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What happens to your wealth when you pass on? The answer sometimes catches many people off-guard, especially once they discover how much of their estate could be claimed by the government. Everyone wants to protect their legacy, and make sure their loved ones get the most of their wealth. This guide to inheritance tax will simplify everything for you. You will find out how much might be due, what rules apply to your estate or loved one’s assets, and how to avoid paying more tax than necessary.
Let’s get into it.
What is Inheritance Tax in the UK?
Inheritance Tax (IHT) is a tax levied on the estate of someone who has died. In simple terms, it is a tax on the value of their money, possessions, and property after their death. However, not every estate is subject to IHT. It is only payable if the value of the estate exceeds a certain threshold.
How Much is Inheritance Tax in the UK?
The current rate of Inheritance Tax is 40%. It is levied on the portion of the estate that exceeds the available tax-free thresholds. However, if the estate qualifies for a reduced rate because at least 10% of the net value of the estate is left to charity, the rate can be reduced to 36%.
As of the current tax year (2025-2026), the standard nil-rate band (amount exempt from IHT) is £325,000. In addition to the standard nil-rate band, there is also the residence nil-rate band.
This applies when a person leaves their home to their direct descendants (children, grandchildren, etc.). The current residence nil-rate band is £175,000. This can be added to the standard nil-rate band, increasing the total tax-free threshold to £500,000 for eligible estates.
Who Pays Inheritance Tax and When?
When someone passes away, the question of who pays inheritance tax depends on the structure of the estate and who is responsible for managing it. Mainly, it all falls upon the executors and the beneficiaries.
Beneficiaries vs Executors: What is the Difference?
- Executors are the people named in a will who are legally responsible for managing the deceased person’s estate. Their job is to apply for probate, settle debts, handle taxes and distribute the remaining assets to the rightful heirs.
- Beneficiaries are the individuals or organisations who inherit money, property, or other assets from the estate.
Generally, inheritance tax (IHT) is paid out of the estate before beneficiaries receive anything. Beneficiaries do not pay tax on their inheritance unless they receive gifts that are subject to IHT or the estate does not have enough funds to cover it.
The Role of Probate & the Payment Timeline
Probate is the legal process of proving a will and authorising the executors to carry out the wishes of the deceased. It must be granted before any assets can be released or sold.
Here is a timeline:
- Inheritance tax must be paid within six months of the end of the month in which the person died.
- If it is not paid on time, interest will accrue on the outstanding amount, even if probate has not been granted yet.
Executors need to submit an IHT400 form (or IHT205 in simpler cases) to HMRC to calculate and declare the tax due.
Paying Inheritance Tax by Instalments
In certain cases, especially where the estate includes non-liquid assets (such as property), inheritance tax can be paid in instalments over 10 years.
This applies to:
- Land and buildings
- Certain shares and business interests
The instalment option helps when the estate is asset-rich but cash-poor. However, interest is usually charged on the unpaid balance, except for the first instalment. The remaining IHT must be settled in full if the asset is sold.
Real-Life Scenario: Inheriting a Family Home with No Liquid Assets
Imagine this: You inherit your parents’ home, valued at £600,000, but they had no savings left to cover the tax. The nil-rate band covers the first £325,000, and the residence nil-rate band (if applicable) can cover up to an additional £175,000. That still leaves £100,000 potentially taxable at 40%. That is £40,000 in IHT!
With no cash in the estate, selling the home seems like the only option. But by paying inheritance tax in instalments, you might be able to hold onto the property, paying off the tax gradually whilst sorting out finances or finding another solution—like letting the property for income.
Exemptions, Reliefs & Tax Planning Strategies
Paying inheritance taxes does not have to be inevitable. With the right knowledge and forward planning, you can take full advantage of the UK’s tax reliefs, exemptions, and strategic tools to reduce or even eliminate your estate’s liability.
Potentially Exempt Transfers (PETs): Giving Whilst You are Living
A Potentially Exempt Transfer (PET) is a gift made during your lifetime that becomes fully exempt from inheritance tax if you survive for seven years after making it. This is one of the most powerful tools in estate planning.
You can gift money, property, or assets to an individual (such as a child or grandchild) and if you live for another seven years, it falls outside your estate. If you pass away before the seven-year mark, the gift may still qualify for taper relief, which gradually reduces the tax owed over time.
It is a valuable way to support loved ones whilst you are alive and lessen your tax burden in the long run.
Tax Reliefs You Should Know
Certain assets benefit from specific reliefs that can greatly reduce the inheritance tax due:
- Agricultural Relief: Available on farms and farmland, this can reduce the value of these assets for tax purposes by up to 100%.
- Business Relief: If you own a qualifying business or shares in one, this can also qualify for up to 100% relief, making it a smart planning tool for entrepreneurs.
- Charitable Donations: Leaving at least 10% of your estate to a registered charity can reduce your IHT rate from 40% to 36%. In some cases, it may even bring the taxable value of the estate below the threshold altogether.
Using Life Insurance to Cover Inheritance Tax
Many people overlook the role of life insurance in estate planning. By placing a life insurance policy in trust, the payout does not count towards your estate’s value, and can be used to pay the inheritance tax due. This helps ensure your beneficiaries receive their full inheritance without needing to sell off assets to settle the bill.
It is an efficient and practical way to cover your tax liability whilst keeping your legacy intact.
Trusts and Estate Planning
Using a trust is another advanced yet widely used strategy to manage how and when assets are passed on. Trusts allow you to reduce the value of your taxable estate, control how assets are distributed and protect wealth from creditors or divorce settlements.
Whilst setting up a trust can be complex, especially with changing tax laws, the long-term benefits often outweigh the administrative effort. Trusts can be especially useful when planning for young beneficiaries or those with special needs.
Learn more about some of the common tax loopholes for the middle class how they could help reduce the inheritance tax burden on your estate.
Inheritance and Property: What You Should Know
Property is often the most valuable, and emotionally significant part of any inheritance. But along with bricks and mortar comes a set of complex tax rules and legal steps that can catch people off guard. If you are thinking about selling an inherited property or unsure what to do with an inheritance, here is what you need to know to start making informed decisions.
Selling an Inherited Property
Once you have inherited a property, your first decision is whether to keep it, rent it out, or sell it. If you decide to sell, here is what you need to know:
- Establish the property’s value at the time of inheritance (usually the market value at the date of death).
- If you sell it for more than this value, the difference is potentially subject to Capital Gains Tax (CGT).
- Private Residence Relief typically does not apply unless you lived in the property as your main home.
Whilst you will not owe inheritance tax again on the sale, CGT can take a bite out of any profit made between inheritance and sale. That is why getting a professional valuation and considering the timing of the sale are both vital steps.
For detailed strategies, read our guide on how to avoid Capital Gains Tax on property.
Tax Planning with Joint Ownership or Tenants in Common
How a property is owned significantly impacts both your inheritance and the tax implications:
- Joint Tenants: The property automatically passes to the surviving co-owner, and doesn’t form part of the deceased’s estate. This can bypass probate but limits flexibility in tax planning.
- Tenants in Common: Each owner’s share is part of their estate and can be left to someone else in a will. This structure is often used in estate planning to maximise the use of nil-rate bands and potentially reduce the inheritance tax bill.
In either case, understanding the ownership type early on can help avoid costly mistakes—and even open up tax-efficient strategies.
Use Case: Inheriting a Buy-to-Let vs. a Main Residence
Let’s compare two common scenarios:
- Inheriting a Main Residence: You will be able to claim the residence nil-rate band, which can reduce or eliminate the inheritance tax liability on the property. If you plan to move in, CGT will not apply later if it is your main home.
- Inheriting a Buy-to-Let: This can provide rental income, but you will need to consider income tax on the earnings, potential CGT if you sell, and possibly higher inheritance tax due to the property being treated as an investment asset.
What to Do with an Inheritance
Receiving an inheritance can be a complex experience, filled with both emotional weight and financial implications. Let’s break down some practical steps and long-term considerations, keeping in mind the information we have covered in this inheritance tax guide.
- Notification and Documentation: If you are an executor, your first step is to formally notify the relevant institutions (banks, insurance companies, etc.) of the death and obtain the necessary documentation, such as the death certificate.
- Valuing the Estate: For tax purposes, it is to get a clear understanding of the total value of the inherited assets. This can involve professional valuations for property, investments, and other significant items.
- Clearing Debts and Liabilities: Before any assets can be distributed to beneficiaries, any outstanding debts, taxes (including Inheritance Tax, if applicable), and administrative expenses of the estate must be settled.
- Accessing Funds and Assets: Once probate (or confirmation/letters of administration) is granted, you will be able to access funds in bank accounts, transfer ownership of property, and manage other assets according to the will or the rules of intestacy.
Taking your time, seeking professional advice on inheritance, and planning strategically can help you honour your loved one’s legacy, whilst building your own.
Pension Wealth and Inheritance
When you think about passing on your wealth, your pensions are a non-negligible part of the picture. The rules around what happens to your pension pot when a person passes on can be quite different from other assets.
Generally, your pension does not automatically form part of your taxable estate for Inheritance Tax in the same way as your property or savings. Instead, pension providers have their own rules about who can inherit your pension and how it is paid out.
With a Self-Invested Personal Pension (SIPP), you have more flexibility in nominating beneficiaries. You can specify who you want your pension pot to go to, and you can often update these nominations throughout your life.
How Pensions Are Taxed After Passing On
The tax treatment of your pension after death depends on your age at the time of passing. If a person dies before age 75, any unused pension funds can be passed to the beneficiaries tax-free.
Beneficiaries can choose to receive the funds as a lump sum, annuity, or through drawdown, without triggering Inheritance Tax (IHT) or Income Tax on the transfer itself.
If a person dies at age 75 or older, the pension remains outside the estate for IHT, but any withdrawals the beneficiaries make will be taxed as income at their marginal rate.
However, from April 6, 2027, the rules are set to change. Defined contribution pensions will be included in your estate for Inheritance Tax purposes, meaning they could be taxed if your total estate value exceeds the nil-rate band.
Other Changes in IHT Tax Laws
Shifting The Basis of IHT For Non-domiciled Individuals
Starting April 6, 2025, IHT has shifted from a domicile-based system to a residency-based model. Under the new rules, anyone who has been a long term UK resident for 10 out of the last 20 tax years is liable for IHT on their worldwide assets, not just UK-based ones.
Digitalisation of IHT Services
From the tax year starting April 6, 2025, tax advisors filing IHT returns will need to use advanced electronic signature technology. This aims to streamline processes and reduce errors
Restrictions on Agricultural Property Relief (APR) and Business Property Relief (BPR)
Looking ahead, two more impactful changes are on the horizon. From April 6, 2026, the generous 100% reliefs available through Agricultural Property Relief (APR) and Business Property Relief (BPR) will be capped at £1 million per estate. Any qualifying assets above this threshold will be taxed at 20%, half the standard IHT rate. Then, from April 6, 2027, unused pension pots will begin to count as part of a deceased person’s estate, making them subject to IHT for the first time.
FAQs About Inheritance Tax UK
Can I spread the cost by paying inheritance tax by instalments?
Yes, paying inheritance tax by instalments is allowed in certain cases, especially for assets like property that are not easily sold. You can apply to pay over 10 years, though interest is charged after the first instalment. This helps avoid selling assets under pressure.
Can stepchildren or unmarried partners inherit tax-free?
Unlike biological or adopted children, stepchildren do not automatically qualify for the residence nil-rate band unless they’ve been formally adopted. Similarly, unmarried partners are not treated the same as spouses or civil partners for inheritance tax purposes.
Is inheritance tax due on overseas assets?
For UK-domiciled or long-term residents, inheritance tax applies to worldwide assets—including property, investments, and bank accounts held abroad. However, if the deceased was non-domiciled and did not meet the long-term resident threshold, only their UK-based assets will typically be subject to IHT.
Does debt reduce inheritance tax?
Yes, debts and liabilities owed by the deceased at the time of death are deducted from the total estate value before calculating inheritance tax. This includes things like mortgages, credit card debts, or outstanding loans.
What if I refuse an inheritance?
It is entirely possible to refuse an inheritance, a process known as “disclaiming” your inheritance. People may do this to avoid a higher tax bill or if they believe the estate will leave them with more liabilities than assets. Once you disclaim, the inheritance passes to the next eligible beneficiary under the will or intestacy laws, and you cannot later change your mind.
Get Expert Advice on Inheritance Tax with Legend Financial
Every estate is unique, and whilst this guide to inheritance tax can help you understand the rules, personalised advice makes all the difference in estate planning. At Legend Financial, our team of inheritance tax specialists is here to walk you through all the complexities. We make sure your children, partner, or beneficiaries are not left with unexpected tax bills. Contact us now and let’s create a plan that honors your legacy and gives your loved ones the security they deserve.
