Inheritance Tax

The Nil-Rate Band

Every individual has a nil-rate band of £325,000, which has been frozen at this level since 2009 and is currently scheduled to remain frozen until 2027/28. This means no IHT is payable on the first £325,000 of your estate. Anything above this is taxed at 40% unless reliefs apply. The nil-rate band is transferable between spouses and civil partners. If one partner dies and does not use all of their NRB, the unused percentage can be claimed by the surviving spouse's estate. For example, if the first partner used 20% of their NRB (leaving £260,000 unused out of £325,000), the survivor's estate can claim an additional 80% of £325,000, giving them a total NRB of £585,000. This is claimed via form IHT402 and must be submitted within two years of the death of the surviving spouse. The residence nil-rate band (RNRB) provides an additional £175,000 allowance when a main home is passed to direct descendants, which we cover in our separate guide.

Who Pays and When

The personal representatives (executors or administrators) of the estate are responsible for paying IHT to HMRC. They must submit an IHT400 account if the estate is over the NRB, if it exceeds £240,000 in value, or if certain reliefs or exemptions are claimed. The payment deadline is six months after the end of the month in which the person died. Interest is charged on late payments — HMRC currently charges 7.5% on overdue IHT, and this interest is not tax-deductible. Where the estate includes land, buildings, or a business, IHT can be paid in annual instalments over 10 years. Instalments attract interest at the standard late-payment rate if paid on time. The first instalment is due six months after death, with subsequent instalments on the anniversary each year. If you sell the property or business during the instalment period, all remaining IHT becomes payable immediately. For estates where probate is needed, HMRC will not issue the legacy tax certificate (IHT421, form D18 for Scottish estates) until the initial payment of IHT has been made, and without this certificate you cannot access the deceased's assets or sell property to raise funds.

36% Reduced Rate for Charitable Gifts

If you leave at least 10% of your net estate to charity, the IHT rate on the remainder of your estate reduces from 40% to 36%. The net estate for this calculation is your total estate after deducting debts, liabilities, reliefs, exemptions, and the nil-rate band. This can produce a significant tax saving. For example, on a £1 million estate, the standard IHT bill would be £270,000 (40% of £675,000 after the £325,000 NRB). If you leave 10% (£67,500) to charity, the tax on the remaining £607,500 is charged at 36%, producing a bill of £218,700 — a saving of £51,300. The charity receives £67,500, while the estate and HMRC both lose £51,300. The net result is that the charity receives its donation at a discounted cost to your other beneficiaries. This rule applies to lifetime charitable legacies written into your will. You cannot claim the reduced rate for charitable gifts made during the donation to a charity within two years of death via a deed of variation (although these can still qualify for IHT exemption under normal charitable giving rules). Talk to your solicitor or financial adviser about including a charitable legacy clause in your will.

IHT400 and Reporting

For most estates worth over £240,000 (or any estate where the deceased gave gifts in the seven years before death, owned a business, had foreign assets, or claimed certain reliefs), the personal representatives must complete the IHT400 account. This is a comprehensive form that covers the value of all assets: property, bank accounts, investments, pensions (from April 2027), life insurance payouts, cars, jewellery, and business interests. You also report debts, funeral expenses, reliefs claimed, and gifts made in the seven years before death. If the estate qualifies (under £240,000 and simple assets), you can use the shorter IHT205 form instead. Once HMRC receives the IHT400 and the initial payment, they issue the legacy tax certificate which allows the executors to obtain probate. After probate, the estate can be distributed to beneficiaries. The IHT400 must be filed online via HMRC's online service or by post. You should keep records for at least 12 years after the death in case HMRC opens an enquiry. HMRC generally has 12 months from the date the IHT400 is delivered to open an enquiry.

Payment Timeline

IHT must be paid to HMRC before probate can be granted, meaning the tax is due before you can access the deceased's bank accounts or sell their property. The key deadlines are: six months from the end of the month of death to pay IHT without incurring interest (the "due date"), 12 months from death for the first anniversary of the deadline, and up to 10 years to pay IHT in instalments on property and business assets. If the estate does not have sufficient cash to pay the IHT bill (common when the main asset is the family home), there are options: the executors can apply for a probate loan from a specialist lender, sell assets to raise cash (but this requires probate first, creating a catch-22), or use the Direct Payment Scheme where banks pay IHT directly from the deceased's accounts. HMRC also allows payment via National Savings and Investments (NS&I) or through a probate loan from a regulated provider. The interest rate on overdue IHT is set by HMRC quarterly and is typically 2.5% above the Bank of England base rate. For the 2026/27 tax year the rate stands at 7.5%. If you pay IHT early (before probate), you may be entitled to a refund of any overpayment when the final estate value is determined. Professional advice from a solicitor or accountant is strongly recommended for any non-standard estate.

FAQs

Is inheritance tax payable on gifts made during my lifetime?

Gifts made more than seven years before death fall outside your estate entirely (subject to the seven-year rule). Gifts made within seven years are potentially exempt transfers (PETs) and become chargeable on a sliding scale known as tapering relief if they exceed the nil-rate band. The £3,000 annual exemption, normal expenditure from income, and small gifts allowances are always exempt.

Can I avoid inheritance tax by giving everything away before I die?

Gifts with reservation of benefit rules prevent you from giving away assets while continuing to enjoy them (for example, giving away your house but continuing to live in it rent-free). HMRC will still treat such assets as part of your estate. If you genuinely give assets away and no longer benefit from them, the seven-year rule applies.

What is the inheritance tax threshold for married couples?

Married couples and civil partners can combine their nil-rate bands, giving up to £650,000. If both also have full residence nil-rate bands (each £175,000) passed to direct descendants, the combined allowance can reach £1 million — £325,000 + £325,000 + £175,000 + £175,000.

Do I need to report inheritance tax for a small estate?

If the estate is worth less than £240,000 and no gifts were made in the seven years before death, you can use the shorter IHT205 form. If the estate is below the £325,000 nil-rate band and all assets pass to an exempt beneficiary (spouse or charity), no IHT is due but you may still need to report via IHT400 if the estate exceeds £240,000.