What Is Inheritance Tax?
Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. It may also apply to certain gifts made during a person’s lifetime. IHT is governed by the Inheritance Tax Act 1984 and administered by HMRC.
IHT is charged at 40% on the value of the estate above the nil-rate band. However, numerous exemptions and reliefs can significantly reduce or eliminate the tax.
The Nil-Rate Band
Every individual has a nil-rate band (NRB) — a tax-free threshold below which no IHT is charged. The NRB is £325,000 and has been frozen at that level since April 2009. Any change is announced by the government at a Budget.
Transferable Nil-Rate Band
If a spouse or civil partner dies without using their full NRB, the unused portion can be transferred to the surviving partner’s estate. This means a surviving spouse can potentially have a combined NRB of £650,000.
The transfer is claimed by the executors of the second estate and applies regardless of when the first spouse died.
Residence Nil-Rate Band
An additional Residence Nil-Rate Band (RNRB) is available when a home is passed to direct descendants (children, grandchildren, step-children). It has been £175,000 since April 2020.
The RNRB is also transferable between spouses, giving a potential combined threshold of £350,000.
Combined Thresholds
| Individual | Married Couple/Civil Partners |
|---|---|
| NRB: £325,000 | NRB: £650,000 |
| RNRB: £175,000 | RNRB: £350,000 |
| Total: £500,000 | Total: £1,000,000 |
The RNRB is tapered for estates over £2 million — it is reduced by £1 for every £2 of estate value above £2 million, disappearing entirely at £2.35 million (for individuals) or £2.7 million (for couples).
IHT Rates
| Value of Estate | Rate |
|---|---|
| Below the nil-rate band (+ RNRB) | 0% |
| Above the nil-rate band (+ RNRB) | 40% |
| Above the nil-rate band if 10%+ left to charity | 36% |
The reduced 36% rate applies if the deceased left at least 10% of their net estate to qualifying charities.
Lifetime Gifts
IHT also applies to certain gifts made during your lifetime:
Potentially Exempt Transfers (PETs)
Gifts to individuals are potentially exempt — they become fully exempt if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the gift is added back to the estate and taxed.
Taper relief reduces the IHT on PETs based on how long before death the gift was made:
| Years Before Death | IHT Rate on Gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| Over 7 years | 0% (exempt) |
Chargeable Lifetime Transfers
Gifts into certain trusts are chargeable lifetime transfers, taxed at 20% on the value above the NRB when the gift is made (or 40% if the donor dies within 7 years).
Annual Exemptions
Several exemptions reduce lifetime IHT liability:
| Exemption | Amount |
|---|---|
| Annual exemption | £3,000 per person per year (can carry forward one year) |
| Small gifts | £250 per recipient per year (not the same person as the annual exemption) |
| Wedding gifts | £5,000 from parents, £2,500 from grandparents, £1,000 from others |
| Normal expenditure out of income | Unlimited — if from income (not capital) and habitual |
| Gifts to spouses/civil partners | Unlimited (if UK-domiciled recipient) |
| Gifts to charities | Unlimited |
| Gifts to political parties | Unlimited (qualifying parties) |
Business Relief
Business Relief (BR) — formerly known as Business Property Relief — reduces the IHT value of qualifying business assets. For deaths and other chargeable transfers from 6 April 2026, the combined 100% allowance for qualifying agricultural and business property is capped at £2.5 million. Qualifying value above the available allowance normally receives 50% relief. Unused allowance can be transferred from a deceased spouse or civil partner, potentially increasing it to £5 million.
| Asset Type | Relief Rate |
|---|---|
| Business or interest in a business (sole trader, partnership) | 100% within the combined £2.5 million allowance; 50% above it |
| Shares in an unlisted company | 100% within the combined £2.5 million allowance; 50% above it |
| Shares traded on AIM and similar non-listed markets | 50% |
| Shares in a listed company with controlling interest | 50% |
| Land, buildings, or machinery owned personally but used in your business/company | 50% |
Qualifying Conditions
To qualify for Business Relief:
- The asset must have been owned for at least 2 years before the transfer
- The business must be a trading business — mainly (more than 50%) trading rather than investment
- The business must not consist wholly or mainly of holding investments, land, or dealing in securities
What Does Not Qualify
- Investment companies — companies whose main activity is holding investments
- Property investment businesses — buy-to-let portfolios and property holding companies
- Cash and investments held within a trading business that are not needed for the trade (known as excepted assets)
Business Relief and Company Shares
For directors and shareholders of private limited companies, Business Relief can substantially reduce IHT on a qualifying trading company. The relief is no longer automatically 100% on the whole value because of the combined £2.5 million allowance. Shares traded on AIM receive 50% relief from 6 April 2026.
Agricultural Relief
Agricultural Relief works similarly to Business Relief and applies to the agricultural value of agricultural property. From 6 April 2026 it shares the combined £2.5 million allowance for relief at 100%, with qualifying value above the allowance normally receiving relief at 50%.
| Property Type | Relief Rate |
|---|---|
| Owner-occupied agricultural land and buildings | 100% |
| Let agricultural land (tenancies since 1 September 1995) | 100% |
| Let agricultural land (tenancies before 1 September 1995) | 50% |
The property must have been occupied for agricultural purposes for at least 2 years (if occupied by the owner) or 7 years (if let to a tenant).
Payment of IHT
When Is IHT Due?
IHT is normally due 6 months after the end of the month in which the death occurred. For deaths on 15 March, IHT is due by 30 September.
Payment by Instalments
IHT on certain assets can be paid in 10 equal annual instalments:
- Land and buildings
- Shares giving control of a company
- Unquoted shares (subject to conditions)
- Business assets
Interest is charged on outstanding instalments (except on land and buildings where the interest-free instalment option may apply in some circumstances).
Reporting
The estate’s personal representatives must file an IHT400 form with HMRC if:
- The estate is above the IHT threshold
- Certain reliefs or exemptions are being claimed
- The estate includes certain assets (such as trusts or foreign property)
Estates below the threshold that qualify for the excepted estates rules can use the simpler process through the probate application.
IHT and Your Tax Position
IHT is separate from income tax, corporation tax, and Capital Gains Tax, but they can interact:
- Assets receive a CGT-free uplift to market value on death — the inheritor’s base cost is the value at death
- Where Business Relief reduces the IHT value to nil, the CGT base cost is still the market value
- Lifetime gifts that are PETs may trigger CGT at the time of the gift (though hold-over relief may be available for business assets)
- Self-assessment obligations for the deceased’s final tax year still apply
Maintaining thorough accounting records and up-to-date business valuations helps executors manage the IHT process and claim reliefs accurately.