How Much is Inheritance Tax? UK Laws Explained

Dealing with Inheritance Tax (IHT) can be one of the most daunting parts of the probate process. The standard Inheritance Tax rate is high, meaning that IHT liability can cost your loved ones thousands of pounds after you die. However, with some careful planning, it is possible to reduce or completely avoid your IHT liability. In this brief guide, the experts at Percy Hughes & Roberts Solicitors detail how much Inheritance Tax is in the UK, and potential ways to minimise your bill.

Figures from HMRC show that only one in 20 estates is large enough to incur an IHT liability. However, increasing inflation, coupled with the fact that the inheritance tax threshold is expected to remain frozen until 2028, means that more of us are likely to pay this often costly tax in the coming years.

The rules around Inheritance Tax can be difficult to understand at first, particularly for executors who are often dealing with grief, and already have a lot of administrative duties related to managing a deceased person's estate. However, it is important to understand how to calculate and pay tax on an estate, particularly as failing to pay IHT on time can cause delays in the probate process.

Here, the wills and probate experts at Percy Hughes & Roberts Solicitors explain what IHT is, detail the Inheritance Tax rates and tax-free allowances in the UK, outline how professional advice when drawing up a will or planning an estate can minimise this liability, and guide executors through their responsibilities when administering an estate. If you need legal services to reduce your tax liability or support you in managing an estate, you can contact us by completing the enquiry form below or by calling 0151 666 9090.

What is Inheritance Tax?

As a brief explanation, IHT is payable on the estate of someone who has passed away. We have indicated above that you do not need to pay IHT on all estates, or even most - only those that exceed the Inheritance Tax threshold, which we will explain in more detail below.

Unlike some taxes, the executor must calculate the Inheritance Tax liability of an estate themselves, and report this to HMRC as part of the probate process. This is one of the first steps, and means that executors must estimate the value of an estate before they apply for a grant of probate. Once they have reported the value of the estate, they will be responsible for establishing a more accurate value of the deceased's estate, and calculating and paying Inheritance Tax that is due.

How much is IHT in the UK?

How much Inheritance Tax is owed will depend on the size of the estate. For example, there will be no Inheritance Tax to pay if:

• The value of the estate is below what is known as the nil rate band. This threshold is £325,000
• The deceased left everything above this threshold to a spouse or civil partner
• The deceased left everything above the threshold to an exempt beneficiary, such as a charity

Any of the deceased's assets that are left to a spouse or civil partner (or a charity) do not incur a tax liability provided the couple is married or in a registered civil partnership. If none of the above applies the estate will be taxed at:

• 40% on anything above the £325,000 threshold

This tax-free threshold can be increased, however. If the deceased decides to give their home to their children or grandchildren, the threshold can increase to £500,000. This is due to what is known as the residence nil rate band (RNRB)

• The maximum RNRB is currently £175,000, which is added to the overall Inheritance Tax threshold

This applies to deaths after 5th April 2017 and can be claimed where the family home is inherited by children or grandchildren.

In addition to this, married couples and those in civil partnerships can pool an unused threshold with that of their spouse or civil partner. This can double the amount of NRM and RNRB for the surviving partner.

• Unused Inheritance Tax thresholds transferred to partners can increase the tax free allowance to £650,000
• A residence nil rate band transferred to a surviving partner can increase the RNRB threshold to £350,000
• Combined, a surviving partner could have a new tax-free threshold of £1 million

This is quite a complex area of law - for example, different rules will apply to an unmarried partner - so it is always best to seek legal advice before submitting your Inheritance Tax form to HMRC.

When do you pay Inheritance Tax?

If there is Inheritance Tax due, it must be paid by the end of the sixth month after the person’s death. This normally gives the executors plenty of time to get everything in the estate valued and to calculate their liability. In most cases, the executor pays Inheritance Tax from the estate's assets - this must be paid before beneficiaries receive any gifts from the will.

If the tax bill is not paid in time, HMRC will start to charge interest. This can represent a significant amount of money, particularly due to the sums involved and the high rate of IHT. Therefore, it is important for executors to act quickly and fulfil their administrative duties with care.

Will the freeze on the Inheritance Tax-free threshold affect me?

In the 2022 Autumn Statement, Chancellor Jeremy Hunt confirmed that the threshold for Inheritance Tax will be frozen for a further two years. In his time as Chancellor, Prime Minister Rishi Sunak had already frozen the threshold at £325,000 until April 2026. This new freeze means the threshold will not increase until at least April 2028.

Unfortunately, as property prices increase, estate values will also go up. This freeze on the tax-free allowance means that more people will likely have to pay Inheritance Tax over the next five years. Analysis by accountancy firm RSM has revealed that 10,000 more families could end up paying IHT in the coming years. 

For these reasons, it is important to understand the rules around Inheritance Tax and when it might affect you, along with the strategies you can use to minimise your liability.