What is inheritance tax and who has to pay it?

Inheritance tax might have to be paid if a person’s “estate” is worth over £325,000 when they die.

An estate includes everything a person owned, such as:

• property (including residential and buy-to-let)
• personal possessions (e.g. their car, jewellery and collectibles)
• savings (e.g. money held in savings accounts and Cash ISAs)
• investments (e.g. assets held in Stocks and Shares ISAs and General Investing Accounts GIAs)
• certain gifts made before they passed away

If you give your home away to your children or grandchildren, the threshold increases to £500,000. Currently, the inheritance tax rate is set to 40%.

How to value an estate for inheritance tax

A person’s estate must be valued to find out if inheritance tax should be paid. You can value a person’s estate using the following steps:

• identify assets: this includes property, personal possessions (such as cars and jewellery), gifts over £3,000 made in the 7 years before they died, savings and investments.
• identify liabilities: this includes outstanding debt such as household bills, loans, mortgages, credit cards as well as funeral costs
• subtract liabilities from assets: this should give you an idea of how much an estate is worth and whether IHT will need to be paid

It’s important to keep records of how you calculated inheritance tax. HMRC can ask to see evidence up to 20 years after the tax is paid.

This process can be complicated so depending on how challenging it is to calculate everything it may be worth getting independent financial advice to help.

Inheritance tax is only paid on the portion of your estate that lies above the threshold. It doesn’t apply to the total value of your estate.

Here’s an example of how it works:

• Your estate is worth £525,000
• The IHT threshold is £325,000
• IHT applies to £200,000 of your estate (£525,000-£325,000)
• Your estate pays £80,000 (40% of £200,000)

Currently, inheritance tax is 40%. It only applies to the portion of an estate which goes over the £325,000 tax-free limit. This tax-free limit increases to £500,000 for people who leave their homes to their children or grandchildren.

It might be possible to reduce how much inheritance tax is due by:

• Transferring to a spouse or civil partner
  Leaving your estate to a spouse or civil partner usually means that inheritance tax won’t apply.
• Donating to charity
  Leaving at least 10% of the taxable value of your estate to charity in your will could reduce your inheritance tax bill to 36%.
• Setting up a trust
  Putting assets into a trust for your heirs passes on ownership. So when you die they are no longer part of your estate or subject to inheritance tax.
• Gift giving
  You won’t have to pay inheritance tax on gifts of up to £3,000 each tax year during your lifetime. (The tax year runs from 6 April to 5 April the following year.)
• Pay into a pension (for now)
  Pensions are currently exempt from inheritance tax. However from 6 April 2027 they will be included as part of a person’s estate (more on this later!)

Inheritance tax is paid by one of the following people when you pass away:

• the executor: a person named in your will to manage your estate. Sometimes they’ll need to apply for a special legal duty called “probate” before getting started.
• the administrator: a person responsible for managing your estate if there’s no will or the executors named in a will aren’t able to commit. Administrators have to apply for a letter of administration before they can deal with your estate.

The executor or administrator must apply for a payment reference number on GOV.UK before they can pay an inheritance tax bill.

Payments can be made online through your bank account or via bank transfer.

Alternatively, you can pay using telephone banking, in perShould consider son at your bank or building society branch or by cheque through the post.

The executor or administrator must pay the inheritance tax bill by the end of the sixth month after you die. For example, if a person passes away in January, the bill must be paid by 31 July.

HM Revenue and Customs (HMRC) will charge interest if the inheritance tax payment deadline is missed.

If you can’t pay an inheritance tax bill, you might be able to apply for a “grant on credit” which allows you to extend the payment deadline.

To be eligible you’ll need to sell as many assets from the estate to free up cash and cover as much of the inheritance tax bill as possible.

You can apply for a grant on credit using the following steps:

• complete and sign the IHT400 form
• write a letter to HMRC confirming that you can’t get funds from the estate to pay
• tell HMRC the maximum amount you can pay
• share your plan to raise the rest of the money needed to pay the outstanding inheritance tax

HMRC makes decisions on a case-by-case basis. If your grant on credit is successful, you’ll need to pay the inheritance tax bill (including interest) by the new deadline.

If your grant for credit is refused it’s worth seeking independent financial advice to find the best option for your circumstances.

For example, in some cases it could be cheaper to cover the inheritance tax bill with a low-interest personal loan rather than paying interest to HMRC.

According to the latest government figures, in the 2022-23 tax year 31,500 estates paid inheritance tax. This represents 4.62% of estates in the UK and raised £6.7 billion for the government.

As with all taxes, inheritance tax is used to help fund public services such as the NHS, state pension, transport and state-funded education.

It also aims to reduce wealth inequality by ensuring that wealthier individuals contribute more towards public services.

It’s not a new concept and has existed for centuries. The earliest records of inheritance tax in England date back to 1694 when something called “Probate Duty” was introduced.

At the time a rate of 5 shillings applied to estates over £20. And it aimed to help fund the government’s involvement in the War of the League of Augsburg (also known as the Nine Years War).

Fast forward to today, the inheritance tax system we currently use was introduced through the Inheritance Tax Act 1984 which came into effect on 18 March 1986.

The table below shows how the inheritance tax threshold has changed in the UK since 1986.

Normally, there’s no inheritance tax to pay if:

• the value of your estate is less than £325,000 (If you leave your home to your children or grandchildren, the threshold can increase to £500,000.)
• anything above the £325,000 threshold is left to a spouse, civil partner, charity or a community or amateur sports club
• you give gifts of up to £3,000 per tax year. These are exempt from IHT.

Although the current inheritance tax thresholds in the UK will remain in place until 2030, the government is introducing some changes.

Previously, certain Alternative Investment Market (AIM) shares were exempt from inheritance tax. Making it a way of passing on wealth tax-free.

However, from 6 April 2026, AIM shares will be taxed at 20%. HMRC estimates that this will raise an extra £110 million for public spending.

New rules are coming in for pensions too. From 6 April 2027, pensions will be included as part of your estate when you pass away. This includes workplace pensions and self-invested personal pensions (SIPPs).

The exact details of how pensions will be affected are still to be confirmed. But we’ve rounded up everything we know so far in this inheritance tax video.

Inheritance tax only applies to any assets that are still in the UK even if you live abroad. This includes things like property and bank or savings accounts.

HMRC considers you as being based abroad if you have lived in the UK for less than 10 years in the last 20.

Inheritance tax won’t apply to assets such as:

• foreign currency accounts with a bank or the Post Office
• overseas pensions
• holdings in authorised unit trusts and open-ended investment companies