What is inheritance tax?

Inheritance tax is a tax charged on the value of a person’s estate when they die. An estate includes everything a person owns: their property, savings, investments and personal possessions, minus any debts they owe. In some cases, inheritance tax can also apply to gifts made during a person’s lifetime.

Inheritance tax is paid from the estate before any assets or funds are distributed to beneficiaries. Responsibility for managing this process rests with the executor, who is appointed in the deceased’s will. In most circumstances, beneficiaries do not pay tax on the assets they inherit. However, gifts made within the seven years preceding death may be taken into account when calculating the estate’s inheritance tax liability.

Taxes on estates have existed in the UK since the Stamps Act 1694. Inheritance tax in its current form was introduced in 1986, initially with a range of different rates. In 1988 a single flat rate of 40% was introduced and this remains the rate today.

A lower rate of 36% applies where a person leaves at least 10% of the net value of their estate to qualifying charities. Any money left to charity is completely exempt from inheritance tax.

Who pays inheritance tax?

Inheritance tax is usually paid by the estate rather than the people who inherit from it. The executor normally arranges payment to HMRC using money and assets from the estate. After the tax has been paid, the remaining assets are passed on to the beneficiaries.

Inheritance tax can also be charged on some gifts or transfers made while a person is still alive, including transfers into certain trusts.

The tax-free allowances explained

Before inheritance tax is calculated, a number of tax-free allowances are deducted from the value of the estate. These reduce the amount on which tax is charged. There are three main allowances to understand.

The nil rate band

The nil rate band is the amount each person can leave behind completely free of inheritance tax. It is currently set at £325,000 per person and has been at this level since 2009. It is due to remain frozen at £325,000 until 2030/31.

Because this amount has not increased while property values and investment portfolios have grown, a greater number of estates are now above this threshold than at any previous point in the tax’s history.

The nil rate band is the amount each person can leave behind completely free of inheritance tax. It is set at £325,000 per person.

The transferable nil rate band

When a person dies and leaves everything to their spouse or civil partner, the unused proportion of their nil rate band can be transferred to the surviving spouse or civil partner. This means married couples and civil partners can effectively combine their allowances, giving them a combined tax-free amount of up to £650,000 when the second partner dies.

It is also worth noting that any transfer of money or assets between spouses and civil partners, whether during their lifetime or on death, is generally exempt from inheritance tax. This is known as the spousal exemption.

The residence nil rate band

Introduced in 2017, the residence nil rate band is an extra tax-free allowance of up to £175,000 per person. It applies to the value of a person’s main home, but only if that home is left to direct descendants such as children or grandchildren. The allowance is limited to the lower of £175,000 or the actual value of the home being passed on.

Like the nil rate band, the residence nil rate band can be passed to a surviving spouse or civil partner if it is not used when the first partner dies. This gives couples a combined residence nil rate band of up to £350,000.

There is an important restriction for larger estates. The residence nil rate band is reduced by £1 for every £2 that an estate exceeds £2 million. As a result, it is fully tapered away once an individual’s estate reaches £2.35 million.

How much can be passed on tax free?

On the death of the second partner in a married couple or civil partnership, the combined tax-free allowances may be as much as £1 million. However, this is only available where both the nil rate band and the residence nil rate band apply in full and have been correctly transferred.

AllowancePer personPer couple on second death
Nil rate band£325,000£650,000
Residence nil rate band£175,000Up to £350,000
Combined maximum£500,000Up to £1,000,000

The combined maximum of £1 million is subject to the conditions and restrictions described above.

Why more estates are affected than ever before

The nil rate band has not increased since 2009. In the same period, property values across much of the UK have risen substantially. An estate that would have sat comfortably below the tax-free threshold fifteen years ago may now be well above it, even if nothing has significantly changed for the family involved.

Inheritance tax receipts reached £8.2 billion in 2024/25, a record high and a 10.8% increase on the previous year. The Office for Budget Responsibility (OBR), which is the independent body that forecasts UK government finances, expects receipts to exceed £14 billion by 2030/31*.

Significant changes to the inheritance tax rules were announced at the Autumn Budget 2024 and are now taking effect. These changes affect business relief, shares listed on the Alternative Investment Market (AIM) and pension savings. They are covered in detail in this article: IHT changes 2026: what advisers need to do now.

£8.2 billion collected in inheritance tax in 2024/25. This is forecast to exceed £14 billion by 2030/31.*

*Source: HMRC Tax Receipts and National Insurance Contributions for the UK, April 2025. OBR Economic and Fiscal Outlook, Spring 2026.

A worked example

The example below shows how inheritance tax works for a married couple with a combined estate of £3 million and no estate planning in place.

The scenario

A married couple have a combined estate of £3 million. This consists of a property worth £1.75 million and other investments and savings worth £1.25 million.

 

Step 1: when the first partner dies

When the first partner dies, all their assets pass to the surviving spouse. Under the spousal exemption, no inheritance tax is due at this point. The deceased partner’s nil rate band of £325,000 is not used and can be transferred to the surviving partner for use later.

Inheritance tax due: None

Nil rate band used: None, preserved to transfer to surviving partner

 

Step 2: when the second partner dies

The surviving partner’s estate is still worth £3 million. Two nil rate bands are now available, one from each partner, giving a combined tax-free allowance of £650,000. The residence nil rate band does not apply here because the total estate is worth more than £2.35 million, which takes it above the threshold where this allowance tapers away entirely.

Amount
Total value of estate£3,000,000
Combined nil rate band (two allowances added together)(£650,000)
Residence nil rate bandNot available**
Amount on which tax is charged£2,350,000
Inheritance tax at 40%£940,000
Amount left for beneficiaries£2,060,000

**The residence nil rate band is not available because the total estate is worth more than £2.35 million.

Estate planning considerations

The conversation about estate planning is most valuable when it starts early, while all the options are still open. Without any planning in place, this couple’s estate would owe £940,000 in inheritance tax.

Had the estate been reduced through lifetime planning, for example by making use of gifting or other strategies, the residence nil rate band might have become available.

For a couple, this could have saved up to £140,000 in tax. Other planning strategies can reduce the tax bill further still.

A £3 million estate with no planning in place leaves a significant tax liability.

Common questions

At what point does an estate start paying inheritance tax?

A single person’s estate starts paying inheritance tax on the value above £325,000. For a married couple or civil partners, the combined tax-free amount on the second death may be as high as £1 million, where both nil rate band allowances and residence nil rate band allowances are fully available and have been correctly transferred.

Who is responsible for paying the tax?

The executor of the estate pays the inheritance tax to HMRC using money from the estate, before passing on what remains to the beneficiaries. The people who inherit do not normally pay any inheritance tax themselves.

Can gifts made during a person's lifetime affect inheritance tax?

Yes. Gifts made within seven years of a person’s death may be brought back into the inheritance tax calculation. Depending on when the gift was made and the reliefs available, tax may be reduced through taper relief. Gifts made into certain types of trusts may result in an immediate inheritance tax charge.

Taper relief is a UK tax relief that can reduce the tax payable on certain lifetime gifts if the person making the gift dies between 3 and 7 years after making it. It applies mainly to failed Potentially Exempt Transfers (PETs), such as gifts of money or assets to individuals.

If death occurs:

Time between gift and death Effective IHT rate on taxable gift
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% (gift falls outside the estate)

 

 

Are transfers between spouses or civil partners exempt?

Yes. Any transfer of money or assets between spouses and civil partners, whether during their lifetime or when one of them dies, is generally exempt from inheritance tax under the spousal exemption.

What is the current rate of inheritance tax?

The standard rate is 40% on the value of the estate above the available tax-free allowances. A lower rate of 36% applies where at least 10% of the net estate is left to qualifying charities.

What is the nil rate band and has it changed recently?

The nil rate band is the amount each person can pass on free of inheritance tax. It is currently £325,000 per person and has been at this level since 2009. It will remain frozen at £325,000 until 2030/31. For married couples and civil partners, the unused nil rate band from the first death can be transferred to the surviving partner, giving a combined allowance of up to £650,000 when the second partner dies.

What is the residence nil rate band?

The residence nil rate band is an extra allowance of up to £175,000 per person that applies to the value of a person’s main home, provided it is left to direct descendants such as children or grandchildren. It can be transferred between spouses and civil partners, giving couples a combined residence nil rate band of up to £350,000. It reduces for estates worth more than £2 million and is not available at all for estates worth more than £2.35 million per person.

Have the inheritance tax rules changed recently?

Yes. Significant changes were announced at the Autumn Budget in October 2024 and are now taking effect. These include a new allowance for business relief and agricultural property relief, changes to how shares listed on the Alternative Investment Market (AIM) are treated, and the inclusion of defined contribution pension savings in a person’s estate from April 2027. These changes are covered in full in our companion article: IHT changes 2026: what advisers need to do now.

TECHNICAL TEAM

Simon Palmer

Simon Palmer

Group Technical Director

Sebastien Couplez

Sebastien Couplez

Technical Director

Jack Ingilby

Jack Ingilby

Technical Manager

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A plain-English guide for advisers: how inheritance tax works, the key allowances and why more estates are affected than ever before.
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