Inheritance Tax - An Overview

Inheritance tax (IHT) is a tax on the transfer of wealth - mainly the wealth someone leaves when they die, but also some gifts made during life and some assets held in trust. It is charged on the value transferred, not on income or on the act of dying itself. That single idea - IHT bites when value moves from one set of hands to another - explains almost everything below.

This is the hub page for IHT. It gives you the working picture and points to the detailed sub-topics: the The Nil-Rate Band & Transferable Nil-Rate Band, the The Residence Nil-Rate Band, the exemptions and reliefs, and the The Relevant Property Regime for trusts.

The core idea#

The charging provision is the Inheritance Tax Act 1984, s.1: IHT is charged on the value transferred by a chargeable transfer. A chargeable transfer is any transfer of value a person makes that is not exempt (s.2). On death, s.4 treats the deceased as having made a transfer of value equal to their whole estate the moment before death. So death is taxed as one large deemed gift of everything you own.

Two rates do most of the work:

• 40% on death, on value above the available tax-free bands.
• 20% on certain lifetime gifts into trust (the "lifetime chargeable rate").

Everything else is bands, exemptions, reliefs, and timing rules that decide how much of a transfer is actually caught.

The "estate" - what is counted#

The estate (IHTA 1984, s.5) is broadly everything a person is beneficially entitled to at death, less their debts and reasonable funeral expenses. In practice it includes:

• Property, cash, bank accounts, investments, and personal possessions (chattels).
• The deceased's share of jointly owned assets - for example a half-share of the family home.
• Trust property in which the deceased held a qualifying interest in possession (for example an older life interest or an immediate post-death interest) - this is taxed as if the deceased owned it. See Understanding Trusts - A Plain-English Guide.
• Gifts with reservation of benefit - assets given away but still enjoyed, such as a house given to the children while the donor keeps living there rent-free (Finance Act 1986, s.102). These are treated as still in the estate.
• From 6 April 2027, most unused pension funds and death benefits (see below).

Debts, mortgages, and funeral costs are deducted to reach the net estate.

The three moments IHT can bite#

It helps to keep three separate charging points in mind:

1. On death - the deemed transfer of the whole estate, taxed at 40% above the bands.
2. On lifetime gifts - most gifts are tax-free if you survive seven years, but some are chargeable straight away, and any can be pulled back into charge if you die too soon.
3. Within trusts - trusts that hold "relevant property" face their own periodic charges rather than waiting for a death.

The rest of this page takes each in turn.

Rates and bands - quick reference#

Item	Rate / amount	Notes
Nil-rate band (NRB)	£325,000	Frozen to 5 April 2031; unused portion transferable to a surviving spouse/civil partner. See The Nil-Rate Band & Transferable Nil-Rate Band.
Residence nil-rate band (RNRB)	up to £175,000	Extra band when a home passes to direct descendants; frozen to 5 April 2031. See The Residence Nil-Rate Band.
RNRB taper threshold	£2,000,000	RNRB reduced by £1 for every £2 of estate above this; frozen to 5 April 2031.
Death rate	40%	On the estate above the available bands.
Reduced (charity) death rate	36%	Where at least 10% of the net estate passes to charity.
Lifetime chargeable rate	20%	Entry charge on chargeable lifetime transfers above the NRB.
Ten-year (principal) charge	up to 6%	On relevant property trusts, each tenth anniversary.
Annual gift exemption	£3,000	Per tax year; one year's unused amount can be carried forward.
Small gifts exemption	£250	Per recipient, per tax year.

The rates sit in IHTA 1984, s.7 and Schedule 1. The reduced 36% rate (Schedule 1A) applies where the deceased leaves at least 10% of the "baseline amount" - broadly the net estate after the nil-rate band and other exemptions and reliefs - to charity. It is a genuine planning point: leaving a little more to charity can sometimes leave the family better off net of tax.

The two bands have their own detailed pages: the The Nil-Rate Band & Transferable Nil-Rate Band (including the transferable NRB between spouses) and the The Residence Nil-Rate Band (including its downsizing addition and the £2m taper).

Lifetime transfers - PETs, CLTs, the 7-year rule and taper#

This is the canonical place for the lifetime-gift mechanics. Two categories matter, and they behave very differently.

Potentially exempt transfers (PETs)#

A PET is an outright gift to another individual (or into a bare trust or a disabled person's trust) - IHTA 1984, s.3A. There is no tax at the time. If the donor survives seven years, the gift falls out of account entirely and is exempt. If the donor dies within seven years, the PET "fails": it becomes a chargeable transfer and is brought back into the death calculation.

Chargeable lifetime transfers (CLTs)#

A CLT is a gift into a trust that falls within the The Relevant Property Regime - in practice most lifetime trusts created since 2006, chiefly discretionary trusts (see Discretionary Trust of Residue). A CLT is chargeable immediately at the 20% lifetime rate on any value above the available NRB. This is the trust "entry charge."

Worked figure - entry charge. A settlor puts £400,000 into a discretionary trust and has made no chargeable transfers in the previous seven years. The trustees pay the tax: (£400,000 − £325,000) × 20% = £15,000. If instead the settlor pays the tax, it is "grossed up" (because paying the tax is itself a further loss to the estate), giving an effective 25% rate on the excess: £75,000 × 25% = £18,750.

The 7-year rule and cumulation#

Gifts are cumulated. To work out the NRB available for any chargeable transfer, you look back seven years and deduct earlier chargeable transfers. On death, all failed PETs and CLTs made in the seven years before death are brought into account, and they use up the NRB first, in date order - before the death estate. Only what is left of the NRB then shelters the estate itself.

One trap worth flagging: because a CLT made up to seven years before a later PET can reduce the NRB available to that PET if it fails, gifts can cast a shadow of up to 14 years. For a professional revisiting a gifting history, always map the CLTs first.

Taper relief#

Taper relief reduces the tax payable on a failed PET or CLT where the donor survived more than three years. Crucially, it reduces the tax, not the value of the gift.

Years between gift and death	Reduction in tax	Tax as % of the full charge
0–3	0%	100%
3–4	20%	80%
4–5	40%	60%
5–6	60%	40%
6–7	80%	20%
7+	Gift exempt	0%

The common misunderstanding: taper only helps where the cumulative gifts exceed the NRB, because it scales down a tax charge. If the failed gift sits within the NRB, there is no tax to taper - surviving four years feels safer than it is.

Exemptions and reliefs in outline#

Many transfers escape IHT entirely. The main exemptions, covered in full on Inheritance Tax Exemptions & Reliefs, are:

• Spouse/civil partner exemption - transfers between them are generally unlimited and tax-free (s.18). This, with the transferable NRB, is why the first death in a couple often produces no tax.
• Charity exemption - gifts to qualifying charities are exempt (s.23), and can trigger the reduced 36% death rate.
• Annual exemption - £3,000 of gifts per tax year, with one year's unused amount carried forward (s.19).
• Small gifts - up to £250 per recipient per year (s.20).
• Normal expenditure out of income - regular gifts made from surplus income that do not affect the donor's standard of living (s.21). Underused, and valuable.
• Gifts in consideration of marriage - £5,000 from a parent, £2,500 from a grandparent or party to the marriage, £1,000 from anyone else (s.22).

Business and agricultural property relief - and the April 2026 cap#

Business Property Relief (BPR) (IHTA 1984, ss.103–114) and Agricultural Property Relief (APR) (ss.115–124) can reduce the value of qualifying business or farming assets by 100% or 50%, and have long been the backbone of passing a family business or farm down the generations. Trusts are often built around them - see Business Property Relief Trust and Agricultural Property Relief Trust.

A major reform applies from 6 April 2026 (legislated in the Finance Bill 2026). The 100% rate of APR and BPR is capped at a combined £2,500,000 allowance across an individual's qualifying agricultural and business property; value above that gets 50% relief, i.e. an effective IHT rate of up to 20% on the excess. Key features:

• The £2.5m allowance is transferable to a surviving spouse or civil partner where unused, so a couple can shelter up to £5m of qualifying property between them.
• It refreshes every seven years for lifetime gifts, and relevant property trusts get their own £2.5m allowance refreshing on the ten-year cycle.
• It is set to be CPI-indexed from April 2031 (though that indexation is not automatic and would need a statutory instrument).

(The £2.5m figure was raised from the £1m originally proposed at Autumn Budget 2024. As the measure is being enacted through the Finance Bill 2026, confirm the final legislated position before advising.)

How trusts are taxed#

Trusts sit in one of two worlds for IHT:

• Trusts treated as belonging to an individual - bare trusts, and qualifying interest-in-possession trusts (such as an immediate post-death interest, or a Flexible Life Interest Trust (FLIT)). The trust assets are taxed as part of that individual's estate. These sit outside the special trust regime.
• Relevant property trusts - most other lifetime and will trusts, chiefly discretionary. These fall under the The Relevant Property Regime, with its own charges instead of a death event:
  • an entry charge of 20% on assets going in above the NRB (the CLT charge above);
  • a ten-year (principal) charge of up to 6% on each tenth anniversary (s.64);
  • an exit charge when capital leaves the trust between anniversaries (s.65).

For the mechanics of these charges - the "effective rate", the settlement's own NRB, and how additions and related settlements interact - see The Relevant Property Regime and the wider tour in Understanding Trusts - A Plain-English Guide.

Who is liable and who pays#

Liability shifts depending on which of the three moments applies:

• The death estate - the personal representatives (the executors named in the will, or the administrators on an intestacy) are liable, and pay the tax out of the estate. See Executors, Administrators & the Grant of Probate and Administering an Estate, Step by Step. Where there is no valid will, see Intestacy - Dying Without a Will.
• Failed PETs - the donee who received the gift is primarily liable for the tax on it. If they do not pay within twelve months of the end of the month of death, the personal representatives become liable.
• Trust charges - the trustees are liable for entry, ten-year, and exit charges.

Interaction with probate#

There is a chicken-and-egg point that catches people out: for a taxpaying estate, the personal representatives generally cannot obtain the grant of probate (or letters of administration) until the IHT account has gone to HMRC and any tax due on delivery has been paid or secured. Banks can often release funds directly to HMRC under the Direct Payment Scheme, and the instalment option (below) eases the cash-flow problem for illiquid estates. The full process is covered in Administering an Estate, Step by Step.

Reporting and paying IHT#

• The account. For a taxpaying or larger estate, the personal representatives deliver form IHT400 (IHTA 1984, s.216). Many estates are "excepted" - broadly where no tax is due, for example because the estate is within the NRB or fully covered by the spouse or charity exemption - and need only reduced reporting.
• The deadline. IHT on the death estate is due by the end of the sixth month after the month of death (s.226). So a death in January means tax is due by 31 July.
• Interest. Tax paid late carries interest from the due date at HMRC's prevailing rate (s.233) - a real cost on a slow estate.
• Instalments. Tax on certain assets - land and buildings, a business or interest in a business, and some unquoted shares - can be paid in ten equal annual instalments (s.227). Interest usually runs on the outstanding balance, though some business and agricultural property attracts interest-free instalments. This is what makes it possible to inherit a house or a farm without an immediate forced sale.

The residence-based regime (from April 2025)#

From 6 April 2025, IHT moved off the old concept of domicile and onto long-term residence. Whether an individual is exposed to IHT on their worldwide assets (rather than just UK assets) now turns on whether they are a long-term UK resident - broadly, someone who has been UK-resident for at least 10 of the previous 20 tax years. Once that status is acquired it can persist for several years after leaving the UK (a "tail"). If you are advising anyone with an international dimension, the old domicile analysis no longer governs; check the long-term residence position instead.

Pensions within the estate (from April 2027)#

From 6 April 2027, most unused pension funds and death benefits are brought within the IHT estate - reversing the long-standing position that most pensions passed free of IHT. Personal representatives will need to account for these funds, and BPR/APR will not apply to them. For anyone whose estate plan leaned on leaving pensions untouched to pass wealth tax-efficiently, this is a prompt to review the whole plan, including the will (see The Will (Single & Mirror)).

Worked examples#

Example 1 - a death estate leaving a home to children#

Anna dies leaving an estate of £900,000, including a home worth £400,000 that passes to her children. She is single and has no transferable NRB.

• Nil-rate band: £325,000.
• Residence nil-rate band: £175,000 (home to direct descendants; estate under £2m, so no taper).
• Total tax-free bands: £500,000.
• Taxable estate: £900,000 − £500,000 = £400,000.
• IHT at 40%: £160,000.

If Anna had instead left at least 10% of her net estate to charity, the balance would be taxed at 36%, and the charitable gift itself would be exempt - often leaving the family little worse off than the charity is better off.

Example 2 - a failed PET with taper relief#

Diana gives her son £500,000 outright on 1 June 2020 (a PET) and makes no other gifts. She dies on 1 September 2026 - 6 years and 3 months later.

• The gift was within seven years, so the PET fails and becomes chargeable.
• It is set against her NRB first: chargeable amount above the NRB = £500,000 − £325,000 = £175,000.
• Tax at 40% = £70,000.
• Death fell in the 6–7-year band, so taper relief cuts the tax by 80%: payable tax = £14,000.
• Her son, as donee, is primarily liable for that £14,000.
• Because the £325,000 NRB is fully absorbed by the gift, none is left for the rest of Diana's estate, which is taxed at 40% from the first pound (subject to any RNRB or other exemptions).

Note how taper only helped because the gift exceeded the NRB - had she given £300,000, there would have been no tax to taper at all.

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This guide is for general understanding and is not legal or tax advice. The law and tax thresholds change; confirm the current position before relying on this.