Inheritance tax

Inheritance tax (IHT) is a tax on the estate of someone who has died. It is paid by the estate — the property, money and possessions left behind — before anything is distributed to beneficiaries. The current rate is 40%, but it only applies to the portion of an estate that exceeds certain thresholds. Most estates in the UK fall below those thresholds and pay no inheritance tax at all.

Understanding how IHT works can help you know what to expect when dealing with probate, and it can inform decisions about wills and estate planning well in advance.

The nil-rate band

Every individual has a tax-free allowance called the nil-rate band, currently set at £325,000. Any value in the estate up to this amount is not subject to IHT. Only the value above it is taxed at 40%.

This threshold has been frozen at £325,000 since 2009. At Budget 2025, the government confirmed it will remain at this level until at least 5 April 2031 (HMRC: IHT nil-rate band from April 2028). Because the threshold does not rise with inflation, more estates are expected to fall within the scope of IHT over time.

The residence nil-rate band

An additional allowance — the residence nil-rate band (RNRB) — applies when a home is left to direct descendants such as children, stepchildren or grandchildren. This adds a further £175,000 per person on top of the standard nil-rate band.

Combined, the nil-rate band and RNRB give an individual a potential IHT-free allowance of £500,000. For a married couple or civil partners, the unused portion of both allowances can transfer to the surviving partner's estate, meaning up to £1 million can potentially pass free of IHT.

The RNRB tapers for estates valued above £2 million — it reduces by £1 for every £2 over that threshold. The RNRB is also frozen at £175,000 until at least 5 April 2031 (HMRC: IHT thresholds from April 2026).

Spousal and civil partner exemption

Assets left to a spouse or civil partner are fully exempt from inheritance tax, regardless of value. There is no upper limit on this exemption.

If the first partner to die does not use their full nil-rate band (for example, because everything passes to the surviving partner), the unused percentage transfers to the survivor's estate. This means the surviving partner's estate can benefit from up to double the standard thresholds when they die (GOV.UK: inheritance tax).

Gifts and the 7-year rule

Gifts made during your lifetime can reduce the value of your estate for IHT purposes — but only if you survive for at least 7 years after making them. A gift made more than 7 years before death is usually exempt.

If you die within 7 years of making a gift, it may be taxed on a sliding scale known as taper relief:

• 0 to 3 years before death — 40% (no reduction)
• 3 to 4 years — 32%
• 4 to 5 years — 24%
• 5 to 6 years — 16%
• 6 to 7 years — 8%

There is also an annual exemption of £3,000 per tax year — gifts up to this total are immediately free of IHT regardless of the 7-year rule. Unused annual exemption can be carried forward for one year only. Small gifts of up to £250 per recipient are also exempt (GOV.UK: IHT gifts).

Upcoming change: pensions from April 2027

From 6 April 2027, most unused pension funds and death benefits will be brought within the scope of inheritance tax. Previously, unspent pension pots were not counted as part of the estate for IHT purposes — this changes significantly under rules announced at Autumn Budget 2024.

The government estimates that around 10,500 additional estates per year will face an IHT liability as a result. Death-in-service benefits paid from registered pension schemes will be excluded from this change. Personal representatives — rather than pension scheme administrators — will be responsible for reporting and paying any IHT due on pension assets (GOV.UK: IHT on unused pension funds).

If you hold significant pension savings and have not reviewed your estate planning in light of this change, speaking to a financial adviser before April 2027 would be sensible.

How and when to pay

Inheritance tax must be paid by the end of the sixth month after the person died. For example, if someone died in January, payment is due by 31 July. Interest is charged on late payments.

In most cases, at least some IHT must be paid before probate is granted. This can create a practical difficulty — the estate's assets may be frozen until probate is obtained, yet HMRC requires payment before issuing the grant. Options include paying from the deceased's bank accounts (some banks release funds directly to HMRC for this purpose), taking out a short-term loan, or using the instalment scheme available for certain assets such as property, which allows payment to be spread over 10 annual instalments (GOV.UK: paying inheritance tax).

For a broader overview of the probate process and how IHT fits into it, see our probate guides.