What is Inheritance Tax?

Inheritance Tax is a tax that can be payable on a person’s “estate” (i.e. their property, money and possessions) following their death. Funds from the estate are used to pay Inheritance Tax to HMRC. The person dealing with the estate (they’re called the executor if there’s a will) sorts out payment of Inheritance Tax.  

The beneficiaries, who are the people who inherit the estate, do not normally pay tax on things they inherit. Those who have received gifts from the deceased may be required to pay Inheritance Tax, but only if the deceased gave away more than £325,000 and died within seven years of giving the gift. 

Usually, there is no Inheritance Tax to pay if the estate is worth less than the £325,000 Inheritance Tax threshold or the deceased leaves everything above the threshold to their spouse, civil partner, a charity or a community amateur sports club. The estate’s value may still need to be reported even if it’s below the Inheritance Tax threshold. 

If you give your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000. When you’re married or in a civil partnership and your estate is worth less than the threshold, on your death, any unused threshold can be added to your partner’s threshold. 

The standard Inheritance Tax rate is 40%, which is only payable on the part of the estate that’s over the £325,000 Inheritance Tax threshold. Your estate can pay Inheritance Tax at the lesser rate of 36% on some assets if you leave 10% or more of its net value to charity in your will. 

When someone living permanently outside the UK (i.e. domiciled in another country) dies, Inheritance Tax is only payable on their taxable UK assets.