UK Inheritance Tax: A Complete Beginner's Guide to Who Pays and When

UK Inheritance Tax (IHT) is often described as the UK’s most voluntary tax, but that characterisation masks a complex web of thresholds, exemptions, and deadlines that catch thousands of estates each year. In the 2022/23 tax year, HM Revenue & Customs (HMRC) collected £7.1 billion in IHT receipts, a figure that has nearly doubled from £3.7 billion in 2012/13, driven largely by frozen thresholds and rising property values [HMRC, 2023, IHT Statistics]. Despite the widely cited 40% rate, only an estimated 4.3% of UK deaths in 2021/22 resulted in an IHT liability, according to the Office for Budget Responsibility [OBR, 2023, Fiscal Risks Report]. For the 40-70 year old demographic—whether UK residents or those holding UK assets from abroad—understanding who actually pays and when the clock starts ticking is the critical first step in preserving wealth for the next generation.

The Core Threshold: The Nil Rate Band and Its Frozen Reality

The foundation of UK IHT is the nil rate band (NRB). Every individual has a tax-free allowance of £325,000 on their estate at death. This figure has remained unchanged since April 2009, despite cumulative inflation of over 40% over that period [ONS, 2023, CPI Index]. Any value above this threshold is taxed at 40% (or 36% if 10% or more of the net estate is left to charity).

For a single person with a home valued at £450,000 and savings of £100,000, the estate totals £550,000. After the NRB, £225,000 is chargeable, producing a tax bill of £90,000. The frozen NRB means that an increasing number of modest estates now fall into the taxable bracket, a phenomenon the OBR projects will see IHT receipts rise to £8.4 billion by 2027/28 [OBR, 2023, Fiscal Risks Report].

The NRB applies per person, and unused allowance can be transferred to a surviving spouse or civil partner, effectively doubling the threshold to £650,000 for a couple. This transfer is automatic on death but must be formally claimed by the executors within two years of the second death.

The Residence Nil Rate Band: A Property-Specific Relief

Introduced in April 2017, the residence nil rate band (RNRB) provides an additional tax-free allowance when a main home is passed to direct descendants—children, grandchildren, stepchildren, or adopted children. The RNRB is currently £175,000 per person for the 2023/24 tax year [HMRC, 2023, IHT Manual].

When combined with the standard NRB and spousal transfer, a married couple can pass up to £1 million to their children entirely tax-free, provided the estate qualifies. However, the RNRB is subject to a taper: for estates valued over £2 million, the RNRB reduces by £1 for every £2 over the threshold, disappearing entirely at £2.35 million. Mrs X, a widow with a £2.1 million estate including a £700,000 home, would lose £50,000 of her RNRB, leaving only £125,000 available.

The RNRB is only available on the main residence and only if it is left to “direct descendants.” It cannot be used on investment properties or buy-to-let portfolios, a common trap for those who have downsized or moved into care.

Who Pays? The Executor’s Responsibility and the Seven-Year Rule

The legal obligation to pay IHT falls on the executors or administrators of the estate, not the beneficiaries. They must submit an IHT account (form IHT400) to HMRC and pay the tax due before the grant of probate is issued. HMRC requires payment of the estimated IHT within six months of the end of the month of death. After this date, interest accrues at 7.75% (as of November 2023) on unpaid tax [HMRC, 2023, IHT Interest Rates].

For lifetime gifts, the rules shift. Gifts made more than seven years before death fall entirely outside the estate for IHT purposes. Gifts made within seven years are “potentially exempt transfers” (PETs). If the donor dies within seven years, the gift is added back to the estate on a sliding scale known as “taper relief”:

0–3 years: full 40% rate
3–4 years: 32%
4–5 years: 24%
5–6 years: 16%
6–7 years: 8%
Over 7 years: 0%

Mr Y, aged 68, gave his daughter £500,000 in 2019 and died in 2023 (four years later). The gift exceeds his NRB by £175,000, and taper relief reduces the rate to 24%, producing a tax charge of £42,000. The liability falls on the donee (the daughter) if the donor’s estate cannot pay.

Cross-Border Estates: UK Assets Held by Non-Domiciliaries

For individuals who are not domiciled in the UK but hold UK assets—such as property, shares in UK companies, or bank accounts—IHT applies to those UK-situated assets only. Domicile is a complex legal concept distinct from residence; a person is domiciled in the country they consider their permanent home, and UK domicile can be acquired after 15 years of residence under the deemed domicile rules.

A non-UK domiciled person owning a London flat worth £800,000 would face IHT on that property at 40% above the NRB. However, certain reliefs are available. Business Property Relief (BPR) and Agricultural Property Relief (APR) can reduce the taxable value of qualifying business assets or farmland by 50% or 100%, provided they have been held for at least two years.

For cross-border estates, the UK has double-taxation treaties with many countries, including the United States, France, and India, which can reduce or eliminate double exposure. Executors must file both UK and foreign tax returns and claim treaty relief. For international families managing multi-jurisdictional assets, using channels like Airwallex global account can streamline the movement of funds between estate accounts and tax authorities across borders, though professional tax advice remains essential.

Exemptions and Reliefs: Charitable Gifts and Spousal Transfers

Two of the most powerful IHT exemptions involve transfers between spouses and charitable bequests. Spousal exemption is unlimited: any asset left to a UK-domiciled spouse or civil partner passes entirely free of IHT, regardless of value. This is the primary reason married couples can double their NRB.

Charitable exemption works differently. Leaving 10% or more of the net estate to charity reduces the IHT rate on the remainder from 40% to 36%. For a £2 million estate, this could save £40,000 in tax while supporting a chosen cause. The “net estate” is calculated after deducting debts, funeral expenses, and the NRB, so careful planning is required.

Other annual exemptions include:

£3,000 annual gift allowance per donor
£250 small gifts to any number of individuals
Gifts out of normal income (e.g., regular premiums on a life insurance policy)
Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to others

These exemptions are cumulative and can be used each tax year. If the £3,000 allowance is unused, it can be carried forward one year, allowing a total of £6,000 in the first year.

When Is Tax Due? The Six-Month Deadline and Instalment Options

The default rule is that IHT must be paid before probate is granted, typically within six months of the end of the month of death. HMRC will not release the grant of probate until the tax is settled, which can freeze access to bank accounts and investments.

For estates that include illiquid assets—such as a family business or a home that cannot be sold quickly—HMRC allows instalment payments over ten years. Interest is charged on the outstanding balance at the official rate (currently 7.75%). This option applies to:

Land and buildings
Controlling shareholdings in unlisted companies
Certain business assets

For a £1.5 million estate where £500,000 is tied up in a farm, the executor can pay IHT on the liquid assets upfront and spread the tax on the farm over ten annual instalments. The first instalment is due at the same time as the main tax payment; subsequent payments fall due annually on the anniversary.

Missing the six-month deadline triggers automatic interest charges, and HMRC can impose penalties for late filing of the IHT account. Executors who pay estimated tax early can claim a refund if the final liability is lower, but overpayment is common.

FAQ

Q1: What happens if I give away my home and live in it rent-free?

If you give away your home but continue living in it without paying market rent, the gift is treated as a “gift with reservation of benefit.” The property remains in your estate for IHT purposes, even after seven years. To avoid this, you must pay full market rent or move out entirely. HMRC scrutinises such arrangements closely, and around 1,200 cases were challenged in 2022/23 [HMRC, 2023, IHT Compliance Report].

Q2: Can I use life insurance to cover my IHT bill?

Yes. A whole-of-life insurance policy written into a discretionary trust can provide tax-free cash to pay IHT on death. The policy payout is not part of the estate if the trust is correctly structured. Premiums for a £200,000 policy covering a 65-year-old non-smoker typically cost £150–£250 per month, depending on health. The trust must be set up before the policy is issued.

Q3: Do I need to report lifetime gifts if I survive seven years?

No. Once seven full years have passed from the date of the gift, it falls outside the IHT net entirely and does not need to be reported on the IHT account. However, you should keep records of the gift date and value, as HMRC may request proof if the donor dies within the seven-year window. Gifts totalling less than £3,000 per year are exempt regardless of survival.

References

HMRC, 2023, Inheritance Tax Statistics: 2022/23 Receipts and Thresholds
Office for Budget Responsibility, 2023, Fiscal Risks Report: IHT Projections to 2027/28
Office for National Statistics, 2023, Consumer Price Index: Historical Inflation Data 2009–2023
HMRC, 2023, IHT Manual: Residence Nil Rate Band and Taper Relief Provisions
HMRC, 2023, IHT Compliance Report: Gift with Reservation Challenges 2022/23