UK Tax and Benefits

Inheritance Tax is often seen as one of the more confusing parts of the UK tax system. In simple terms, it is a tax on the value of someone’s estate when they pass away. The estate includes property, money, investments, and possessions. In this guide we’ll explain what Inheritance Tax is, how it works, when it applies, and what exemptions or reliefs might help reduce the amount owed. Whether you are planning your estate or dealing with a loved one’s affairs, understanding Inheritance Tax can help you make informed decisions and avoid unnecessary costs. What Is Inheritance Tax? Inheritance Tax, often called IHT, is a tax charged on the estate of a deceased person. The estate includes everything they owned at the time of their death, such as houses, bank accounts, shares, and personal belongings. The standard Inheritance Tax rate in the UK is 40%, but it only applies to the value of the estate above a certain threshold known as the nil rate band. For the 2024–2025 tax year, the Inheritance Tax threshold is £325,000. Anything above that amount may be taxed unless exemptions apply. Who Pays Inheritance Tax? Usually, the executor or personal representative of the estate is responsible for paying Inheritance Tax. The tax is normally paid from the estate’s funds before the remaining assets are distributed to beneficiaries. However, in some cases, beneficiaries may need to pay the tax themselves, particularly if they receive money from a trust or certain gifts. How Inheritance Tax Works? The tax is calculated based on the total value of the estate minus any debts, funeral expenses, and allowable exemptions. If the estate’s total value is below £325,000, no Inheritance Tax is due. If it is above £325,000, the amount over that threshold is taxed at 40%. For example: If an estate is worth £500,000, Inheritance Tax applies to £175,000 (£500,000 – £325,000). At 40%, the tax would be £70,000. Inheritance Tax Thresholds and Allowances There are a few key allowances that can reduce how much Inheritance Tax is due. Allowance Type Amount (2025) Who Can Use It Details Nil Rate Band £325,000 Everyone Standard tax-free amount per person Residence Nil Rate Band £175,000 Homeowners Extra allowance if you leave your home to children or grandchildren Spousal Transfer Up to £500,000 combined Married couples and civil partners Unused allowance can be passed to a surviving partner This means that a couple can pass on up to £1 million tax-free if they include their home and combine allowances. Gifts and Inheritance Tax Not all gifts are immediately taxed. The UK has rules known as Potentially Exempt Transfers (PETs). If you give away money or assets and live for seven years after making the gift, no Inheritance Tax is due on it. If you die within seven years, the tax depends on how long ago the gift was made. Years Between Gift and Death Tax Rate Applied 0 to 3 years 40% 3 to 4 years 32% 4 to 5 years 24% 5 to 6 years 16% 6 to 7 years 8% More than 7 years 0% Small gifts of up to £250 per person per year are exempt, as are wedding gifts up to certain limits (£5,000 for children, £2,500 for grandchildren). Exemptions from Inheritance Tax Some transfers and assets are exempt from Inheritance Tax, including: These reliefs can reduce the tax liability significantly, especially for business owners and landowners. Paying Inheritance Tax Inheritance Tax must usually be paid within six months of the person’s death. After that, HMRC may start charging interest. Executors can sometimes arrange to pay the tax in instalments, especially when the estate includes property or other assets that take time to sell. Payments are made directly to HMRC, often from the estate’s bank account, before beneficiaries receive their share. How to Reduce Inheritance Tax? Careful planning can reduce or even eliminate your Inheritance Tax bill. Common strategies include: Many people seek advice from financial or tax professionals to ensure their estate plan is efficient and compliant. Inheritance Tax on Property Your home is often the largest part of your estate, so it’s important to understand how it affects Inheritance Tax. If you leave your home to your children or grandchildren, the Residence Nil Rate Band applies, which can add up to £175,000 to your tax-free threshold. However, if your total estate exceeds £2 million, the Residence Nil Rate Band gradually reduces and may be lost entirely. Inheritance Tax for Non-Residents If you live abroad but own property or assets in the UK, your estate may still be liable for Inheritance Tax. UK-based assets such as property, investments, and savings accounts are usually taxable regardless of your residence status. Non-domiciled individuals may be able to claim exemptions or relief depending on their situation, so professional tax advice is strongly recommended. Final Thoughts Inheritance Tax affects fewer estates than many people think, but it can still take a significant share if not managed correctly. By understanding how it works and planning ahead, you can protect your family’s inheritance and reduce your tax burden. If your estate includes property, business assets, or overseas income, seeking advice from a qualified accountant or financial adviser can make a major difference. Proper planning today can save thousands in the future. If you want to plan your estate wisely or understand how Inheritance Tax might apply to your assets, book a free consultation with our tax expert who can guide you through exemptions, trusts, and effective tax-saving strategies. Frequently Asked Questions