What is Inheritance Tax?

Q: Where can I find more information on Inheritance Tax planning?

You may have some additional questions around Inheritance Tax planning. To support you with these, we recommend visiting Gov.co.uk .

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 from a pension aren't subject to IHT where the pension trustees have discretion over who the recipients are.

What is the threshold for Inheritance Tax?

The Inheritance Tax threshold for 2022/23 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 (RNRB), 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 a threshold of up to £1million can be applied against the 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 giver's death can result in a tax charge 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 can be ongoing or a lump sum payment to a dependant after someone passes away.

Pensions are generally exempt from Inheritance Tax where the pension trustees have 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 has a legal 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.
If you’ve taken your tax-free cash, 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:

Applying for one online, or
Filling out the form IHT422

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.

When do you pay Inheritance Tax?

Paying Inheritance Tax should be completed by the end of the sixth month after the deceased has passed. If this is not done, HMRC will begin charging interest on the amount due. If there are assets which may take longer to sell, such as property, payments can be made in instalments over a period of 10 years. However, the outstanding amount will still be charged interest.

Once the asset has been sold, and if there's still Inheritance Tax to be paid, all remaining instalments (including interest) must be paid immediately after the sale. Even if the estate hasn't been valued, it's a smart idea to pay some of the tax within those first six months after death. This is referred to as 'payment on account' and can save considerable interest costs.

It's also possible for an executor or administrator to pay the tax from their own account. They can then reclaim it from the estate. This is another effective way to avoid unwanted interest fees on unpaid IHT. Executors or administrators of the estate need to submit an account of the estate within one year of death to avoid a penalty.

HMRC will also refund the estate if it has overpaid Inheritance Tax. You can learn more about paying Inheritance Tax through Gov.uk.

How much money can you leave before Inheritance Tax?

One of the most effective approaches to inheritance tax planning is making donations or gifts. If you give away money during your lifetime, it may reduce the value of your estate for Inheritance Tax purposes. There are a few options for lifetime gifting. As long as you no longer benefit from it yourself, it can reduce the value of your estate. It can also be a way of making sure those you gift to are able to make use of the money immediately. Although Inheritance Tax may not be immediately payable, other taxes might be so we recommend seeking professional tax advice.

Seven-year rule

If you make an outright gift or gift to an absolute (or bare) trust, providing you survive for seven years from the date of the gift then the value won’t be included within your estate.

If you die within seven years from the date of the gift then the value will be included within the value of your estate. In some circumstances, depending on the size of the gift and your remaining nil rate band there may be Inheritance Tax to pay. Taper relief might be available to reduce the tax payable on the gift.

Gifts to discretionary trusts are subject to a different tax treatment and Inheritance Tax can be payable during your lifetime.

We recommend seeking professional tax advice if you are looking to make lifetime gifts.

£3000 annual allowance

While you’re alive, you have a £3,000 ‘gift allowance’ a year. This is known as your annual exemption. This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax purposes.

Any part of the annual exemption which is not used in the tax year can be carried forward to the following tax year. It can only be used in the following tax year and can’t be carried over any further.

Small gifts allowance

You can give as many gifts of up to £250 to as many individuals as you want as long as you haven't used another IHT allowance on the same person.

Some recipients may be exempt from Inheritance Tax, such as spouses or civil partners, as long as they meet certain conditions, see Gov.uk for more information.

Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:

£5,000 to a child
£2,500 to a grandchild or great-grandchild
£1,000 to any other person

If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.

For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

What is effective Inheritance Tax planning?

There are a number of things you can do during your lifetime for IHT planning. This allows you to be prepared for any potential Inheritance Tax charges and to help your beneficiaries.

Gifting to family or friends
Gifting money to charity
Making use of any available Inheritance Tax annual allowances
Ensuring your intentions are recorded, and available Inheritance Tax thresholds are best utilised in a will
Being aware of the IHT treatment of any products you have invested in
Consider setting up life insurance to cover any Inheritance Tax payment

As ever we recommend you seek professional advice regarding the impact to your estate and any tax charges.

Where can I find more information on Inheritance Tax planning?

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Find out more about Inheritance Tax and how it affects pensions.