Inheritance Tax, often referred to as IHT, is one of the most important tax considerations when dealing with an estate. It can affect how much of a person's wealth passes to their beneficiaries and what responsibilities fall on the executors or administrators dealing with the estate. For many families, Inheritance Tax only becomes a concern after someone has died, when the estate needs to be valued and reported. However, it is also an important part of lifetime estate planning, particularly for people with property, savings, investments, business interests, agricultural assets, trusts, pensions or overseas assets. Calculating Inheritance Tax is not always as simple as applying 40% to the value of an estate. The final liability depends on the value of the assets, the debts that can be deducted, gifts made during lifetime, available exemptions, reliefs, nil-rate bands and who inherits the estate. This guide explains how Inheritance Tax is calculated, what executors need to consider and how careful planning can help reduce unnecessary tax exposure.
Inheritance Tax is a tax that may be payable on a person's estate after they die. The estate includes money, property, possessions and other assets owned or controlled by the deceased at the date of death.
Inheritance Tax can also apply to certain lifetime transfers, including gifts made shortly before death, gifts into some trusts and gifts where the person giving the asset continues to benefit from it. This means that the calculation is not limited to what the deceased owned on the day they died. Executors may also need to look back at earlier transactions.
Not every estate pays Inheritance Tax. Many estates fall below the available tax-free allowances, pass to a spouse or civil partner, or qualify for exemptions and reliefs. However, rising property values, frozen tax thresholds, pension reforms and changes to business and agricultural relief mean more families are becoming aware of the need to understand their potential IHT position.
Inheritance Tax is usually paid from the estate by the personal representatives. These are the executors if there is a will, or administrators if there is no valid will.
Inheritance Tax is usually considered when someone dies and their estate is being administered. It may be payable where the taxable value of the estate exceeds the available allowances.
It can also apply to certain transfers made during a person's lifetime. These include chargeable lifetime transfers, such as some gifts into trusts, and potentially exempt transfers, which are usually gifts made directly to individuals. A potentially exempt transfer may fall outside the estate if the person making the gift survives for seven years. If they die within seven years, the gift may need to be included in the IHT calculation.
The tax position can also depend on the deceased's residence status. The old domicile-based approach has been replaced for IHT purposes by rules based on long-term UK residence. This can affect whether overseas assets fall within the scope of UK Inheritance Tax. Estates involving international assets, overseas property or people who have lived in more than one country should be reviewed carefully.
The important point is that IHT is not assessed by looking only at the will. Executors must consider the estate as a whole, including lifetime gifts, trusts, pensions, reliefs and any assets that may be treated as part of the estate for tax purposes.
The first step is to identify what forms part of the estate. This usually includes the deceased's home, other property, bank accounts, savings, investments, shares, personal possessions, vehicles, jewellery, business interests and money owed to the deceased.
Assets should be valued at their open market value at the date of death. This means the price the asset might reasonably have achieved if sold on the open market at that time.
Property is often the largest asset in an estate and should be valued carefully. Where Inheritance Tax may be payable, or where the property value is uncertain, a professional valuation may be advisable. Shares, investments and business assets may also need specialist valuation.
Jointly owned assets need particular attention. A joint bank account may pass automatically to the surviving account holder, but the deceased's share may still need to be considered for IHT.
Property ownership is also important. Property owned as joint tenants usually passes automatically to the surviving owner, while property owned as tenants in common passes under the will or intestacy rules and forms part of the estate.
Executors should also consider gifts with reservation of benefit. This is where someone gives away an asset but continues to benefit from it. A common example is giving away a home while continuing to live in it rent-free. In these circumstances, the asset may still be treated as part of the estate for IHT purposes.
Trust interests may also need to be included. If the deceased had a right to income or benefit from a trust, this may affect the IHT calculation. Pension death benefits should also be reviewed carefully, particularly because unused pension funds and most pension death benefits will fall within the value of the estate for IHT purposes from 6 April 2027.
To calculate Inheritance Tax, the executor must first value the estate. This means identifying all assets owned by the deceased and establishing their value at the date of death.
This may include obtaining bank balances, investment valuations, share prices, pension information, property valuations, business valuations and details of valuable personal possessions. Executors should also check whether the deceased had digital assets, foreign accounts, loans owed to them or interests in trusts.
The valuation should be as accurate as possible. Incorrect valuations can lead to delays, HMRC enquiries or further tax becoming payable later. Where an asset is difficult to value, professional advice should be considered.
Executors should keep clear records of how values were obtained. This may include estate agent appraisals, formal valuations, bank letters, investment statements and correspondence with financial institutions.
The value of the estate is not only relevant for Inheritance Tax. It can also affect probate reporting, estate accounts, beneficiary expectations and whether later tax, such as capital gains tax, may arise if assets are sold during the administration period.
The next stage is to identify whether the deceased made gifts or transfers during their lifetime that need to be considered.
Gifts made within seven years before death may affect the IHT calculation. This does not mean every gift will create a tax liability, but executors must identify them and assess whether they are exempt, within allowances or chargeable.
Potentially exempt transfers are usually gifts made to individuals. If the person making the gift survives seven years, the gift generally falls outside the estate for IHT purposes. If they die within seven years, the gift may become chargeable and may use some or all of the nil-rate band.
Chargeable lifetime transfers, such as certain transfers into trusts, can also affect the IHT position. These may have been taxed at the time they were made, but they can still be relevant if the person dies within seven years.
Gifts with reservation of benefit should be treated with particular care. If the deceased gave away an asset but continued to use or benefit from it, the asset may still be included in the estate.
Several lifetime gift exemptions may be relevant. The annual exemption allows a person to give away up to £3,000 each tax year. Any unused annual exemption can usually be carried forward for one tax year only. Small gifts of up to £250 per person may also be exempt, provided another exemption has not been used for the same recipient.
Wedding or civil partnership gifts may also be exempt up to certain limits. A parent can give up to £5,000, a grandparent or great-grandparent can give up to £2,500, and another person can give up to £1,000.
These exemptions can be useful, but they should be recorded clearly so executors can identify them later.
Regular gifts from surplus income may also be exempt if they meet the conditions. To claim this exemption, executors usually need evidence that the gifts formed part of normal expenditure, were made from income rather than capital, and left the deceased with enough income to maintain their usual standard of living.
Taper relief may apply where a gift becomes chargeable because the donor died within seven years. It is important to understand that taper relief reduces the tax payable on a failed gift. It does not reduce the value of the gift itself. It will usually only be relevant where the gifts made within the seven-year period exceed the available nil-rate band.
Once the estate assets have been identified, certain debts and liabilities can be deducted. This reduces the value of the estate before Inheritance Tax is calculated.
Deductible liabilities may include mortgages, loans, credit card balances, overdrafts, unpaid household bills, care fees, funeral expenses and outstanding tax liabilities. Income tax or capital gains tax owed by the deceased up to the date of death may also need to be taken into account.
Reasonable funeral expenses can usually be deducted, but not every expense connected with death or administration will automatically reduce the estate for IHT purposes. Executors should distinguish between debts owed at death, funeral costs and later estate administration expenses.
Some debts require closer review. For example, a debt may not be fully deductible if it was used to acquire assets that qualify for certain reliefs, or if it has not actually been repaid from the estate. Loans between family members should also be evidenced clearly.
Executors should keep copies of invoices, statements, loan agreements and receipts. Accurate records are essential if HMRC asks how the taxable value of the estate was calculated.
After assets and liabilities have been calculated, exemptions should be considered.
Transfers to a spouse or civil partner are generally exempt from Inheritance Tax. This means that where the estate passes entirely to a surviving spouse or civil partner, there may be no IHT to pay at that stage. However, this does not mean IHT will never arise. The surviving spouse or civil partner's estate may be larger as a result and should be reviewed as part of wider planning.
Gifts to charities are also exempt, provided the organisation qualifies. Gifts to some community amateur sports clubs and certain national institutions may also be exempt.
Lifetime gift exemptions should also be reviewed carefully. The £3,000 annual exemption, £250 small gift exemption and wedding or civil partnership gift exemptions can all reduce the value of chargeable lifetime gifts where the conditions are met.
Exemptions should be applied carefully because they can significantly affect the final IHT liability. Executors should not assume that a transfer is exempt simply because it feels informal, generous or family-related. The legal conditions still need to be met.
Reliefs can reduce the taxable value of certain assets. The most common reliefs are Agricultural Property Relief and Business Property Relief, although both now require particularly careful review.
From 6 April 2026, the combined allowance for Agricultural Property Relief and Business Property Relief at the 100% rate is £2.5 million per person. Qualifying agricultural and business property within that allowance can receive 100% relief. Qualifying assets above the allowance receive 50% relief, which means that where the standard IHT rate is 40%, the effective IHT rate on the excess is 20%.
This allowance is transferable between spouses and civil partners. This includes cases where the first death occurred before 6 April 2026. As a result, a married couple or civil partners may be able to pass on up to £5 million of qualifying agricultural and business property with 100% relief, where the full transferable allowance is available.
The allowance works by reference to chargeable transfers within the relevant seven-year period. In practical terms, it can refresh as earlier transfers fall outside the seven-year window. The allowance is also frozen until 5 April 2031, so business owners and farming families should keep their planning under review.
Unlisted shares, including shares traded on markets such as AIM, now receive 50% Business Property Relief rather than 100%. This is a significant change for investors and estates holding portfolios that previously expected full relief.
The ten-year interest-free instalment option has also been extended to all assets that qualify for Agricultural Property Relief or Business Property Relief. This can be important where an estate includes valuable business or farming assets but does not have sufficient cash available to pay the full IHT liability immediately.
These reliefs can still be extremely valuable, but they are technical. Not every business, company shareholding, farm or rural asset qualifies.
Investment businesses, mixed-use assets, development land and business structures involving significant non-trading activity may require detailed analysis.
Other reliefs may also be relevant in specialist cases, including reliefs for heritage property or woodlands.
Executors dealing with valuable, unusual or business-related assets should seek advice before submitting IHT figures.
Every individual has a nil-rate band. This is the amount that can pass without Inheritance Tax before tax is charged. The standard nil-rate band is £325,000 and is frozen until 5 April 2031.
The nil-rate band can be used against the estate on death, but it may also have been used by chargeable lifetime transfers made in the seven years before death. This means executors must review lifetime gifts and trust transfers before assuming the full nil-rate band is available.
If the deceased was widowed or survived a civil partner, there may be a transferable nil-rate band available from the earlier death. This can increase the amount that can pass free of IHT, depending on how much of the first spouse or civil partner's allowance was unused.
Claiming a transferable nil-rate band usually requires evidence from the first estate, such as the death certificate, will, probate documents and estate values. Executors should allow time to gather this information.
The residence nil-rate band is an additional allowance that may be available where a person leaves a qualifying home to direct descendants.
Direct descendants include children, grandchildren and certain other lineal descendants, including adopted children.
The residence nil-rate band is currently up to £175,000 and is frozen until 5 April 2031. When combined with the standard nil-rate band, this can allow an individual to pass on up to £500,000 free of IHT where the conditions are met. For married couples and civil partners, unused allowances may be transferable, meaning some estates can benefit from a combined tax-free amount of up to £1 million.
The residence nil-rate band is capped at the value of the qualifying home. This means that if the qualifying residential interest is worth less than the available residence nil-rate band, the allowance is limited to the value of that home or share of the home.
The residence nil-rate band does not apply in every estate. It generally requires a qualifying residential interest and a gift to direct descendants. It may not be available where the estate passes to other relatives, friends, many types of trust or more distant beneficiaries.
There is also a taper for larger estates. Where the net value of the estate exceeds £2 million, the residence nil-rate band is reduced by £1 for every £2 above that threshold. This can mean that high-value estates lose some or all of the additional allowance.
Downsizing rules may apply where someone sold, gave away or moved from a home but still leaves assets to direct descendants. These rules can be complex and should be considered where the deceased had previously owned a home but did not own one at death.
After valuing assets, deducting liabilities, reviewing lifetime gifts, applying exemptions and considering reliefs, the taxable estate can be calculated.
Inheritance Tax is generally charged at 40% on the value above the available nil-rate bands and reliefs. For example, if an estate has a taxable value that exceeds the available allowances by £100,000, the IHT on that excess would usually be £40,000.
This calculation can become more complicated where there are lifetime gifts, trusts, business assets, agricultural assets, foreign assets, charitable gifts, pensions or transferable allowances.
The order in which gifts and allowances are applied can also matter. Lifetime gifts made within seven years before death may use the nil-rate band before the estate itself. This can affect both the amount of tax payable and who is responsible for paying it.
Executors should therefore avoid using overly simple calculations where the estate includes lifetime gifts or complex assets. A headline estate value does not always reflect the taxable estate.
Where at least 10% of the net estate is left to charity, the estate may qualify for a reduced IHT rate of 36% on the taxable part of the estate.
This can be an effective way to support charitable causes while reducing the overall tax rate. However, the calculation is technical. The 10% test is based on specific components of the estate and must be applied correctly.
In some cases, increasing a charitable gift can produce a better outcome for both the charity and the non-charitable beneficiaries because of the reduced tax rate. In other cases, the benefit may be more limited.
Anyone considering charitable giving as part of estate planning should take advice when preparing their will. Executors dealing with an estate that includes charitable gifts should also ensure that the reduced rate has been considered correctly.
Further adjustments may be available in some estates.
Quick Succession Relief may apply where the deceased inherited assets from someone else within a short period and IHT was paid on the earlier estate. This relief can reduce the tax payable where assets have been taxed again within a relatively short timeframe.
Double Taxation Relief may be relevant where assets are taxed both in the UK and another country. This is particularly important for estates involving overseas property, foreign investments or individuals who had connections with more than one jurisdiction.
Loss relief may also be available where certain assets are sold for less than their date of death value. For example, relief may be available where qualifying shares are sold at a loss within the relevant period, or where land or property is sold for less than the probate value within the applicable timeframe.
These reliefs are not automatic. Executors must identify whether they apply and make the appropriate claims.
Pensions require specific consideration when calculating Inheritance Tax.
From 6 April 2027, unused pension funds and most pension death benefits will fall within the value of the deceased person's estate for IHT purposes. This represents a major change for estate planning, because many families previously understood pension funds to sit outside the estate for IHT in many circumstances.
Death in service benefits from registered pension schemes are excluded from this change. This means they will not be brought into the estate for IHT in the same way as most unused pension funds and pension death benefits.
Personal representatives will be responsible for reporting and paying any Inheritance Tax due on pension funds and death benefits that fall within the estate. This means executors and administrators may need to gather pension information earlier in the estate administration process and factor pension values into the wider IHT calculation.
Pension scheme administrators, trustees and providers may still play an important role in providing information and paying benefits, but personal representatives should not assume pension values can be ignored. Pension nominations, death benefit rules, lifetime planning and estate administration should now be considered together.
Inheritance Tax is usually paid by the executors or administrators from estate funds. In many cases, some IHT must be paid before the Grant of Probate or Letters of Administration can be issued.
Inheritance Tax is generally due six months after the end of the month in which the person died. Interest may run after the payment deadline if the tax has not been paid in full.
This can create practical difficulties where the estate is valuable but cash is limited. A common example is an estate where most of the value is tied up in property, agricultural land or business assets. Executors may need to consider whether tax can be paid in instalments, whether banks will release funds directly to HMRC, or whether temporary funding is needed.
The ten-year instalment option can apply to certain assets, including land and relevant business or agricultural property. From 6 April 2026, the interest-free instalment option has been extended to all assets that qualify for Agricultural Property Relief or Business Property Relief.
The probate application fee is separate from Inheritance Tax. For estates over £5,000, the probate application fee is £526. There is no application fee for estates valued at £5,000 or less. Official copies of the probate document can also be ordered, which are often useful where several organisations need to see the grant at the same time.
Inheritance Tax planning should be considered as part of wider estate planning. The aim is not simply to reduce tax, but to ensure that assets pass in a way that reflects the person's wishes while protecting family members and avoiding unnecessary complications.
Lifetime gifting is one common approach. Gifts to individuals may fall outside the estate if the person making the gift survives seven years. However, gifts must be affordable, properly documented and considered alongside the person's future needs.
The annual exemption allows a person to give away £3,000 each tax year. Small gifts of up to £250 per person may also be exempt. Wedding or civil partnership gifts may be exempt up to £5,000 from a parent, £2,500 from a grandparent or great-grandparent, and £1,000 from another person.
Regular gifts from surplus income can also be effective where the conditions are met. This exemption can be useful for people with income that exceeds their normal living costs, but good records are essential.
Trusts may be suitable in some circumstances, particularly where control, asset protection or provision for vulnerable beneficiaries is important. However, trusts have their own tax rules and should not be used without proper advice.
Business and agricultural reliefs should also be reviewed where relevant.
Business owners and farming families should ensure that their wills, company documents, partnership agreements and succession plans work together, particularly because the APR and BPR rules now include the combined £2.5 million allowance, 50% relief above that allowance and special treatment for shares such as AIM shares.
Pensions should also be reviewed as part of estate planning. From 6 April 2027, unused pension funds and most pension death benefits will fall within the estate for IHT purposes, so beneficiary nominations, retirement planning and will planning should be considered together.
Some planning may still be possible after death.
A Deed of Variation allows beneficiaries to redirect part of their inheritance, provided the relevant conditions are met. For IHT purposes, this can sometimes be treated as if the deceased had made the gift themselves. This may be useful where beneficiaries want to redirect assets to children, charities or other family members.
A Deed of Variation must usually be completed within two years of the date of death if it is to be effective for IHT and Capital Gains Tax purposes. It must be handled carefully and all affected beneficiaries must agree. It cannot be imposed by executors or used where a beneficiary lacks capacity without additional legal steps.
Executors should also consider whether loss relief, Quick Succession Relief or Double Taxation Relief is available. These claims can reduce the final IHT position after the estate has been valued or after assets have been sold.
Post-death planning should not be seen as a substitute for lifetime planning, but it can still be valuable where circumstances have changed or where the will does not produce the most tax-efficient outcome.
A common mistake is valuing the estate too informally. Property, business interests, shares and valuable possessions should be assessed carefully, particularly where IHT may be payable.
Another issue is failing to investigate lifetime gifts. Executors should ask about gifts, review bank statements where appropriate and check whether the deceased made transfers into trusts or gave away assets while continuing to benefit from them.
Some executors overlook transferable allowances. If the deceased was widowed or had survived a civil partner, unused nil-rate band, residence nil-rate band and, where relevant, unused APR/BPR 100% relief allowance from the first death may reduce the IHT position significantly.
Pensions can also be misunderstood. From 6 April 2027, unused pension funds and most pension death benefits fall within the value of the estate for IHT purposes, with personal representatives responsible for reporting and paying any tax due. Death in service benefits from registered pension schemes are excluded from this change.
Another common mistake is misunderstanding taper relief. Taper relief does not reduce the value of a gift. It reduces the tax payable on a failed gift where the donor dies between three and seven years after making the gift and the relevant conditions are met.
Finally, executors should avoid distributing the estate before the IHT position is clear. If further tax becomes payable after assets have been distributed, the executors may face personal liability.
Calculating Inheritance Tax can be complex, particularly where an estate includes property, pensions, trusts, business assets, agricultural assets, lifetime gifts or overseas connections.
While some estates will fall within the available tax-free allowances, others may require careful reporting, relief claims and planning to ensure the correct amount of tax is paid.
Executors should take care when dealing with IHT because mistakes can delay probate, increase tax liabilities and create personal risk. It is important to value the estate accurately, understand which exemptions and reliefs may apply, and ensure HMRC requirements are dealt with correctly before the estate is distributed.
Recent changes to Agricultural Property Relief, Business Property Relief and pension death benefits mean that estates involving farms, businesses, AIM shares or pensions need particular attention. The freezing of the nil-rate band and residence nil-rate band until 5 April 2031 also means more estates may need careful review as asset values rise.
If you are dealing with an estate and are unsure how Inheritance Tax should be calculated, or if you are planning ahead and want to reduce the potential tax burden on your beneficiaries, Premier Solicitors can help.
Our experienced probate and estate administration team can guide you through the process, explain your options clearly and ensure that all available reliefs and allowances are properly considered. For tailored advice on Inheritance Tax, probate or estate planning, contact Premier Solicitors today.
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