29 May 2026
Inheritance tax, often referred to as "death tax" or "death duties," is a tax levied on a person’s estate—comprising money, assets, property, and personal possessions—when they die. This guide provides a comprehensive overview of inheritance tax (IHT), its rates, exemptions, and planning strategies, designed for individuals seeking to understand how death tax impacts estates and beneficiaries under current UK law.
The standard inheritance tax rate in the UK is 40%, applied only to the portion of the estate that exceeds the nil-rate band threshold, currently set at £325,000 per tax year. A reduced rate of 36% applies if at least 10% of the net value of the estate is left to charity.
Under the current rules, a married couple or civil partner couple can potentially pass on up to £1,000,000 if both allowances are available and a home goes to direct descendants. Additionally, the residence nil-rate band offers an extra £175,000 allowance when a home is passed to direct descendants such as children or grandchildren, increasing the total threshold to £500,000 for individuals.
Death duties are payable only on the net estate value above the applicable threshold. For example, if an estate is worth £500,000, the inheritance tax is charged on £175,000 (£500,000 minus £325,000).
Many estates avoid death duties altogether due to exemptions such as transfers to a surviving spouse, civil partner, or charity, and reliefs like business property relief.
The executor is responsible for the payment and must pay inheritance tax on the deceased's estate from the estate’s funds before distributing assets to beneficiaries. This is usually settled before assets pass to beneficiaries.
Beneficiaries themselves typically do not pay tax on the assets they inherit, though they may be liable for income tax on rental income or other income generated from inherited assets. Recipients of gifts made within seven years before the person dies may in some cases have to pay inheritance tax on those gifts under the seven-year rule.
Individuals can make tax-free gifts up to £3,000 per tax year under the annual exemption, with any unused allowance carried forward to the next year, and it's sensible to keep records of gifts above a certain value.
Small gifts of up to £250 per person per tax year are also exempt, as are certain gifts for weddings or civil partnerships and regular gifts made out of surplus income for maintenance. Such gifts can also be made to children, including adopted children, subject to the usual rules.
Gifts made during a person’s lifetime are considered Potentially Exempt Transfers (PETs). If the donor survives for seven years after making the gift, it becomes exempt from inheritance tax, though inheritance tax charges may arise if the donor dies within seven years and the gift is not fully covered by available exemptions.
If the donor dies within seven years, the gift counts towards the estate’s value for tax purposes, with taper relief reducing the tax payable on gifts made between three and seven years before death. For example, a gift made five years before death may attract only 24% of the full 40% tax rate.
Transfers to a surviving spouse or civil partner are exempt from inheritance tax regardless of the estate’s value. The residence nil-rate band further increases the threshold when the main residence is left to direct descendants. Gifting a house before death can also increase the threshold but requires careful inheritance tax planning to ensure eligibility.
Business Property Relief (BPR) can reduce the inheritance tax payable on qualifying business assets by up to 100%, provided certain conditions are met. Agricultural Property Relief (APR) similarly offers relief on farmland and farm buildings.
Other reliefs and exemptions may apply depending on the nature of assets, such as woodland relief and leaving assets to a community amateur sports club as an exempt beneficiary.
Effective inheritance tax planning includes lifetime gifting strategies to reduce the net estate value and lower the value of a person's estate before death, using trusts to manage and protect assets, and charitable giving to benefit from reduced tax rates.
Reviewing pensions, the pension fund, and beneficiary nominations is also crucial since pension funds may be subject to different tax rules.
Executors must notify HMRC of the death and submit inheritance tax forms within six months of the person dying. They should keep thorough records of all gifts and assets, obtain professional valuations where necessary, and ensure all due tax payments are made to avoid penalties.
Calculating inheritance tax requires inputs such as the total value of assets, outstanding debts including mortgages and credit card debt, applicable nil-rate bands, and reliefs. Professional property valuations help ensure accuracy. Using these inputs, one can estimate the total amount of inheritance tax payable.
For instance, an estate valued at £600,000 with no reliefs other than the £325,000 nil-rate band would incur inheritance tax on £275,000 at 40%, resulting in a tax bill of £110,000.
If 10% of the net estate is left to charity, the rate reduces to 36%, lowering the tax payable accordingly. Gifts made within seven years before death also affect the taxable estate value and tax due.
Recent government announcements include the freezing of nil-rate bands until at least April 2028 and upcoming changes to pension taxation from April 2027, which will bring defined contribution pensions into the estate for inheritance tax purposes.
Various reform proposals are under discussion, including simplification of the seven-year rule and potential adjustments to capital gains tax to balance inheritance tax changes. A future general election could also reshape reform plans, including possible capital gains tax and inheritance tax changes under different rates proposals.
For complex estates or to optimize inheritance tax planning, consulting a solicitor specializing in estate law and a tax adviser is recommended. They can provide tailored advice on reliefs, exemptions, trusts, and strategies to minimize tax liability.
Official guidance from HMRC and helplines offer valuable information. Creating a personalized inheritance tax planning checklist and scheduling a consultation with a professional adviser can help ensure compliance and effective estate management. Earlier UK death taxes included succession duties under the Succession Duty Act 1853, charged at 1% to 10% depending on the beneficiary’s relationship to the deceased, before later regimes such as estate duty and eventually inheritance tax.
Inheritance Tax, often called death tax, is a tax on the estate (money, property, and possessions) of someone who has died. In the UK, it is technically an estate tax paid from the estate before assets are distributed to beneficiaries.
IHT was introduced in 1986 under the Finance Act, replacing the Capital Transfer Tax (CTT), which previously taxed both lifetime gifts and transfers on death.
The seven year rule means that gifts made during a person’s lifetime are exempt from IHT if the donor survives for seven years after making the gift. If the donor dies within seven years, the gift counts towards the estate for tax purposes.
Individuals can gift up to £3,000 per tax year without incurring IHT, and any unused allowance can be carried forward. Small gifts up to £250 per person per year and certain gifts for weddings or regular maintenance are also exempt.
The Residence Nil-Rate Band provides an additional £175,000 tax-free allowance when a main home is passed to direct descendants, increasing the total threshold to £500,000 for individuals.
The standard rate is 40% on the estate value above the £325,000 threshold. A reduced rate of 36% applies if 10% or more of the net estate is left to charity.
Yes, transfers to a surviving spouse or civil partner are exempt from IHT regardless of the estate’s value.
Business Property Relief and Agricultural Property Relief can reduce or eliminate IHT on qualifying business assets and farmland.
Beneficiaries usually do not pay tax on inherited assets, but they may owe related taxes, such as income tax on rental income from inherited properties. The overall amount inherited may be reduced due to IHT paid by the estate.
In 2019/20, less than 4% of deaths resulted in an IHT charge, meaning most estates do not pay this tax.
Most Americans are exempt from estate tax due to a high federal exemption threshold (around $15 million). However, some US states impose inheritance taxes requiring beneficiaries to pay a portion of their inheritance.
Estate Tax is charged on the deceased’s estate before distribution, while Inheritance Tax is paid by the beneficiaries on what they receive. The term "death tax" encompasses both types.
