Inheritance Tax (IHT) is one of the most significant taxes affecting individuals, families and business owners when passing on wealth. It is charged on the value of a person’s estate at death and, in some cases, on certain lifetime gifts. Despite its impact, many people underestimate how IHT works, who pays it, and the opportunities available to reduce liability through careful planning.
What this article is about
This guide provides a detailed overview of inheritance tax in the UK. It explains when IHT applies, who is liable, and the thresholds and rates set by HMRC. It also covers the reliefs and exemptions that can apply, from spouse exemptions to business and agricultural reliefs, as well as strategies for tax planning to protect family wealth. The article will also highlight compliance requirements, reporting duties, and the practical pitfalls that executors and families should avoid.
The aim is to give business owners, finance directors, trustees and individuals a clear and authoritative resource for navigating UK inheritance tax, balancing compliance with planning opportunities to minimise exposure.
Section A: What is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the transfer of wealth. In the UK, it applies when a person dies and their estate – including property, possessions, money, and certain lifetime gifts – is valued above the available tax-free thresholds. It is often referred to as a tax on estates, but in practice, the liability can fall on executors, trustees, or even beneficiaries, depending on the circumstances.
IHT is an area that combines strict HMRC rules with opportunities for careful planning. Understanding the basic framework is the first step to compliance and, where possible, mitigation.
1. Overview of Inheritance Tax
IHT applies primarily on death, when the total value of an estate is calculated and compared against the nil rate band and other allowances. If the value exceeds those allowances, tax is charged on the balance.
In addition to death estates, IHT can also apply to certain transfers made during a person’s lifetime. These include:
- Potentially Exempt Transfers (PETs): lifetime gifts that become exempt from IHT if the donor survives for seven years after making the gift. Where death occurs between three and seven years, taper relief may reduce the tax due.
- Chargeable Lifetime Transfers (CLTs): certain transfers into trusts or companies that can attract an immediate IHT charge if above the nil rate band.
HMRC administers IHT, and reporting is done using prescribed forms, usually the IHT400. Executors, administrators or personal representatives are responsible for reporting and paying IHT on estates, while trustees are liable for trust-related charges.
2. Who Pays Inheritance Tax?
In most cases, IHT is paid out of the deceased’s estate before assets are distributed to beneficiaries. Executors or administrators are responsible for calculating the liability, submitting the IHT account, and ensuring payment is made within the deadlines.
However, liability is not limited to executors:
- Trustees may be responsible where trust property gives rise to a chargeable event.
- Beneficiaries can, in certain cases, become liable where tax has not been correctly paid.
In practice, the majority of IHT is settled by personal representatives managing the estate, but business owners and trustees must be aware of their obligations where family trusts or business assets are involved.
Section Summary
Inheritance Tax is a charge on wealth transfers, most commonly arising on death but also potentially on lifetime transfers such as PETs and CLTs. Executors, trustees and sometimes beneficiaries bear responsibility for compliance. Knowing the basic structure of how IHT operates is the foundation for applying the detailed thresholds, rates, reliefs and planning opportunities covered in later sections.
Section B: Inheritance Tax Thresholds and Rates
The starting point for calculating any inheritance tax liability is understanding the available thresholds and rates. These determine whether an estate is taxable, and at what level. HMRC sets the limits and applies strict rules on how they interact.
1. Nil Rate Band and Thresholds
Every individual has a standard tax-free allowance for inheritance tax, known as the nil rate band (NRB). The NRB is currently fixed at £325,000 and has been at this level since 2009.
If the value of an estate does not exceed this threshold, no IHT is payable. Where it does, IHT is applied only to the value above the threshold. Any unused nil rate band can usually be transferred to a surviving spouse or civil partner, potentially doubling the available allowance for couples.
Transfers between spouses and civil partners are exempt from IHT, meaning that a person can leave their entire estate to their partner without triggering tax. This exemption ensures that, in practice, IHT tends to arise when wealth is passed to the next generation.
2. Residence Nil Rate Band
In addition to the NRB, estates may also benefit from the Residence Nil Rate Band (RNRB). This provides an extra allowance where a main home is passed on to direct descendants, such as children or grandchildren.
The RNRB is currently set at £175,000. Combined with the NRB, this means that an individual could pass on up to £500,000 tax-free, and a couple could potentially pass on up to £1 million, provided conditions are met. Like the NRB, the RNRB is transferable between spouses and civil partners, giving surviving partners the ability to use any unused portion of their late partner’s allowance.
The RNRB is subject to a taper for estates worth more than £2 million, reducing the available allowance by £1 for every £2 over the threshold. This means larger estates may lose the benefit entirely.
Practical planning is often needed to maximise the RNRB, especially where estates are close to or above the taper threshold.
3. IHT Rates
Inheritance tax is charged at a standard rate of 40% on the taxable value of the estate above the available allowances.
However, a reduced rate of 36% may apply where at least 10% of the net estate is left to charity. Executors must calculate the baseline amount carefully to ensure eligibility for this lower rate.
For certain lifetime transfers, such as chargeable lifetime transfers into trusts, IHT can be charged at 20% immediately if the transfer exceeds the nil rate band, with further charges if the donor dies within seven years.
Section Summary
The inheritance tax system is built on the nil rate band, residence nil rate band, and standard tax rates. Together, these create a framework that can exempt significant amounts of family wealth but leave higher-value estates exposed to charges at up to 40%. Knowing how thresholds combine and taper is central to both compliance and effective tax planning.
Section C: Exemptions and Reliefs
Reliefs and exemptions are a central part of inheritance tax planning. They provide opportunities to pass wealth on without triggering a charge, provided HMRC rules are carefully followed. Some exemptions apply to all taxpayers, while others are targeted at specific assets such as businesses or farms.
1. Common Exemptions
The most widely used inheritance tax exemptions include:
- Spouse and civil partner exemption: Transfers between spouses or civil partners, whether during lifetime or on death, are exempt from IHT, regardless of value. This allows couples to defer IHT until the second death.
- Annual exemption: Each individual can give away up to £3,000 each tax year free of IHT. If unused, this allowance can be carried forward for one year.
- Small gifts exemption: Gifts of up to £250 per recipient per tax year are exempt, provided the recipient has not also benefited from the annual exemption.
- Wedding and civil partnership gifts: Parents can give up to £5,000, grandparents up to £2,500, and others up to £1,000 to a couple on their marriage or civil partnership, free of IHT.
These exemptions are relatively straightforward, but they must be properly recorded to withstand HMRC scrutiny, especially if the donor dies within seven years of the transfer.
2. Business and Agricultural Relief
Business and Agricultural Relief are among the most valuable tools available to business owners and landowners.
- Business Relief (BR): This can reduce the value of a qualifying business or business assets by 50% or 100% for IHT purposes. For example, a family business may be passed on without an immediate tax bill if it meets the qualifying conditions. Not all businesses qualify, however – for instance, those mainly dealing in investments, securities or land do not.
- Agricultural Property Relief (APR): This provides relief of up to 100% on the agricultural value of land or property that is used for farming. APR is subject to strict conditions, including how long the property has been owned and used.
In some cases, BR and APR may apply together. For example, a farming business that also qualifies as a trading entity may benefit from both reliefs, with APR covering the agricultural value of land and BR applying to business assets. Executors and advisers must assess which relief is most advantageous and provide robust evidence to HMRC.
3. Charitable and Other Reliefs
Additional reliefs apply where wealth is directed to specific causes:
- Charitable gifts: Transfers to UK-registered charities are exempt from IHT. Where 10% or more of the estate is left to charity, the reduced 36% rate of IHT may also apply to the rest of the estate.
- Political party exemption: Gifts to qualifying political parties are exempt, though this is less commonly used.
- National heritage and cultural property: Certain gifts of heritage assets, land or works of art may qualify for relief if they are transferred under specific HMRC schemes and made available for public access.
Section Summary
Inheritance tax reliefs and exemptions provide powerful ways to reduce liability. From the routine spouse and annual exemptions to targeted business and agricultural reliefs, each requires careful documentation and adherence to HMRC conditions. Charitable giving can also both reduce tax and support chosen causes. Properly used, these mechanisms can significantly reduce or even eliminate IHT exposure.
Section D: Compliance, Planning and Practical Considerations
Meeting HMRC’s compliance requirements is just as important as understanding thresholds and reliefs. Executors, trustees and families must ensure reporting is accurate and deadlines are met. At the same time, effective estate planning can reduce or delay inheritance tax liability.
1. Calculating and Reporting IHT
The starting point is a full valuation of the estate, including property, investments, business interests and personal possessions. Liabilities such as debts and funeral expenses can be deducted.
Where tax is due, the executor or administrator must complete the relevant forms. For taxable estates this will usually be the IHT400 and accompanying schedules. For smaller or exempt estates, the shorter IHT205 may apply.
IHT must generally be reported within 12 months of death, and the tax itself is due within six months of the end of the month of death. Late payments attract interest, and incorrect or incomplete returns may lead to penalties.
HMRC does allow IHT to be paid in instalments over a period of up to 10 years where the estate includes certain illiquid assets such as property or business interests. Interest is usually charged on the outstanding balance, and executors must apply for this option.
2. IHT Planning Strategies
There are a range of planning strategies that individuals and business owners can use to reduce their exposure to IHT:
- Lifetime gifting: Using annual exemptions and PETs can reduce the taxable estate, provided the donor survives seven years.
- Trusts: Placing assets into trust can move them outside the estate for IHT purposes, though rules are complex and charges may apply.
- Life insurance: Policies written in trust can provide liquidity to cover IHT liabilities without increasing the value of the estate.
- Business and agricultural structuring: Ensuring business or farm assets qualify for BR or APR can protect significant family wealth.
Planning must be proportionate, legally compliant, and regularly reviewed to reflect changes in tax law and personal circumstances.
3. Common Pitfalls and HMRC Enforcement
Despite the opportunities for planning, common mistakes can lead to unnecessary tax bills or HMRC disputes:
- Undervaluing assets: HMRC may challenge valuations, particularly of property or business assets, leading to penalties and interest.
- Failing to report gifts: Executors must account for relevant lifetime transfers; failure to disclose can result in additional liability.
- Missing deadlines: Late reporting or payment can erode estate value through fines and interest.
HMRC has extensive powers to investigate estates and trusts. Transparency, accurate record-keeping and timely professional advice are critical to avoiding disputes.
Section Summary
Inheritance tax compliance requires full and accurate reporting, with strict deadlines for both forms and payments. Planning can reduce or delay liability, but must be carefully managed to avoid falling foul of HMRC rules. Executors, trustees and individuals must balance compliance with strategic use of exemptions, reliefs and lifetime planning tools.
FAQs
What is the current inheritance tax threshold in the UK?
The nil rate band is set at £325,000 per individual. Estates below this threshold pay no IHT. Additional allowances, such as the residence nil rate band, may increase the amount that can be passed on tax-free.
How does the residence nil rate band work?
The residence nil rate band (RNRB) provides up to £175,000 extra allowance when a main residence is passed to direct descendants. It tapers for estates worth more than £2 million and can be combined with the standard nil rate band. Any unused RNRB can also be transferred between spouses and civil partners.
Do spouses pay inheritance tax?
Transfers between spouses and civil partners are exempt from IHT. This means no tax is charged on assets left to a partner, and any unused allowance can usually be transferred to the survivor.
What are PETs and CLTs in inheritance tax?
A Potentially Exempt Transfer (PET) is a lifetime gift that becomes exempt if the donor survives for seven years after making it. A Chargeable Lifetime Transfer (CLT) is a gift, often into a trust, that may attract an immediate 20% IHT charge if it exceeds the nil rate band.
How do business owners minimise inheritance tax exposure?
Business owners may be able to claim Business Relief of 50% or 100% on qualifying business assets, reducing or eliminating IHT on those assets. Effective structuring, use of trusts, and lifetime gifting strategies can further reduce liability.
Conclusion
Inheritance tax remains one of the most significant considerations in estate planning. With the nil rate band frozen, more estates are being brought into charge, making it essential for families, business owners and trustees to understand how the rules apply.
Compliance with HMRC’s reporting and payment requirements is non-negotiable. Executors and trustees must ensure valuations are accurate, deadlines are met, and all relevant transfers are disclosed. At the same time, the tax system provides a range of exemptions and reliefs that can reduce or even eliminate liability if used properly.
For individuals, effective planning often involves a combination of lifetime gifts, structuring assets to qualify for relief, and considering vehicles such as trusts or life insurance policies. For business owners and farmers, Business Relief and Agricultural Relief can protect family enterprises if the qualifying conditions are satisfied.
Ultimately, IHT planning requires a balance between compliance, fairness to beneficiaries, and protection of family wealth. With clear understanding and timely action, the impact of inheritance tax can be managed effectively.
Glossary
| Nil Rate Band (NRB) | The standard inheritance tax threshold, currently £325,000 per individual, below which no IHT is payable. |
| Residence Nil Rate Band (RNRB) | An additional allowance of up to £175,000 where a main home is passed to direct descendants, subject to tapering for large estates. Transferable between spouses and civil partners. |
| Potentially Exempt Transfer (PET) | A lifetime gift that becomes exempt from inheritance tax if the donor survives for seven years after making it. Taper relief may apply if death occurs between three and seven years. |
| Chargeable Lifetime Transfer (CLT) | A lifetime gift, often into trust, that may attract an immediate inheritance tax charge if above the nil rate band. |
| Business Relief (BR) | A relief that can reduce the taxable value of certain qualifying business assets by 50% or 100% for IHT purposes. |
| Agricultural Property Relief (APR) | A relief providing up to 100% exemption on the agricultural value of qualifying farmland and property. |
Useful Links
| GOV.UK – Inheritance Tax |
| GOV.UK – Inheritance Tax thresholds and rates |
| GOV.UK – Inheritance Tax exemptions and reliefs |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
