What is Inheritance Tax and does it apply to you?

Inheritance Tax (IHT) is a tax on your estate (property, savings and possessions) that can apply in your lifetime and after you die, depending on any gifts you make and how much your estate is worth. The standard inheritance tax rate is 40%. This is only charged against any part of your estate that exceeds the Inheritance Tax threshold after any available Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) has been applied.
There is normally no tax to be paid if:
  • The value of your estate is below the threshold at which Inheritance Tax is applied, or
  • You leave everything to your spouse or civil partner, or
  • You leave everything to an exempt beneficiary, such as a charity.
Pension scheme structures will differ, but generally death benefit payments out from a pension aren't subject to IHT due to the pension trustees having discretion over who the recipients are. 

What is the threshold for Inheritance Tax?

The Inheritance Tax threshold for 2021/22 is £325,000. This is also known as the Nil Rate Band (NRB). You can pass on assets up to the value of your NRB without having to pay any Inheritance Tax. Even if the value of your estate is below the threshold, you still need to report it to HMRC.
Following the introduction of the Residence Nil Rate Band, it's possible to increase your Inheritance Tax limit if you pass your home on to your children (adopted, fostered or step) or grandchildren. If the conditions are met this will increase your threshold by £175,000, which when combined with the NRB of £325,000 gives a potential combined allowance of £500,000.
The RNRB will gradually reduce, or taper away, for an estate worth more than £2 million, even if a home is left to direct descendants.  
For married couples or those in a civil partnership where the NRB and/or RNRB is not fully utilised on first death, the remaining threshold passes to the surviving spouse or civil partner, meaning up to £1 million in threshold can be applied against their estate following their death. Further information on unused allowances can be found at Gov.uk
The NRB and RNRB have been frozen until April 2026.

How much is Inheritance Tax?

The general rate for inheritance tax is 40% of the value of the estate exceeding the threshold. For example, on an estate worth £600,000 left to a friend (therefore meaning the RNRB does not apply):
  • The amount on which inheritance tax will be charged is £275,000 (£600,000 minus the £325,000 threshold).
  • At the general rate, the tax payable will be £110,000 (40% of £275,000).
  • The general rate can be reduced to a rate of 36% on some assets if the deceased leaves 10% or more of the 'net value' to charity in their will.
There are reliefs and exemptions available that can be applied to IHT. These include:
  • Annual £3000 allowance
  • Normal expenditure out of income
  • Lifetime direct gifts with no immediate IHT. Some lifetime gifts are subject to IHT (i.e. those to discretionary trusts that are above the NRB), this is at a reduced rate.
  • Taper Relief can mean that gifts given in the 7 years prior to the gift givers death may have a tax rate below 40%.
Inheritance Tax Calculator
You can get an idea of the inheritance tax that may apply on your estate by using an Inheritance Tax calculator.

Pensions and Inheritance Tax

It's important to know the Inheritance Tax rules when inheriting a pension fund or receiving death benefits. Death benefits are an ongoing or lump sum payment to a dependant after someone passes away. 
Pensions are generally exempt from Inheritance Tax due to the pension trustees having discretion over who the recipients are. However, there are some scenarios where Inheritance Tax may still apply: 
  • Death benefits can be subject to Inheritance Tax if the estate legally has a right to the payment, or the member can dictate to whom any benefit is paid
  • There is a lifetime transfer made of the death benefit when the member is in ill-health
  • On lump sum death benefits where no discretion exists around who to pay the benefits to, Inheritance Tax may be charged
  • If you’ve taken your tax-free sum, either in one lump sum or as part of multiple payments, but don’t spend or gift it before you pass away, it will be included within your estate and IHT may be charged
If you want to leave a pension to someone after you die, find more information about what happens to your pension when you die and the options you have.

How to pay Inheritance Tax

Paying inheritance tax requires obtaining an inheritance tax payment reference number from HM Revenue and Customs (HMRC). This should be done at least 3 weeks before your first payment is due. You can retrieve your reference number by either:
HMRC will start to charge interest from six months after death. 
Visit Gov.uk for further details on how to pay your Inheritance Tax bill. It's suggested that you seek professional advice when paying your Inheritance Tax.
It’s always a difficult time when someone close to you dies. We've outlined the steps to take in Bereavement and how you can tell us about a death here




Next steps

We can't help you manage how you use or gift your money, but we do have products and information that may help:

Lady in coffee shop

Need help?

Making decisions about finances is important so it’s worth making use of the guidance and advice services available.

Retirement guidance

Pension wise

The Government’s impartial retirement guidance will help you avoid the risks and think about what’s right for you.

Speak with us

Our colleagues in Cardiff are always happy to help with your questions or to help you apply for a quote.

0800 048 2446

Monday to Friday
9am to 5pm
We may record and monitor calls.

Get advice

Find an independent financial adviser in your area through Unbiased.