How does Inheritance Tax work?

Inheritance Tax (IHT) may have to be paid on an estate if it's worth more than the tax-free threshold. However, there's no IHT to pay on estates left entirely to a spouse, civil partner or charity.

What's included in the estate?

The value of your estate for the purpose of IHT includes:

• your savings
• your personal possessions
• property you owned
• the value of any money or property you gave away during the seven years prior to death, subject to certain exemptions.

What is Inheritance Tax?

IHT may have to be paid on the estate if it’s worth more than the tax-free threshold of £325,000. This means that the first £325,000 of your estate is tax-free – the 40% tax only applies to any assets over this threshold. If a house the deceased lived in before dying is left to their children or grandchildren, the threshold increases to £500,000. 

If one partner dies and hasn’t used their tax-free allowance, this can be passed on to the surviving partner, giving them a higher threshold of up to £1,000,000 before IHT applies.

What's exempt from Inheritance Tax?

• If you leave your whole estate to your spouse or civil partner, no IHT is payable on your estate.
• You don't need to pay IHT on anything you leave to charity. And if you leave 10% or more of your estate to charity, then a reduced rate of 36% tax may apply to what's left over. Special rules apply though so seek legal advice if you're planning to do this.
• Gifts of up to £3,000 in each tax year are exempt from IHT, as are small gifts to individuals and some wedding or civil partnership gifts. But be aware that gifts made while you're alive could be liable for IHT, depending how much they were and when they were given.

How to pay Inheritance Tax

If you're the executor of someone's estate, one of your responsibilities, among other things, is to pay any IHT.

Before you report the value of an estate, it's a good idea to check if you need to send details of the estate so that you can complete the correct forms if necessary. Some estates don't need to be reported for Inheritance Tax (IHT).

Find out more about valuing an estate for Inheritance Tax on GOV.UK

It's a good idea to get a professional valuation on high-value items like houses or stock market investments if there could be IHT to pay, because you must give HMRC a detailed account along with valuations. 

If the valuations aren't accurate, you may have to pay penalties. 

To get an IHT form, you can either call the HMRC helpline for probate and Inheritance Tax enquiries on 0300 123 1072 or download one online on GOV.UK.

Find out more about how to be an executor