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Inheritance Tax (IHT)

Also known as: IHT, Estate Tax, Death Duty

Definition

Inheritance Tax (IHT) is a tax paid on the estate of someone who has died, charged at 40% on the value above £325,000.

At 40%, IHT can significantly reduce what your loved ones inherit, though only about 4-5% of UK estates actually pay it.

What Does Inheritance Tax (IHT) Mean?

Under the Inheritance Tax Act 1984, IHT is charged at 40% on estates exceeding £325,000 (the nil-rate band). Most estates don't pay IHT because they fall below this threshold, pass to a spouse or civil partner (which is exempt), or qualify for additional allowances. In 2022-23, only 31,500 estates out of approximately 681,000 deaths paid IHT—just 4.62%. The £325,000 threshold has been frozen since 2009 and remains at this level until April 2030.

The tax applies only to the value above the threshold. If your estate is worth £425,000, only £100,000 is taxable, resulting in IHT of £40,000. The residence nil-rate band provides up to £175,000 extra when you leave your main home to children or grandchildren. Sarah's £450,000 estate includes her £300,000 home left to her daughter. Using both allowances (£325,000 + £175,000 = £500,000 tax-free), her estate pays no IHT.

Married couples benefit from transferable allowances. When David dies leaving everything to his wife Emma, no IHT is payable due to spouse exemption. When Emma later dies with their £950,000 estate (including the family home left to their children), her estate uses their combined allowances totaling £1,000,000 tax-free. Emma's estate pays no IHT.

IHT planning opportunities include lifetime gifting. Under the seven-year rule, gifts become potentially exempt if you survive seven years. Annual exemptions allow £3,000 in IHT-free gifts, plus smaller gifts of £250 per person. Leaving 10% or more to charity reduces the IHT rate from 40% to 36%. Your executor pays any IHT due—usually within six months of death—before distributing assets to beneficiaries.

Common Questions

"How much can you inherit before paying inheritance tax?"

In 2025/26, you can inherit up to £325,000 tax-free, or £500,000 if the estate includes a main residence left to children or grandchildren. Married couples can pass up to £1 million tax-free when both partners' allowances are combined.

"Do I have to pay inheritance tax on my parents' house?"

If your parents' total estate (including their house) is under £500,000, there's usually no IHT to pay. Above this threshold, IHT at 40% applies only to the excess, paid from the estate before you inherit.

"How can I avoid paying inheritance tax?"

You cannot avoid IHT completely if your estate exceeds thresholds, but you can reduce it through lifetime gifts (potentially exempt after seven years), annual gift allowances (£3,000), leaving 10% to charity (reduces rate to 36%), and ensuring married couples maximize their combined allowances.

Common Misconceptions

Myth: Everyone has to pay Inheritance Tax when someone dies

Reality: Only about 4-5% of UK deaths result in IHT. In 2022-23, just 31,500 estates out of approximately 681,000 deaths paid IHT. Most estates fall below the £325,000 threshold or qualify for exemptions like spouse exemption or the residence nil-rate band.

Myth: If I give away my house before I die, I won't have to pay Inheritance Tax on it

Reality: Giving away your house doesn't automatically avoid IHT. Under the seven-year rule, gifts made within seven years of death may still be taxable. If you continue living in the property after gifting it, it remains part of your estate unless you pay market rent to the new owners.

Understanding IHT connects to these related concepts:

  • Nil-Rate Band: The £325,000 tax-free threshold below which no IHT is charged.
  • Residence Nil-Rate Band: Additional £175,000 allowance when leaving your home to children or grandchildren.
  • Spouse Exemption: Unlimited IHT exemption for transfers between married couples, with unused allowances transferring.
  • 7-Year Rule: Lifetime gifts become potentially exempt if you survive seven years.
  • Executor: The person who administers your estate and pays any IHT due before distributing assets.
  • Understanding UK Inheritance Tax Basics: Comprehensive introduction to how IHT works and when it applies to your estate.
  • Smart Strategies to Reduce Your Inheritance Tax Bill: Explore legal methods for minimizing IHT liability through gifting, trusts, and exemptions.
  • Estate Planning Essentials for UK Families: Learn how IHT fits into comprehensive estate planning and wealth transfer strategies.

Need Help with Your Will?

Understanding IHT is essential when planning your will to minimize tax liability and maximize what your loved ones inherit.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. For advice specific to your situation, consult a qualified solicitor. Thresholds mentioned are current as of 2025/26 and frozen until April 2030. Always verify current rates at gov.uk/inheritance-tax.