This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Clear, practical explanation of Inheritance Tax on estates in England and Wales, including thresholds, nil‑rate bands, residence allowances, exemptions, reliefs, how IHT is calculated and paid, and what executors need to know to manage tax liabilities effectively.
When someone dies in England or Wales, their estate - including property, money, investments and possessions - may be subject to Inheritance Tax (IHT). This is a tax on the transfer of wealth on death above specified thresholds. It affects estate administration, probate procedures and how much beneficiaries ultimately receive. This article explains how Inheritance Tax works, the legal framework and practical considerations for personal representatives, beneficiaries and those planning their affairs.
What Is Inheritance Tax?
Inheritance Tax is a tax charged on the value of a deceased person's estate when that value exceeds a statutory nil‑rate band. IHT is paid to HM Revenue & Customs (HMRC) before assets can be distributed to beneficiaries. The tax is calculated on the estate's net value - that is, the total value of assets after deducting debts and certain exemptions.
The standard IHT rate is 40%, charged only on the portion of an estate that exceeds the available tax‑free thresholds. However, the effective tax rate is often lower because of exemptions, reliefs and allowances.
Tax‑Free Thresholds and Allowances
Nil‑Rate Band
Every individual has a nil‑rate band (NRB) of £325,000. No IHT is payable on the value of the estate up to this threshold. If the estate's net value exceeds £325,000, IHT is charged at 40% on the excess amount.
Residence Nil‑Rate Band
An additional allowance, the Residence Nil‑Rate Band (RNRB), may apply if a main residence is passed to direct descendants such as children or grandchildren. Currently set at £175,000, the RNRB can increase the total tax‑free threshold to £500,000 for qualifying estates. This allowance is subject to tapering for larger estates above £2 million.
Transferable Allowances
If a spouse or civil partner dies without using their full NRB or RNRB, the unused portion can be transferred to the surviving partner. This means a married couple or civil partners can potentially shelter up to £1 million of their estate from IHT on second death.
How Inheritance Tax Is Calculated
Inheritance Tax is calculated on the chargeable estate, which includes all assets after debts and certain reliefs and exemptions are applied. Steps to calculate IHT typically include:
- Estimate the gross estate value, including property, savings, business assets, investments and possessions.
- Deduct liabilities such as outstanding debts, funeral expenses and administration costs.
- Apply exemptions and thresholds, including the NRB and RNRB where applicable.
- Apply reliefs for qualifying assets such as business or agricultural property.
- Calculate the taxable amount (value above thresholds) and apply the 40% rate.
If at least 10% of the net value of an estate is left to charity, the IHT rate on the taxable estate can be reduced to 36%. Executors must ensure these conditions are met and documented to claim the reduced rate.
Gifts and the Seven‑Year Rule
Lifetime gifts may be potentially exempt transfers (PETs). If the donor survives seven years after making a gift, it falls outside the IHT net. Gifts given less than seven years before death may count towards the estate for IHT purposes and be taxed under taper relief on a sliding scale, depending on when they were made.
Some gifts are exempt from IHT regardless of timing, including:
- Gifts between spouses or civil partners.
- Gifts to registered charities or political parties.
- Annual exemptions up to £3,000 per tax year.
- Small gifts up to £250 per person per tax year.
- Gifts in consideration of marriage or civil partnership within specified limits.
Reliefs and Exemptions
Spouse and Civil Partner Exemption
Transfers between spouses and civil partners are generally exempt from IHT, meaning assets passing to the surviving partner do not count towards the taxable estate. This exemption applies regardless of the value transferred.
Agricultural and Business Property Relief
Certain business or agricultural assets may qualify for 100% relief (or partial relief), reducing their taxable value. These reliefs require specific conditions to be met regarding ownership and use of the assets. Executors should check eligibility and retain supporting documentation.
Paying Inheritance Tax
The person responsible for administering the estate - usually the executor of a will or the administrator where there is no will - must ensure IHT is paid to HMRC. Tax is typically due within six months of the person's death, although arrangements may be made to pay from estate assets if necessary. If the estate does not have sufficient liquid funds, HMRC may allow payment in instalments for property assets, subject to interest.
In many cases, estates with no IHT payable still require notification to HMRC so that the tax position is clear and to ensure probate applications can proceed. Executors should verify whether reporting is required even if no tax is due.
Practical Considerations
- Because the NRB and RNRB have been frozen for many years, rising asset values mean that more estates are increasingly likely to exceed thresholds and incur IHT. This shift has led to significant rises in IHT receipts collected by HMRC.
- Planning ahead using gifts, trusts or life insurance placed in trust can help protect wealth, but such actions should be taken with professional guidance.
- Executors and administrators must keep accurate records of valuations, relief claims and IHT forms to support the final tax calculation and avoid disputes or penalties.
Common Questions About Inheritance Tax
Who pays IHT?
Inheritance Tax is paid by the deceased's estate. Beneficiaries generally do not pay personally, though they receive less if tax reduces the estate's value. Executors arrange payment to HMRC.
Does every estate pay IHT?
No. Estates valued below the thresholds after exemptions and reliefs do not pay IHT, though they may still need to be reported to HMRC.
Can I reduce IHT liability?
Exemptions, reliefs, lifetime gifts and charitable donations can reduce the taxable estate, but planning must comply with statutory rules and professional advice can ensure accuracy.
Key Takeaways
Inheritance Tax is a tax on the value of a deceased person's estate above set thresholds. The standard nil‑rate band of £325,000 and the residence nil‑rate band of £175,000 can shelter significant value before tax is due. The tax rate of 40% applies to amounts above these allowances, though reliefs and exemptions can reduce the liability. Executors and administrators are responsible for calculating and paying IHT to HMRC before distributing the estate. Understanding thresholds, gifts, exemptions and reporting requirements is essential to effective estate administration and managing tax liabilities.
