In this article:
Inheritance Tax (IHT) is a tax levied on the estate (the total value of money, property, and possessions) of a person who has passed away. While the topic can seem complex, this guide breaks down the essential rules and procedures you need to be aware of when managing an estate.
Understanding the Thresholds and Rates
The amount of tax owed depends on the total value of the estate.
£325,000
Nil-Rate Band
Standard threshold — estates below this generally pay no IHT.
40%
Standard Rate
Applied to the portion of the estate above the £325,000 threshold.
36%
Reduced Rate
If at least 10% of the net estate is left to a registered charity.
Who Is Responsible for Payment?
Executors and Administrators: It is the legal responsibility of the executor (if there is a will) or the administrator (if there is no will) to pay the tax using the estate's funds.
Trustees: If the estate includes assets held in a trust, the trustees may be responsible for the tax due on those specific assets.
Beneficiaries: Generally, those who inherit from an estate do not pay the tax personally — it is deducted from the estate before distribution. However, there are exceptions, such as taxes due on certain gifts made by the deceased prior to their death.
Key Exemptions
Certain assets and transfers are exempt from Inheritance Tax:
Spousal Transfers
Assets left to a husband, wife, or civil partner are typically exempt from IHT.
Agricultural and Business Reliefs
Certain types of property, such as agricultural land or holdings in specific types of businesses, may qualify for special reliefs that reduce or eliminate the tax liability.
How to Calculate and Report IHT
To determine if tax is due, you must conduct a thorough valuation of the deceased's assets, including property, savings, investments, and personal belongings.
If IHT is due
Complete form: IHT400 (C1 for Scottish estates)
If no IHT is due
Complete form: IHT205 (or C1/C5 for Scotland) to confirm estate is below threshold
Submission: These forms must be submitted alongside your application for a Grant of Representation (Probate), which provides legal authority to manage the estate.
Deadlines and Payment Methods
The Deadline: Inheritance Tax must be paid within six months of the end of the month in which the person died. Payments made after this deadline will incur interest charges.
Early Payments: You can make payments to HMRC before the final tax bill is calculated to minimise potential interest.
Instalment Options: If the estate includes "non-liquid" assets — such as a property or company shares — that take time to sell, you may be eligible to pay the tax on those assets in annual instalments over up to 10 years.
How to Make a Payment
Before sending any money, you must obtain an Inheritance Tax reference number from HMRC — requested at least three weeks before you intend to pay (online or via form IHT422). Once you have your reference number, you can pay via:
Direct Payment Scheme: Pay the tax directly from the deceased's bank or building society account before probate is granted.
Standard Methods: Through your own bank, via bank transfer, or by cheque.
Tax legislation can change frequently, and estate valuation can be complicated. If you are dealing with a significant estate, it is strongly advised to seek guidance from a qualified solicitor or an independent financial advisor to ensure compliance and avoid penalties.