Inheritance Tax in the UK: The basics explained clearly

Inheritance Tax in the UK: The basics explained clearly

Inheritance Tax (often referred to as IHT) is one of the least understood taxes in the UK. Many people worry that their family will face a large tax bill when they die, while others assume it will never apply to them at all.

In reality, Inheritance Tax only affects a minority of estates, but when it does apply, it can feel confusing and overwhelming, particularly for those left dealing with the administration of an estate at a difficult time.

This guide explains the basics of Inheritance Tax in the UK, who it applies to, how it works, and what individuals and business owners should be aware of.

1. What Is Inheritance Tax?

Inheritance Tax is a tax on the estate of someone who has died. An estate includes everything they owned at the date of death, such as:

  • Property

  • Savings and bank accounts

  • Investments

  • Business interests

  • Personal possessions (for example vehicles, jewellery, or valuable items)

  • Certain gifts made during their lifetime

The tax is calculated on the total value of the estate, after deducting debts and applying any available allowances or exemptions (more information in Section 4).

Probate is the legal right to deal with someone’s property, money and possessions (their ‘estate’) when they die. You should not make any financial plans or put property on the market until you’ve got probate.

As previously announced in the Autumn 2024 Budget, most unused pension funds and death benefits will be included within an individual's estate for IHT purposes from April 6, 2027. This could add a significant amount of additional IHT liability to estates who fall under the new rules.

2. How Much Is Inheritance Tax?

Inheritance Tax is normally charged at 40%, but only on the part of an estate that exceeds the tax-free threshold.

  • The basic tax-free threshold is £325,000

  • If the total estate is worth less than this amount, no Inheritance Tax is payable

If a main home is left to children or grandchildren (including adopted or stepchildren), an additional allowance may apply:

  • This can increase the tax-free amount to £500,000 per person

  • For married couples or civil partners, unused allowances can usually be transferred, potentially allowing up to £1 million to pass free of Inheritance Tax

These thresholds are currently frozen, meaning that more estates may fall within the scope of Inheritance Tax over time as property and asset values increase.

3. Who Pays Inheritance Tax?

Inheritance Tax is usually paid by the executor (or personal representative) of the estate, using money from the estate itself.

In most cases:

  • Beneficiaries do not pay tax on what they inherit

  • The executor is responsible for valuing the estate, reporting to HMRC, and ensuring any tax due is paid on time

In certain situations, such as large gifts made shortly before death, the recipient of the gift may become responsible for the tax instead.

4. What Is Included in an Estate?

An estate generally includes:

  • Property owned in the UK (and sometimes overseas assets)

  • Cash, savings, and bank balances

  • Shares and investments

  • Business assets

  • Valuable personal belongings

  • Gifts made within the seven years before death (subject to rules)

From this, allowable liabilities are deducted, including:

  • Mortgages and loans

  • Credit cards and other debts

  • Funeral expenses

The resulting figure is used to determine whether Inheritance Tax applies.

5. Gifts and Inheritance Tax

Gifts made during a person’s lifetime can affect the Inheritance Tax position.

  • Gifts made more than seven years before death are usually free from Inheritance Tax

  • Gifts made within seven years may be taxable if the estate exceeds the tax-free threshold

If death occurs between three and seven years after a gift is made, the amount of tax due on that gift may be reduced through taper relief.

Some gifts are exempt from Inheritance Tax, including:

  • Up to £3,000 per tax year (annual exemption)

  • Small gifts of up to £250 per person

  • Certain wedding or civil partnership gifts

  • Regular gifts made from surplus income, provided they do not affect normal living costs

Accurate records of gifts are important, as executors may need this information when reporting to HMRC.

6. Passing on a Home

The family home often makes up a large part of an estate.

  • Transfers between spouses or civil partners are fully exempt from Inheritance Tax

  • Leaving a home to children or grandchildren may allow the additional residence allowance to be used

  • Estates valued above £2 million may see this extra allowance reduced

Giving away a home during your lifetime while continuing to live in it can create complications and does not automatically remove it from the estate for tax purposes.

7. Business Assets and Inheritance Tax

For business owners, business assets may form part of the estate and must be valued accurately.

Some qualifying business interests may be eligible for Business Property Relief, which can reduce the amount of Inheritance Tax payable. The rules in this area are detailed and depend on the nature of the business and how long assets have been owned.

Clear records and accurate valuations are essential, particularly where business interests are involved.

8. Top Tips: What You Should Do Now

  1. Have a general understanding of your estate
    Knowing roughly what assets you own and their value can help you understand whether Inheritance Tax is likely to be relevant.

  2. Keep clear well organised records
    Clear records of assets, liabilities, and gifts make estate administration far simpler for those dealing with it later. Accurate accounts and bookkeeping help avoid delays and uncertainty when values need to be confirmed.

  3. Review important documents regularly
    Wills, ownership structures, and records should reflect your current circumstances.

  4. Seek professional support when dealing with an estate
    Executors are often required to report detailed financial information to HMRC and meet strict deadlines.

9. How Halliday Styan can help

Accountants often play a key role in ensuring the accuracy, clarity, and compliance of the financial information involved.

We regularly support clients by:

  • Preparing and maintaining accurate accounts

  • Assisting with personal tax and self-assessment matters

  • Ensuring financial records are clear, complete, and HMRC-ready

  • Supporting individuals and executors with financial information required during estate administration

Clear financial records can significantly reduce stress and uncertainty at an already difficult time.


10. Final Thoughts

Inheritance Tax can seem daunting, but for most people it is manageable with the right information and organised records. Understanding the basics helps individuals and business owners avoid surprises and ensures that matters are dealt with correctly when the time comes.


If you would like help with keeping your financial affairs clear, compliant, and well-structured, professional accountancy support can provide reassurance and confidence.