Inheritance Tax: Who Pays It and How Much?

This guide is for information only and does not constitute financial advice. Always speak to a qualified financial adviser before making financial decisions.

Losing a loved one is one of life’s most challenging experiences. Amidst the emotional weight of grief, the practicalities of handling an estate can feel overwhelming. One of the most significant hurdles executors and beneficiaries face is understanding inheritance tax in the UK—a tax often described as the most "unpopular" in Britain, yet one that affects an increasing number of families as property prices remain high.

Inheritance Tax (IHT) is essentially a tax on the estate (the property, money, and possessions) of someone who has passed away. While most estates do not end up paying IHT because they fall below the current thresholds, the rules are complex, and the stakes are high. If your estate is liable, the tax bill can be substantial, potentially forcing the sale of family assets to meet the demand from HM Revenue and Customs (HMRC).

In this guide, we will break down exactly how inheritance tax in the UK works, who is responsible for paying it, and the legal ways you can minimise its impact on your loved ones. Whether you are planning for your own future or currently managing the affairs of a deceased relative, understanding these rules is the first step towards financial peace of mind.

What is the Inheritance Tax Threshold in the UK?

The "Nil Rate Band" (NRB) is the amount up to which an estate can be passed on without any inheritance tax being due. For the 2025/2026 tax year, the standard IHT threshold remains frozen at £325,000. This freeze has been extended by the government until at least April 2030, which means that as asset values rise with inflation, more estates are being "dragged" into the tax net—a phenomenon known as fiscal drag.

However, the £325,000 figure is only part of the story. There are additional allowances and exemptions that can significantly increase the amount you can pass on tax-free.

The Residence Nil Rate Band (RNRB)

If you leave your main home to your "direct descendants" (children, step-children, or grandchildren), you may be entitled to an additional allowance known as the Residence Nil Rate Band. This is currently worth £175,000. When added to the standard £325,000, an individual can potentially pass on up to £500,000 tax-free.

The Spousal Exemption

One of the most important rules in UK inheritance tax is the "spousal exemption." If you are married or in a civil partnership, you can leave your entire estate to your partner tax-free, regardless of the value. Furthermore, any unused portion of your Nil Rate Band or Residence Nil Rate Band can be transferred to the surviving spouse. This means a married couple can effectively pass on up to £1 million to their children without paying a penny in IHT.

How Much is Inheritance Tax?

The standard inheritance tax rate is 40%. This is only charged on the part of your estate that is above the relevant thresholds. For example, if your estate is worth £500,000 and your tax-free threshold is £325,000, you would pay 40% on the £175,000 difference.

The Seven-Year Inheritance Tax Rule: Gifting Assets

One common way to reduce a future IHT bill is by giving away assets while you are still alive. However, you cannot simply give away your wealth on your deathbed to avoid tax. This is where the seven-year rule for inheritance tax comes into play.

Most gifts made to individuals are known as "Potentially Exempt Transfers" (PETs). If you live for seven years after making the gift, it falls outside of your estate and is not subject to IHT. If you die within seven years, the gift is added back into your estate for tax purposes.

Taper Relief

If you die between three and seven years after making a gift, the tax rate applied to that gift is reduced on a sliding scale. This is known as Taper Relief. Note that Taper Relief only applies to the tax on the gift itself if the gift exceeds the £325,000 threshold—it does not reduce the tax on the rest of the estate.

• 0-3 Years: 40% tax (No relief)
• 3-4 Years: 32% tax (20% relief)
• 4-5 Years: 24% tax (40% relief)
• 5-6 Years: 16% tax (60% relief)
• 6-7 Years: 8% tax (80% relief)
• 7+ Years: 0% tax (Fully exempt)

Annual Exemptions and Small Gifts

Not every gift is subject to the 7-year rule. There are several "allowable" gifts that are instantly exempt from inheritance tax in the UK:

• Annual Allowance: You can give away £3,000 total each year. You can carry forward one year's unused allowance to the next.
• Small Gift Allowance: You can give up to £250 per person to as many people as you like (as long as they haven't received part of your £3,000 annual allowance).
• Wedding Gifts: You can give £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else for their wedding.
• Gifts from Surplus Income: If you can prove that a gift is part of your regular expenditure and does not reduce your standard of living, it may be exempt. This is a complex area that usually requires meticulous record-keeping.

Recent and Upcoming Changes to IHT

The landscape of inheritance tax in the UK is shifting. In the 2024 Autumn Budget, the government announced significant reforms that will take effect in the coming years:

Pensions and IHT

Historically, most pension pots were held outside of an estate for IHT purposes, making them a popular tool for tax planning. However, from April 2027, most unused pension funds and death benefits will be brought into the scope of Inheritance Tax. This is a major change that will require many people to review their retirement and estate planning strategies.

Business and Agricultural Relief

From April 2026, Business Property Relief (BPR) and Agricultural Property Relief (APR) will be reformed. While the first £1 million of combined business and agricultural assets will remain tax-free (100% relief), assets above this value will only receive 50% relief, resulting in an effective IHT rate of 20%.

How to Pay the Inheritance Tax Bill

The responsibility for paying IHT usually falls on the executor (the person named in the will) or the administrator (if there is no will). The tax must usually be paid within six months of the end of the month in which the person died. If the tax is not paid by this deadline, HMRC will begin charging interest.

1. Value the Estate: Total up all assets (property, bank accounts, investments) and subtract any debts (mortgages, credit cards, funeral expenses).
2. Calculate the Tax: Apply the relevant nil rate bands and exemptions to determine the taxable amount.
3. Report to HMRC: Complete the relevant IHT forms (even if you don't think there is tax to pay, you often still need to report).
4. Arrange Payment: Obtain a "Direct Payment Scheme" from a bank or use the "Indemnity" process if funds are locked in the estate. HMRC usually requires the tax to be paid before probate is granted.
5. Receive Probate: Once IHT is settled or a payment plan is agreed upon, the Grant of Probate is issued, allowing the executor to distribute the assets.

Key Takeaways

• The Nil Rate Band is £325,000: This is the standard tax-free threshold for inheritance tax in the UK, frozen until 2030.
• Married couples can double up: Through transferable allowances and the spousal exemption, couples can often pass on up to £1 million tax-free.
• The seven-year rule matters: Gifts made within seven years of death are usually included in the estate, though taper relief may apply after three years.
• Pensions are changing: From April 2027, pension pots will likely be included in your taxable estate.
• Early planning is vital: Using annual gift allowances and writing life insurance in trust are effective ways to minimise a future tax burden.