How Inheritance Tax works
Inheritance Tax (IHT) is charged on the value of your estate (everything you own, minus debts) when you die, above certain thresholds. The standard rate is 40%, charged only on the portion of the estate above the available thresholds — most estates in the UK are actually below these thresholds and pay no IHT at all.
The two main thresholds
| Threshold | Amount | When it applies |
|---|---|---|
| Nil-Rate Band | £325,000 | Available to everyone's estate |
| Residence Nil-Rate Band | £175,000 | When a main residence passes to direct descendants (children, grandchildren) |
Combined, an individual can potentially pass on up to £500,000 free of IHT, and married couples or civil partners can typically combine unused thresholds, potentially passing on up to £1 million between them free of IHT in the right circumstances.
What's exempt regardless of value
- Anything left to a spouse or civil partner (provided both are UK-domiciled, with different rules otherwise)
- Gifts to registered charities
- Certain business and agricultural assets, subject to specific reliefs and conditions
Who actually pays it
IHT is paid from the estate itself (via the executor) before assets are distributed to beneficiaries, rather than being a tax the beneficiaries pay directly out of their own pocket afterward — though a smaller estate for beneficiaries is, of course, the practical effect.
Why planning ahead matters
Because IHT is charged at a flat 40% above the thresholds, even a modestly sized estate — particularly one that includes a family home in an area with high property values — can face a significant bill without any planning. Gifting, trusts and a properly considered will (covered in our other guides) are the main tools used to manage this.
Key takeaways
- IHT is charged at 40% on the estate value above the available thresholds.
- Combined thresholds can allow up to £500,000 (or £1 million for couples) to pass tax-free in the right circumstances.
- Transfers to a spouse/civil partner and registered charities are exempt regardless of value.
- The tax is paid from the estate itself before beneficiaries receive their share.