What Is Inheritance Tax?

Key facts

IHT is charged at 40% on the taxable estate above the nil-rate band (or 36% if 10%+ of the net estate goes to charity).
The nil-rate band is £325,000 per person — frozen until at least April 2028.
The residence nil-rate band adds up to £175,000 when a home passes to direct descendants.
Transfers between spouses and civil partners are normally exempt from IHT.
From April 2026, inherited pensions will be brought within the scope of IHT.

How Inheritance Tax Works When Someone Dies

Inheritance Tax (IHT) is a tax levied on the estate of a person who has died. The estate includes everything they owned at death — property, savings, investments, possessions, and certain gifts made in the 7 years before death.^[1]

IHT is charged at 40% on the value of the estate above the nil-rate band (£325,000 for 2026/27). It is paid by the personal representatives (executors or administrators) of the estate, not by individual beneficiaries. Around 4–5% of UK deaths each year result in an IHT charge.^[2]

Key point: IHT is a tax on the estate, not on the beneficiaries. The personal representatives must settle the IHT bill before distributing assets. Beneficiaries receive their inheritance after IHT has been deducted.

How Inheritance Tax Works

The basic IHT calculation follows these steps:^[1]

Step	Description	Example
1	Total value of the estate at death	£600,000
2	Less: liabilities (mortgage, debts, funeral costs)	−£50,000
3	Net estate value	£550,000
4	Less: nil-rate band	−£325,000
5	Taxable estate	£225,000
6	IHT at 40%	£90,000

The Nil-Rate Band

The nil-rate band (NRB) is the IHT-free threshold. For 2026/27, it is £325,000 per person. The NRB has been frozen at this level since April 2009 and is confirmed frozen until at least April 2028.^[2]

Key points about the NRB:

Every individual has their own NRB of £325,000
Any unused NRB can be transferred to a surviving spouse or civil partner
A married couple can therefore have a combined NRB of up to £650,000
Gifts made in the 7 years before death use up the NRB first (oldest gifts first)

The Residence Nil-Rate Band

The residence nil-rate band (RNRB) provides an additional £175,000 allowance when a home is passed to direct descendants (children, grandchildren, step-children). Combined with the standard NRB, this gives a potential tax-free threshold of:^[2]

£500,000 per person (NRB £325,000 + RNRB £175,000)
£1,000,000 for a married couple or civil partners (both NRBs and RNRBs combined)

Important: The RNRB tapers away for estates worth more than £2 million — it is reduced by £1 for every £2 the estate exceeds £2 million. For estates of £2.35 million or more, the RNRB is completely lost.

IHT-Exempt Transfers

Several types of transfer are exempt from IHT entirely:^[1]

Transfers between spouses and civil partners (unlimited, provided both are UK-domiciled)
Gifts to UK-registered charities
Gifts to political parties (with conditions)
Gifts to national institutions (museums, universities, the National Trust, etc.)
Gifts within the annual exemption (£3,000 per tax year)
Small gifts of up to £250 per recipient per year
Gifts from normal expenditure out of income

What Is Included in the Estate?

The estate for IHT purposes includes:^[3]

Property (the deceased’s share)
Bank accounts and savings
Investments — shares, unit trusts, bonds
Personal possessions — cars, jewellery, furniture
Business interests
Life insurance payouts not written in trust
Gifts made within the 7 years before death (potentially exempt transfers)
Assets held in certain types of trust
From April 2026: unused pension funds and death benefits

Budget 2024 change: The Autumn Budget 2024 announced that from April 2026, unused pension funds and death benefits will be brought within the scope of IHT. This is a significant change — previously, most defined contribution pensions passed free of IHT.^[4]

IHT Rates at a Glance

Situation	Rate
Standard rate (estate above NRB)	40%
Reduced rate (10%+ of net estate left to charity)	36%
Lifetime charge on gifts into trust (CLTs above NRB)	20%
Below the nil-rate band	0%

Who Has to Deal with IHT?

The personal representatives (PRs) of the estate are responsible for:^[3]

Valuing the estate
Completing HMRC forms (IHT400 or reporting via the probate application for excepted estates)
Paying any IHT due
Applying for a grant of probate (or letters of administration)
Distributing the estate to beneficiaries

Beneficiaries do not pay IHT directly. However, IHT reduces the value of the estate before distribution, so beneficiaries ultimately bear the economic cost.

Frequently Asked Questions

What is Inheritance Tax in simple terms?

Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. If the total value of the estate exceeds £325,000 (the nil-rate band), IHT is charged at 40% on the excess. Various exemptions and reliefs can reduce or eliminate the bill.

Does everyone pay Inheritance Tax?

No. Only around 4–5% of UK deaths result in an IHT charge. Most estates fall below the nil-rate band, and many more are covered by the spouse exemption, the residence nil-rate band, or other reliefs. IHT is paid by the estate, not by individual beneficiaries.

When is IHT due?

IHT must normally be paid within 6 months of the end of the month in which the person died. For example, if someone dies on 15 March, IHT is due by 30 September. Interest is charged on late payments. IHT on certain assets (such as property and land) can be paid in 10 annual instalments.

Can I reduce my Inheritance Tax bill?

Yes. Common strategies include making gifts during your lifetime (using the £3,000 annual exemption and other allowances), leaving assets to your spouse, leaving 10%+ of the net estate to charity for the 36% rate, using Business Property Relief, and writing life insurance policies in trust.

Sources

How Inheritance Tax works: thresholds, rules and allowances — GOV.UK
Inheritance Tax rates and thresholds — GOV.UK
Inheritance Tax Manual: IHTM04000 – Introduction to IHT — HMRC
Autumn Budget 2024: Inheritance Tax changes — GOV.UK