How Does Inheritance Tax Work in the UK?
By Georgia Holmes
Understand UK Inheritance Tax thresholds, how gifts and property affect your estate, and practical ways to plan ahead and pass on wealth to your loved ones.
Inheritance Tax (IHT) is a tax that may be payable on the money, property and possessions someone leaves behind when they die. It can affect families passing on a home, savings, investments or other assets, but not every estate has to pay it.
Understanding how Inheritance Tax works can help you plan ahead, make use of available allowances and consider how best to pass your wealth to loved ones.
The rules can be complicated, particularly if you own property, have substantial savings or want to give money to family members during your lifetime. However, some basic principles can help you understand when tax may be due and what you can do to plan for it.
What is Inheritance Tax?
Inheritance Tax is generally calculated on the value of a person's estate when they die. An estate includes their property, money, investments and personal possessions, minus eligible debts and liabilities.
The standard Inheritance Tax rate is 40%, but it only applies to the part of the taxable estate above the available tax-free thresholds. Some transfers and assets may qualify for exemptions or reliefs.
For example, if an estate is worth £500,000 and the available tax-free threshold is £325,000, the taxable amount would be £175,000. At the standard rate of 40%, the Inheritance Tax bill would be £70,000, assuming no other reliefs, exemptions or adjustments apply.
The estate is normally responsible for paying the tax before the remaining assets are distributed to beneficiaries.
What is the Inheritance Tax threshold?
For the 2026/27 tax year, the standard Inheritance Tax threshold, known as the nil-rate band, is £325,000.
This means that, subject to the relevant rules, the first £325,000 of an estate can be passed on without Inheritance Tax. The threshold has been frozen at this level until April 2031, so rising property values and investment growth may bring more estates into the scope of the tax.
The residence nil-rate band
You may be entitled to an additional allowance if you leave a qualifying home to your direct descendants, such as your children or grandchildren. This is called the residence nil-rate band.
For 2026/27, this additional allowance is up to £175,000. If you qualify for both allowances, you could potentially pass on up to £500,000 without Inheritance Tax.
However, the residence nil-rate band is subject to conditions. It generally applies when a qualifying home is inherited by direct descendants, and it is gradually reduced for estates worth more than £2 million.
If you are married or in a civil partnership, unused portions of both allowances may be transferable to your surviving spouse or civil partner. Where the rules and conditions are met, this can potentially allow a couple to pass on up to £1 million without Inheritance Tax.
The actual amount available will depend on the ownership of the assets, the estate's value and how the allowances are used.
What assets can be subject to Inheritance Tax?
Inheritance Tax can apply to a wide range of assets, including:
Your home and any additional properties.
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