WHAT IS INHERITANCE TAX?

Inheritance Tax is primarily a tax on the estate of someone who has died, but it can also apply to certain lifetime transfers, including some gifts made within seven years of death and immediately chargeable transfers such as certain transfers into trusts.

Inheritance Tax Rates

Nil Rate Band – 0%. There is no inheritance tax payable on the nil rate band.

Each individual has a nil rate band amount of £325,000 and they do not have to pay any inheritance tax until that threshold has passed.

Inheritance Tax Rate – Amounts above the £325,000 threshold will (unless exemptions or other reliefs are applicable) be subject to a 40% tax on the estate of the deceased. If the inheritance tax is due to a transfer of value made within the life of the donor, this rate is reduced to 20% for chargeable lifetime gifts.

By way of illustration, if an estate is valued at £500,000, inheritance tax will only be charged on £175,000 (the difference between £325,000 and £500,000) meaning that the 40% tax would result in a £70,000 tax being payable to HMRC.

Residence Nil Rate Band

This applies to individuals who die on or after 6 April 2017 and who pass on their residence, or the proceeds of sale of a residence, to a direct descendant. Direct descendants include children and grandchildren, as well as stepchildren, adopted children and foster children. The residence nil rate band is subject to a maximum allowance of up to £175,000, which applies in addition to the ordinary nil rate band.

Where the estate is valued at over £2 million, the residence nil rate band is reduced, at a rate of £1 for every £2 by which the estate exceeds the £2 million threshold

Transfer of Nil Rate Band and Residence Nil Rate Band

Any unused nil rate band or residence nil rate band can be transferred to the surviving spouse or civil partner. On the death of the survivor, their estate can then benefit from their own nil rate and residence nil rate bands together with those transferred from the first to die. The transfer is not automatic and the survivor’s executors will need to claim it.

 Exemptions and Reliefs

There are a number of exemptions and reliefs that can be utilised to minimise inheritance tax – the key ones which are commonly applied are explained below:

Gifts

Gifts made more than seven years before death are generally free of inheritance tax. Gifts made within seven years of death may still be brought into account, though the tax position depends on the type of gift, its value and who received it. Some gifts are exempt or qualify for a reduced rate. Please consult our Lifetime Gifts information sheet for further information.

Gifts made to charities

Donations to charities will be taken off the value of your estate before IHT is calculated. Additionally, if 10% or more of your estate is left to a charity, your IHT may also be reduced from 40% to 36%.

Reliefs

Certain assets when gifted may attract reliefs which may reduce the amount of IHT payable. Examples include business property relief, agricultural property relief, national heritage property relief and woodlands relief.

From 6 April 2026, the 100% rate of Agricultural Property Relief and Business Property Relief  will be limited to the first £2.5 million of combined qualifying agricultural and business property. Any qualifying value above that allowance will receive relief at 50%. Any unused part of the £2.5 million allowance will be transferable between spouses and civil partners, so qualifying couples may benefit from a combined allowance of up to £5 million, in addition to any available nil-rate bands and other reliefs.

Shares admitted to trading on a recognised stock exchange but designated as “not listed”, including Alternative Investment Market (“AIM”) shares, will qualify for 50% Business Property Relief rather than 100% relief and will not use up the £2.5 million BPR/APR allowance.

Other unlisted shares may continue to qualify for 100% Business Relief, subject to the relevant conditions, but from 6 April 2026 that relief will fall within the £2.5 million combined APR/BPR allowance. Any qualifying value above the available allowance will receive relief at 50%.

 Who pays IHT?

The responsibility for paying the inheritance tax on a person’s death falls on the executors or administrators of the estate. The Grant of Probate will not be issued until the inheritance tax due has been paid to HMRC, or arrangements to pay it have been made, or it is certified that none is payable.

If inheritance tax is payable on a potentially exempt transfer then the responsibility to pay may lie with the individual who received the gift.

Responsibility to pay inheritance tax on lifetime transfers which are immediately chargeable at the 20% rate lies with the individual themselves, however if they die within seven years then inheritance tax will be reassessed on the gift at the higher rate of 40% with credit given for the tax already paid.