What is UK Inheritance Tax? Complete Guide

Key Takeaway:

Inheritance tax is charged at 40% on estates over £325,000 (or £500,000 if you're passing on your main home to direct descendants). However, most estates pay no inheritance tax at all.

What is Inheritance Tax? (The Basics)

Inheritance tax (IHT) is a tax on the estate of someone who has died. The estate includes:

Money in bank accounts
Property and land
Vehicles
Investments and shares
Personal belongings (jewelry, art, etc.)
Life insurance payouts (in some cases)
Business assets

Minus any debts:

Mortgages
Loans
Credit card debts
Funeral expenses

The tax is paid before the estate is distributed to beneficiaries, which means the people inheriting receive what's left after tax has been paid.

Who Pays Inheritance Tax?

Important: The estate pays inheritance tax, not the people inheriting (beneficiaries).

However, you only pay inheritance tax if the estate's value exceeds specific thresholds:

The Nil Rate Band (£325,000)

Everyone gets a tax-free allowance of £325,000
This threshold has been frozen since 2009
Only the amount above this is taxed

The Residence Nil Rate Band (£175,000)

Additional allowance when passing your main home to children or grandchildren
Total possible allowance: £500,000 per person
£1 million for married couples/civil partners

Who is exempt:

Estates worth less than £325,000
Everything left to a spouse or civil partner
Gifts to registered charities
Estates with proper planning in place

Current Inheritance Tax Rates (2026/27)

The standard inheritance tax rate is 40% on the amount above your tax-free threshold.

Example:

Estate value: £500,000
Minus nil rate band: £325,000
Taxable amount: £175,000
Tax owed: £70,000 (40% of £175,000)

Reduced Rate (36%): If you leave at least 10% of your net estate to charity, the rate drops to 36%.

How Much is the Average Person's Estate Worth?

According to recent data:

Average UK estate value: £350,000 - £400,000
London average: £550,000+
Northern regions: £250,000 - £300,000

Key Point: With property prices rising, more families are being caught by inheritance tax - even if they don't consider themselves wealthy.

When is Inheritance Tax Paid?

Critical deadlines:

6 months from the date of death to pay any tax owed (to avoid interest charges)
Interest is charged at the current rate on late payments
Some taxes must be paid before you can get the grant of probate

Common Misconceptions About Inheritance Tax

Myth 1: "Only the rich pay inheritance tax"

Reality: With average UK house prices above £290,000, many middle-class families are affected.

Myth 2: "I can just give everything away before I die"

Reality: Gifts within 7 years of death are still counted. There are also annual gifting limits.

Myth 3: "Life insurance payouts don't count"

Reality: They do unless the policy is written in trust.

Myth 4: "My children will pay the tax"

Reality: The estate pays before distribution. However, it does reduce what they inherit.

Myth 5: "It's too complicated to plan for"

Reality: Basic planning is straightforward and can save thousands.

Inheritance Tax for Married Couples

Key Benefit: Spouses and civil partners can pass assets to each other completely tax-free.

Transferable Allowances:

When the first spouse dies:

Their unused nil rate band transfers to survivor
Their unused residence nil rate band also transfers
Potential combined allowance: £1 million