Inheritance Tax, usually shortened to IHT, is a tax on the value of what someone leaves behind when they die, and sometimes on large gifts made before death. It has a fearsome reputation, but most estates pay nothing, because the value has to clear sizeable tax-free bands before any IHT is due. This guide explains the basics as a mechanism: the nil-rate bands that shield most estates, the spouse exemption that defers tax between couples, the seven-year rule on gifts, and who is actually responsible for paying.
We use round illustrative numbers throughout so the logic stays clear, then point you to a calculator for the live thresholds and rates, which change from time to time.
What IHT is charged on
IHT is charged on the value of a person’s estate above a tax-free threshold. The estate is broadly everything they owned at death, property, savings, investments, possessions, and business interests, minus debts and liabilities like a mortgage or outstanding bills.
Above the tax-free threshold, the excess is taxed at a single flat rate. Below it, there is no IHT at all. This is different from the banded structure of income tax: IHT has a threshold, and then one rate on everything above it.
The crucial point is that the threshold is generous enough that the majority of estates fall under it and pay nothing. IHT is mainly a tax on larger estates, particularly those holding valuable property.
The nil-rate band
The first shield is the nil-rate band, a fixed amount of estate value that passes tax-free. Only value above this band is potentially taxable.
The nil-rate band belongs to each individual. Its level is set by the government and has been frozen for long stretches in the past, which gradually pulls more estates into IHT as asset values rise, an effect sometimes called fiscal drag. Our inheritance tax calculator applies the current band so you can see whether an estate is likely to owe anything.
The residence nil-rate band
There is a second, additional band that applies specifically when a home is passed to direct descendants, children, grandchildren, and so on. This residence nil-rate band sits on top of the ordinary nil-rate band, increasing the total that can pass tax-free, provided a qualifying home goes to qualifying heirs.
It comes with conditions and a catch. The most important is a taper for large estates: above a certain total estate value, the residence band is gradually withdrawn, reducing as the estate grows. Very large estates can lose it entirely. This makes the residence band one of the more intricate parts of IHT, because whether you get it, and how much, depends on both who inherits the home and how big the whole estate is. Our residence nil-rate band calculator shows how the band and its taper apply to a given estate.
The spouse exemption
The single most powerful IHT rule for couples is the spouse exemption. Anything left to a spouse or civil partner is normally completely free of IHT, with no limit. Assets simply pass to the survivor untaxed.
There is a second benefit that follows from this. When the first partner dies and leaves everything to the survivor, the first partner’s unused nil-rate bands can transfer to the survivor. On the second death, the survivor’s estate can therefore use up to two sets of nil-rate bands, and potentially two residence bands. This is why a surviving spouse’s estate often has a much larger combined tax-free threshold than a single person’s.
The effect is that for most married couples and civil partners, IHT is deferred to the second death and assessed against a doubled-up allowance. It is one reason the headline threshold understates how much many couples can pass on tax-free.
A worked illustration
Suppose each person has a nil-rate band of £325,000. The first partner dies and leaves everything to the other, using none of their band because of the spouse exemption. On the second death, the survivor’s estate can claim both bands, £650,000 combined, before the ordinary nil-rate band runs out, and the residence band may add more on top. Only value above that combined total is taxed.
The seven-year rule on gifts
People often try to reduce IHT by giving assets away during their lifetime. The seven-year rule governs whether those gifts escape the tax.
The principle is straightforward. Most outright gifts to individuals are “potentially exempt.” If the giver survives seven years after making the gift, it falls completely outside the estate and no IHT is due on it. Die within seven years, and the gift is brought back into the IHT calculation.
For gifts made within that window that exceed the available nil-rate band, a taper can reduce the tax depending on how many years passed before death. The longer the giver survived after the gift, the lower the tax on it, until at seven years it disappears. A common misunderstanding is that the taper reduces the value of the gift; it reduces the tax on the portion of gifts above the nil-rate band, which is a narrower effect. Our IHT gift taper calculator shows how the taper applies to gifts made within the seven-year period.
Some smaller gifts are exempt straight away, such as modest annual gifting, normal gifts out of surplus income, and gifts between spouses. These do not depend on surviving seven years.
Who pays, and when
IHT is not paid by the people who inherit in the first instance. It is normally settled by the executors or administrators of the estate out of the estate’s assets, before the remainder is distributed to beneficiaries.
The timing is demanding. IHT generally has to be paid within a set period after death, and in many cases at least some of it must be paid before the estate can be fully released through probate. This can create a cash-flow problem when most of the value is locked up in a property that has not yet been sold. There are arrangements to pay tax on certain assets, like property, in instalments, but the basic point stands: the tax often falls due before the assets are easy to access.
Gifts caught by the seven-year rule can be an exception, where the recipient of a gift may bear the tax on it in some circumstances. This is one reason large lifetime gifts deserve careful thought rather than being treated as automatically tax-free.
Frequently asked questions
Does my family pay Inheritance Tax on everything I leave?
No. IHT is only charged on the value of your estate above the tax-free bands, and most estates fall below the threshold and pay nothing. The nil-rate band, the additional residence band where a home passes to direct descendants, and the spouse exemption together shield a large amount of value.
Is everything I leave to my husband or wife taxed?
No. Anything left to a spouse or civil partner is normally completely exempt from IHT, with no limit. On top of that, your unused nil-rate bands can transfer to them, so on the second death their estate can use two sets of allowances. IHT for couples is usually deferred to the second death.
If I give money away, is it free of Inheritance Tax?
Often, but not always. Most gifts to individuals are free of IHT if you survive seven years after making them. Die within seven years and the gift is brought back into the calculation, with a taper that can reduce the tax on gifts above the nil-rate band. Some smaller gifts are exempt immediately.
Who actually pays the Inheritance Tax bill?
Normally the executors or administrators of the estate pay it from the estate’s assets before distributing what is left to beneficiaries. The tax often falls due before probate releases the assets, which can be awkward when most of the value is in a property. Instalment options exist for certain assets such as property.