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How does inheritance tax work?

The executor (if there is a will) or the administrator of the estate (if there is no will) are known as personal representatives. Personal representatives are responsible for calculating any IHT and ensuring that it is paid, before distributing the proceeds of the estate to the beneficiaries (those inheriting the estate).

What are the current inheritance tax thresholds?

For the 2024/25 tax year, the inheritance tax threshold (known as the ‘nil rate band’) is £325,000 for individuals. However, this doubles to £650,000 if the inheritance includes a transfer of the full value of an estate between spouses or civil partners (eg if a husband leaves his entire estate to his wife, the wife’s nil band rate will increase to £650,000). 

Anything below £325,000 (or £650,000) is not subject to any IHT. However, anything above these thresholds is subject to a 40% tax.

If 10% (or more) of the estate which falls above the threshold is left to charity, the level of inheritance tax falls from 40% to 36%.

The nil rate band is expected to remain frozen at £325,000 until April 2028.

The residence nil rate band

Under the residence nil rate band (RNRB) the IHT threshold increases if a family home is left to direct descendants. Direct descendants include the:

  • deceased’s children (including adopted, foster or stepchildren)

  • deceased’s grandchildren

  • deceased’s other lineal descendant (eg great-grandchildren)

  • a spouse or civil partner of a lineal descendant (including their widow, widower or surviving civil partner)

Note that direct descendants must be directly descended from the deceased person. As a result, nephews, nieces, siblings and other relatives are not considered to be direct descendants for the purposes of the RNRB.

The RNRB increases the threshold by the following amounts:

  • £100,000 (for deaths in tax year 2017 - 2018)

  • £125,000 (for deaths in tax year 2018 - 2019)

  • £150,000 (for deaths in tax year 2019 - 2020)

  • £175,000 (for deaths from the tax year 2020 - 2021 onwards)

The RNRB of £175,000 is set to remain in place until April 2026.

What are the rules on gifts?

IHT does not need to be paid on gifts (whether this involves money, property or possessions) if the person giving the gifts does so at least 7 years before their death. Otherwise, IHT is payable on gifts on a sliding scale known as ‘taper relief’. If there are:

  • less than 3 years between gift and death 40% tax is payable

  • 3 - 4 years between gift and death 32% tax is payable

  • 4 - 5 years between gift and death 24% tax is payable

  • 5 - 6 years between gift and death 16% tax is payable

  • 6 - 7 years between gift and death 8% tax is payable

Additionally, there are certain gifts that are exempt from IHT. For example: 

  • a £3,000 annual exemption for gifts (ie to help someone with their living costs)

  • an exemption for wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)

  • small gifts of up to £250 can be given multiple times to an individual (as long as another exemption has not already been used on this person)

How does inheritance tax work for British citizens not living in the UK?

For British citizens whose permanent home is abroad (ie who are classed as being domiciled abroad), IHT is only paid on UK assets (eg bank accounts or property in the UK).

It is not paid on 'excluded assets' like:

  • foreign currency accounts with the bank or Post Office

  • overseas pensions

  • holding in authorised unit trusts and open-ended investment companies

Please note that different IHT rules apply if you: 

  • are a member of visiting armed forces

  • own assets in a trust 

  • own assets in Government gilts

When you will not count as living abroad

Expats will not be classed as being domiciled abroad if they: 

  • had a permanent home in the UK at any time in the 3 years before their death, or

  • lived in the UK for 15 of the last 20 years

Where this is the case, they will be subject to the normal rules of IHT.

How does capital gains tax impact any inheritance?

Capital gains tax (CGT) is payable on the increase in value of an asset (eg property). For IHT purposes, CGT normally relates to the family home. The amount of CGT liability generally reflects any increase in the value of the property between the time it is inherited and the time it is sold. For more information, read Capital gains tax.

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