Inheritance tax in the UK: the basics explained

Inheritance tax (IHT) is charged at 40% on the part of your estate that exceeds the nil-rate band of £325,000. That threshold has been frozen since 2009 and will stay frozen until at least April 2030, according to HM Treasury. Rising property values mean many more families are caught by it than ever expected to be. This article explains how the tax works, what the main exemptions are, and when you need proper professional advice rather than a quick online read.

A quick note on my lane here: this is a factual overview of how the rules work, not tax planning advice. For anything specific to your situation, you'll need a solicitor or a qualified tax adviser.

How much is inheritance tax, and when does it apply?

The headline rate is 40%, applied to the value of your estate above the nil-rate band. So if your estate is worth £500,000 and you have the standard nil-rate band of £325,000, the taxable portion is £175,000. The tax due would be £70,000.

A reduced rate of 36% applies if you leave at least 10% of your net estate to charity. That's worth knowing if charitable giving is already part of your plans.

Inheritance tax is usually paid before probate is granted, which can create a cash-flow problem for executors. Most banks will release funds directly to HMRC to cover the bill, but it's worth your executor understanding this in advance.

What is the nil-rate band?

The nil-rate band is the value of your estate that can pass free of inheritance tax. It sits at £325,000 per person and has been frozen at that level since 2009. The government confirmed in the Autumn 2024 Budget that it will remain frozen until April 2030.

If you're married or in a civil partnership, any portion of your nil-rate band you don't use can be transferred to your surviving spouse. So if one partner dies and leaves everything to the other, the survivor potentially has a combined nil-rate band of £650,000 when they die.

What is the residence nil-rate band?

The residence nil-rate band (RNRB) was introduced in 2017. It gives an additional allowance of up to £175,000 when you pass a qualifying residential property to direct descendants: children, stepchildren, grandchildren and certain others.

Add that to the standard nil-rate band and a single person can potentially pass on £500,000 free of IHT. A couple, using both nil-rate bands and both residence nil-rate bands, could pass on up to £1 million in total. In practice, though, the RNRB comes with conditions.

The taper threshold matters. If your estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 above that figure. At £2.35 million, the RNRB disappears entirely.

The property must also be included in your estate at the time of death. If you've already given the house away (to avoid care fees, say), you won't qualify unless the gift fell within the rules for a qualifying former residential interest. This is one of several reasons why equity release or property gifting arrangements can interact unexpectedly with IHT. For more on the later-life finance side of this, our equity release guide covers the basics.

Which assets are included in your estate?

Your estate for IHT purposes includes broadly everything you own at the time of death: property, savings, investments, business interests, vehicles, jewellery, and any assets you've given away but still benefit from. That last category is called a "gift with reservation of benefit" and it catches a lot of people out.

If you've moved into your daughter's house but you gave her the money to buy it years ago, HMRC may still include that property in your estate. The rules are specific and often counterintuitive.

Jointly owned property is treated depending on how it's held. If you own as joint tenants, your share passes automatically to the survivor and the value is included in the deceased's estate. If you own as tenants in common, your share forms part of your estate and can be left to whoever you choose.

Pensions are a special case. Most defined-contribution pots currently sit outside the estate, but the government's Autumn 2024 Budget announced plans to bring unused pension funds within scope for IHT from April 2027. Nothing is final until legislation passes, but if you have a significant pension, now is a sensible time to speak to a financial adviser.

What are the main inheritance tax exemptions?

Several categories of assets or transfers are exempt from IHT altogether.

Spouse or civil partner exemption. Transfers between UK-domiciled spouses and civil partners are fully exempt, both during life and on death. This is perhaps the most used exemption of all.

Charity exemption. Gifts to qualifying charities are exempt. As noted above, if at least 10% of your net estate goes to charity, the rate on the rest drops from 40% to 36%.

Annual gift exemption. You can give away up to £3,000 per tax year without IHT consequences. Any unused allowance can be carried forward one year only.

Small gift exemption. Gifts of up to £250 per person per tax year are exempt, as long as you haven't used another exemption for the same person.

Wedding or civil partnership gifts. These are exempt up to specified limits: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.

Business property relief and agricultural property relief. Qualifying business assets and agricultural land can attract relief of 50% or 100%, though the Autumn 2024 Budget proposed changes to cap some of these reliefs from April 2026. This area is subject to ongoing consultation, so if you own farmland or a family business, specialist advice matters even more than usual.

How does the seven-year rule work?

Gifts made more than seven years before death are generally exempt from IHT and are called potentially exempt transfers (PETs). The catch is the word "potentially": the exemption only becomes certain once the seven years are up.

If the person making the gift dies within seven years, a sliding scale of taper relief applies:

Years between gift and death	Tax rate on the gift
Less than 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%

Taper relief only applies where the total gifts exceed the nil-rate band, which is another layer of detail your adviser will work through with you.

How is inheritance tax paid, and who is responsible?

The executor named in your will is responsible for calculating and paying any IHT due. The deadline is six months after the end of the month in which the death occurred. Interest runs from that point if payment is late.

In most cases, IHT on property can be paid in instalments over ten years, though interest applies. IHT on other assets generally has to be paid as a lump sum before probate is granted.

HMRC has a helpline and a range of guidance on GOV.UK, including the online IHT calculator at gov.uk/inheritance-tax. That tool gives a rough figure but is not a substitute for professional advice if your estate is at all complicated.

When should you talk to a professional?

If your estate is clearly below the nil-rate band and you have no unusual assets or family arrangements, the basic rules above may be all you need to understand the situation. But in my experience, most families in the 55-plus age group are closer to the threshold than they realise, particularly once property is factored in.

A solicitor with probate experience can advise on will structuring. A tax adviser or accountant with IHT experience can look at gifting strategies, trusts and business reliefs. The two aren't always the same person.

The Law Society's Find a Solicitor tool (lawsociety.org.uk) lets you search by specialism. Age UK also has a free legal advice line that can help you understand whether a more detailed review is worth pursuing.

One final word of caution: the rules in this area are changing. Pension inclusion, agricultural property relief, and the nil-rate band freeze are all live political questions. Whatever position your estate is in today, it's worth revisiting the picture every two or three years.

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