When do I have to pay Inheritance Tax and which exemptions apply?

Inheritance Tax (also known as IHT) is a tax on the money, property, and belongings a person leaves behind when they die. 

When you pass away, what you own at the time of death becomes known as your ‘estate’. Depending on its value and who inherits it, a tax might need to be paid to the government. 

The first £325,000 of your estate is tax-free, so most people won’t pay Inheritance Tax. But if the estate is worth more, IHT might need to be paid at a rate of 40% on any amount above the threshold of £325,000.  

Find out more in A guide to Inheritance Tax.

Inheritance Tax only applies to estates valued over £325,000. Anything below this is tax-free and falls into what is called the ‘Nil Rate Band’.

Plus, if you leave your home to your children or grandchildren, the threshold can be increased by an extra £175,000. This is called the ‘Residence Nil Rate Band’ and means a single person could potentially pass on up to £500,000 tax-free to their loved ones, while married couples or civil partners could pass on up to £1 million between them. 

Visit GOV.UK to find out more about How Inheritance Tax works: thresholds, rules and allowancesOpens in a new window

Typically, you won’t pay Inheritance Tax if:

• the value of the estate is below £325,000 

• the deceased leaves everything above the threshold to their spouse or civil partner, or

• they leave everything above the threshold to an exempt beneficiary, such as a charity or a community amateur sports club.  

Currently, fewer than 1 in 20 estates in the UK pay Inheritance Tax – that's around 5%. 

To check what IHT might be due on the value of your estate, or that of a loved one, check How to value an estate for Inheritance Tax and report its valueOpens in a new window on GOV.UK or use the Which? Inheritance tax calculatorOpens in a new window

Currently, yes, your pension is not part of your estate when you die – but this is changing.  

From April 2027, unused defined contribution pensions (where you build up a pot of money to give you an income during retirement) might be subject to Inheritance Tax if your estate is over the £325,000 threshold. This likely means more people will pay IHT in the future.  

Find out more in our guide What happens to my pension when I die? 

It must be paid within six months of a person’s death. If it’s not paid on time, interest may be charged. In some cases, tax can be paid in instalments, especially if the estate includes property. This can ease money pressures for families who don’t have cash right away, but remember you’ll pay interest on the unpaid balance.

IHT is typically paid by the executor of the estate, or an administrator if there is no will. It’s taken from the estate’s funds or by selling some of its assets. Sometimes, life insurance can be used to cover the cost. 

You can find full details of how to Pay your Inheritance Tax billOpens in a new window on GOV.UK.

Life insurance can be used to help cover an Inheritance Tax bill, so your loved ones aren't forced to sell your home or other assets to pay it.

There are two main types you can use. Term insurance covers you for a fixed period, and is often used to cover potential Inheritance Tax on large gifts made in the 7 years before death. Whole-of-life insurance covers you for as long as you live and pays out when you die.

You could also consider placing your life insurance policy in a trust. This can speed up any claim, and because it doesn't form part of your estate, it can be used to cover a potential Inheritance Tax bill without adding to it.

Setting up life insurance for Inheritance Tax can be complicated, so get advice from a solicitor or financial adviser to find out if it's right for you.  

Find out more in our guide What is life insurance?

If your estate is going to be worth more than £325,000, you can use allowances and exemptions to help reduce the Inheritance Tax bill for your loved ones.

Making a gift to your family and friends while you’re alive can be a way to reduce the value of your estate for Inheritance Tax purposes. 

But there are two important things to remember – if you die within seven years of giving the gift, it will be subject to IHT, and, depending on the type of gift you give, it could mean your loved ones need to pay Capital Gains Tax as well as IHT. So, it’s worth finding out more in our guide Gifts and exemptions from Inheritance Tax.

Each year you can give away up to £3,000 cash tax-free.

Anything you leave to your spouse or civil partner is usually exempt from Inheritance Tax.

Leaving gifts to charity in your willOpens in a new window can reduce the overall IHT bill, and in some cases, lower the tax rate from 40% to 36%.

In some circumstances, you can place money in certain types of trusts to help keep it outside your estate, so IHT might not apply. 

With a trust, you set aside money, property or investments for someone (like a child or a vulnerable person) and someone else manages it for them. Depending on the type of trust and how it is set up, these assets may fall outside your estate when you die when it comes to IHT. 

But the rules are complicated, and it can be costly, so always speak to a solicitor or financial adviser to make sure it’s right for you – find out more in A guide to Inheritance Tax in the UK.

By understanding the rules around Inheritance Tax, you can plan ahead. If you’re unsure about any aspect of Inheritance Tax, it’s a good idea to get independent financial advice. Read our guide to get help choosing a financial adviser.