 

Jane has decided to leave her home to her children, Josh and Fred. Her estate is worth £525,000. By leaving her home to her children, no IHT applies to £500,000 of the estate (basic allowance + main residence allowance). The remaining £25,000 will be charged IHT at a rate of 40%. 

How does it work if my spouse/civil partner did not use their threshold? 

Any unused threshold can be transferred to your partner when you die. This can double the surviving partner’s tax-free threshold by up to £650,000.  

You can also transfer any unused main residence allowance to your partner.  

Combining both allowances, you may be entitled to an allowance of £1 million. This is provided that both allowances were not used when your partner died. 

Example 

John passed away, leaving an estate valued at £600,000. John leaves £100,000 to his children, and his widow, Sarah, inherits £500,000.  

The £100,000 John leaves to his children uses 40% of the £325,000 threshold. 

When Sarah dies, her available threshold increases by the unused 60% to £550,000. 

If Sarah's estate is not worth more than £550,000, there will be no Inheritance Tax to pay when she dies. 

Who pays Inheritance Tax? 

The person who arranges for the Inheritance Tax to be paid is:  

• the executor of the will or; 
• the administer of the estate (if there is not a will)  

IHT can be paid from money within the estate or from the sale of assets.  

Most of the time, IHT is paid through the Direct Payment Scheme (DPS). If the person who died had money in a bank or building society account, you can ask for all or some of the IHT to be paid from these accounts. 

When do you have to pay Inheritance Tax? 

IHT must be paid 6 months after the person’s death. After 6 months, HMRC will start charging interest.  

You can pay tax on certain assets, like property, in instalments over 10 years. The outstanding amount of tax will still be charged interest.  

If the asset is sold, all instalments (and interest) must be paid until that point. 

Visit HMRC to find out more about paying Inheritance Tax.

The information in this guide was accurate when published.