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Written by Adam McIlroy.
18 minute read
Something we all come to realise when we experience a close bereavement — especially if we are the ones who need to organise everything — is quite how much admin is involved. This can really take us by surprise and make things difficult when someone dies. Grief can derail our ability to think and to process even the most simple tasks. One task that emerges when we are the executor of someone’s will is the payment of inheritance tax due on their estate.
We wanted to put together this simple inheritance tax guide, giving you the basics of it for estate purposes. We will explain what inheritance tax is; why it needs to be paid; who needs to pay it; and how it is calculated, including details about the tax-free threshold.
We would also just like to acknowledge straight away that, if you are reading this, we understand that you may have very recently been bereaved, or that you are facing that prospect imminently. We recognise the possible difficulty of the situation that you are in, and hope that our guidance proves useful to you.
Key takeaways:
In simple terms, inheritance tax is a form of tax which needs to be paid on someone’s estate when they die. The amount of tax due is proportional to the size of the estate. Preparing for this moment is a big part of end-of-life planning.
The government uses inheritance tax, quite simply, to help them pay for the services which they deliver for us, alongside other taxes, like income tax, corporation tax and value-added tax (VAT). By making certain things tax exempt (such as certain ISAs) or by offering tax breaks (such as with some pension payments), the government can also try to encourage financially responsible behaviour among the populace.
The disparity in inherited wealth across the UK from one family to the next is perhaps the greatest cause of one of our society’s biggest problems: wealth inequality. The two poles of our society — those whose families have wealth which they can pass down, and those whose don’t — are growing further and further apart. Indeed, the London School of Economics has found that, between 2011 and 2019, the wealth gap in the UK grew by 50%.
Inheritance tax is a lever the government can pull to try to rebalance things and minimise the impact of family-to-family wealth inequality on our economy as a whole. In fact, it has become a big focus of economists in recent times who are thinking about wealth inequality. Thomas Piketty’s 2013 book, Capital in the Twenty-First Century, whose release caused a bit of a stir, argued that the returns available through inherited wealth via investments and property far outstrip the returns we can get by working in the economy. He argues strongly for the use of inheritance tax as a way to definitively rebalance the inequalities of our age.
The only time when we are ever likely to think about inheritance tax is if we are the executor of someone’s will. In this case, once we have applied for probate, we will need to divide and disburse the estate, according to what is specified in the will, among its named beneficiaries. But before we do this, we will need to provide the government with a final account of all the assets in the estate, so that we can pay the correct tax on its value.
The executor of the will is responsible for paying any inheritance tax due on the value of someone’s estate when they die. This is one of the main reasons outlining the importance of writing a will: not only will you need to select an executor whom you trust to distribute your assets according to your wishes, but they will also need to be capable of meeting a legal responsibility. If someone dies without a valid will — often called dying intestate — the inheritance process becomes more complex and stressful for loved ones.
According to the UK Government, there is not normally any inheritance tax to pay if the value of the estate is below £325,000; or, if it is, where the full amount above that £325,000 threshold is left by the person who has died to their spouse or civil partner, or to a charity or a community amateur sports club. The inheritance tax threshold can increase to £500,000 when the person who has died gives away their home to their children. However, there are certain conditions attached to this form of tax avoidance*.
In cases where inheritance tax does apply, the basic rate is 40%.
*Remember: ‘tax avoidance’ = making legal financial manoeuvres like this in order to lower the amount of tax you need to pay. ‘Tax evasion’ = when a person or a company illegally escapes paying taxes which they owe.
If you are dealing with inheritance tax for the first time, the process can feel daunting. In reality, it follows a clear step-by-step approach.
Step 1: Valuing the estate
The first step is to work out the total value of the estate. This includes everything owned by the person who has died at the time of death. Assets are usually valued at their open market value.
Assets typically included are:
Property, such as a house or flat
Savings and bank accounts
Investments, including shares and ISAs
Pensions not paid directly to a beneficiary
Vehicles, jewellery, and other valuable personal items
Step 2: Deducting debts and allowable expenses
Next, certain debts and expenses are deducted from the estate’s value. These may include:
Outstanding mortgages or loans
Credit card balances
Utility bills
Funeral expenses
This gives you the ‘net value’ of the estate.
Step 3: Applying the inheritance tax thresholds
Once the net value is known, the inheritance tax threshold (known as the nil rate band) is applied. Any part of the estate below this threshold is not taxed.
Step 4: Calculating the tax due
Inheritance tax is only charged on the portion of the estate above the threshold. The standard rate is 40%, although this can be reduced in certain situations, such as when charitable donations are made.
While the calculations themselves are often straightforward, gathering the information can take time. It is completely normal to need support or reassurance during this stage.
Inheritance tax is usually due within six months of the person’s death. In many cases, this is before probate has been granted. The executor is legally responsible for arranging payment, although the tax is paid from the estate itself, not from the executor’s personal funds.
If payment is delayed, interest may be charged. However, HMRC understands that estates can be complex, and instalment options may be available, particularly when property is involved. This stage often overlaps with probate, which can feel overwhelming. Taking things one step at a time, and asking for help when needed, can make the process more manageable.
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In some cases, an additional allowance, called the residence nil rate band, may apply. This can increase the inheritance tax threshold.
You may qualify if:
The person who has died owned a home
That home is passed on to direct descendants, such as children or grandchildren
When this applies, the total inheritance tax threshold can increase to up to £500,000.
For example:
If an estate is worth £450,000 and includes a home passed to children, inheritance tax may not be due at all.
This allowance does not apply in every situation, and it can be reduced for very large estates. However, for many families, it provides valuable additional protection without needing complex planning.
There are various ways in which you can legally minimise the inheritance tax burden on your estate, to be paid by the executor of your will.
You can use your will to help reduce the tax burden on your estate. For instance, if your estate is worth enough to push it above the taxable threshold of £325,000 (or £500,000 if bequeathing your house to your children or grandchildren), then you may be able to reduce the tax rate by 4% (to 36%) if you leave at least 10% of the taxable value of your estate to a charitable cause.
Lifetime gifts are another way in which someone could proactively reduce the value of their estate when it comes time to pay inheritance tax. It could be cash or property such as a house. For instance, if someone foresees that their estate will be above the taxable threshold when they die, they may try to avoid this by gifting some of their assets away ahead of time. It’s important to bear in mind that, when providing a final account to HMRC of the estate’s value, the executor will need to establish whether any lifetime gifts have been given by the person who has died; these gifts may retroactively be subject to inheritance tax, payable by the recipient.
You may also decide to set up a trust in order to reduce the tax burden of your estate. Strictly speaking, putting certain property or assets into a trust means that they no longer belong to you. Hence, they are no longer part of ‘your assets’ when it comes to tallying the final estate value. Instead, they belong to the trust, and when certain conditions are met (for instance, you may wish to add an age condition to the trust to prevent younger children from accessing property before they may be fully responsible with it), the property will pass to the ultimate beneficiaries.
Naturally, estate management is quite a bewildering experience for people who don’t normally need to deal with such things. For instance, only some gifts from, e.g., a parent to a child, are potentially applicable to inheritance tax. There are also various kinds of trusts out there, some of which are more costly to establish and administer than others. Therefore, as with other types of financial planning and decision making, it may be a good idea to seek proper financial advice before making any decisions or declarations.
As with any other consumer related decision, you should seek your inheritance tax specialist through a combination of recommendations from people you trust, to consumer comparison research of pricing and customer satisfaction. Some people choose to speak with an inheritance planner or financial adviser, particularly if their estate is complex or involves property, trusts, or overseas assets.
Any legal services have the potential to be expensive, however, so you will need to be sure that your money is being spent as well as possible. Try to head off the need for as much legal advice as possible by discussing the workings of the estate with the person who wants you to be their executor as far enough in advance as possible.
Gifts made during someone’s lifetime can affect inheritance tax, but the rules are often simpler than people fear.
The 7-year rule
Most gifts are known as ‘potentially exempt transfers’. If the person who made the gift lives for at least seven years after giving it, no inheritance tax is usually due on that gift.If they die within seven years, the gift may be taken into account when calculating inheritance tax.
Taper relief
If inheritance tax does apply to a gift, taper relief may reduce the amount due. The longer the person lives after making the gift, the lower the tax may be. Taper relief only applies if tax is actually due.
Allowances and exemptions
Some gifts are exempt straight away, including:
An annual gifting allowance
Small gifts to individuals
Certain gifts for weddings or civil partnerships
Common misunderstandings
A common worry is that all gifts automatically create tax problems. In reality, many gifts never result in inheritance tax, especially when basic allowances are used. Keeping simple records of gifts can be helpful and is usually enough. There is no need for complex paperwork in most everyday situations.
There are situations in which additional tax may apply to inherited property. Make sure to avoid double-taxation where relevant.
If you are inheriting assets from an international estate, depending on where it is based, there may be more than one set of taxes to be paid upon its value. In general, though, you will only pay inheritance tax to HMRC on British assets. Furthermore, if the UK government and a foreign government have charged you inheritance tax on the same asset, you may be able to reclaim what you’ve erroneously paid, or legally avoid paying, through double taxation relief.
In situations where a gift has been made (usually within 7 years of the testator’s death), inheritance tax may have been paid on the value of the estate when it was executed, and more may be due from the beneficiary of the gift. In this situation, HMRC will normally contact the recipient of the gift, assuming it has been properly declared in the final account given by the executor, to ensure compliance with the tax rules. Therefore, if the testator intends to use gifting as a way of lessening the inheritance tax on their estate, it will need to be done properly, or their family could still end up paying more.
As always, if you have any specific questions about cross-border inheritance tax, or the use of double-taxation treaties, it may be worth consulting an expert in the matter. It can be hard enough to understand domestic inheritance tax requirements, without having to worry about the rules of a foreign regime.
Here are some common questions that people tend to have about inheritance tax.
Inheritance tax applies when someone leaves behind an estate whose value crosses a certain threshold (£350,000–500,000). The payment needs to be made within 6 months of their death. Some gifts, such as cash gifts given for specific reasons (like a present for a wedding) are exempt from inheritance tax, if they are within a certain amount.
If you don’t pay your inheritance tax bill within six months, then interest will begin to accrue on top of what you already owe. For this reason, it is wise to pay it as quickly as you are able. If your bill is too large for you to pay in one go, you can pay in instalments.
If you want to appeal a decision about how much inheritance tax you owe, you normally have 30 days to do so. You will need to either write a letter outlining your reasons, or use the appeals form you will have received along with your tax decision letter confirming what you owe.
It depends on how much was given, and how soon before death the gifts were given. When someone dies, the executor will need to record lifetime gifts in their final accounting, providing an accurate estimation of their material worth. Gifts made at least seven years before the death of the testator are normally exempt from inheritance tax, regardless of the value of the gift (referred to as Potentially Exempt Transfers (PETs)). This is as long as the recipient didn’t continue to benefit from it (e.g., financial assets which generate passive income). Gifts made within this seven-year period could potentially be subject to inheritance tax for the beneficiary of the gift.
We hope you have enjoyed our brief inheritance tax guide. As always, it is a pretty complicated subject which can feel overwhelming, and there are consequences attached to planning it poorly. It could be a good idea to seek real, professional advice on the matter, if you have more specific questions.
Thinking about our estates is a big part of end-of-life planning, alongside funeral preplanning. Aura are industry leading experts in funeral planning, and we offer our prepaid funeral plans to families in the UK looking for future peace of mind for themselves and their loved ones. We have the highest Trustpilot rating of any national ‘Cremation Services’ provider in the UK, with 4.9/5 stars.
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Inheritance tax (IHT) is a tax paid on a person’s estate after they die. It applies when the estate’s value exceeds certain thresholds and must be paid before assets are distributed to beneficiaries.
The executor of the will (or administrator if there is no will) is legally responsible for calculating, reporting, and paying any inheritance tax due on the estate.
IHT must be paid within 6 months of the person’s death. If unpaid, interest begins to accrue. Payment can often be made in instalments, especially on property.
The standard rate is 40% on the value of an estate above £325,000. This threshold can increase to £500,000 if the estate includes a home left to children or grandchildren.
Yes. There is no IHT if:
The estate is worth less than £325,000.
Everything above the threshold is left to a spouse, civil partner, charity, or community amateur sports club.
You may deduct:
Funeral expenses (in some cases).
Outstanding debts.
Donations to charity (giving 10% of your estate to charity can reduce the tax rate to 36%).
Gifts made within 7 years of death may be taxable, depending on the amount and type. Gifts made more than 7 years before death are usually exempt.
Some options include:
Making lifetime gifts (earlier than 7 years before death).
Setting up a trust to hold property or assets.
Leaving money to charity in your will.
Using your spouse or partner’s unused allowance (called the transferable nil-rate band).
A digital will outlines your wishes for managing online accounts after death. A living will (also called an Advance Decision) specifies medical care preferences if you’re unable to communicate them yourself.
Yes. Professional financial advice is strongly recommended, especially for large or complex estates. Many legal services and online resources can guide you through will writing, tax planning, and setting up trusts.