What Is IHT? HMRC's Official Definition and a Plain English Explanation

In the tax year 2024/25, HMRC collected £7.5 billion in Inheritance Tax (IHT) receipts, a figure that has nearly doubled from £3.9 billion in 2014/15, according to the Office for Budget Responsibility (OBR, 2024 Fiscal Risks Report). Despite this substantial revenue stream, HMRC’s own official definition of IHT—“a tax on the estate of someone who has died”—can be deceptively simple. The reality is that fewer than 1 in 20 estates actually pay the tax, yet the number of chargeable estates has risen by over 25% since 2021, driven largely by frozen nil‑rate bands and rising property values. This article unpacks HMRC’s statutory definition alongside a plain English explanation, using anonymised case studies to show how the tax applies, what thresholds matter, and where common planning opportunities exist.

What HMRC Actually Says About IHT

HMRC defines Inheritance Tax formally as a tax payable on the value of a deceased person’s estate that exceeds the available nil‑rate band (NRB), currently fixed at £325,000 since 2009/10. The official guidance (HMRC, 2024, IHT Manual, IHTM06001) states that the tax is charged at 40% on the excess, with certain reliefs and exemptions available. Critically, HMRC’s definition also covers lifetime gifts made within seven years of death—a point often missed by executors.

In plain English, this means that if your total assets (property, savings, investments, and certain gifts) are worth more than £325,000 at death, the portion above that threshold is taxed at 40%. Because the NRB has remained static for 15 years while house prices have risen, more families are now caught. For a married couple or civil partners, the combined basic NRB is £650,000, plus a potential additional residence nil‑rate band (RNRB) of up to £175,000 per person for a main home left to direct descendants.

The key distinction is that HMRC’s definition is threshold‑based, not asset‑type‑based. A £1 million estate holding only cash pays the same 40% rate on the excess as a £1 million estate holding only farmland—unless specific reliefs apply.

The Nil‑Rate Band: Frozen, Transferable, and Frequently Misunderstood

The nil‑rate band is the most widely discussed IHT threshold, yet its mechanics confuse many estate planners. Since April 2009, the NRB has been frozen at £325,000 per individual. The OBR (2024) projects this freeze will remain until at least 2028, meaning that as asset values rise, more estates become taxable without any legislative change.

A crucial feature is spousal transferability. If one spouse dies without using their full NRB, the unused portion can be transferred to the surviving spouse. For example, Mrs A died in 2022 leaving her entire estate to her husband. Her £325,000 NRB was fully unused. When Mr A dies in 2025 with an estate of £700,000, his estate can claim both his own NRB (£325,000) and Mrs A’s transferred NRB (£325,000), giving a total of £650,000 tax‑free.

The residence nil‑rate band adds further complexity. Introduced in 2017, the RNRB provides up to £175,000 per person (2024/25 rate) when a main residence is inherited by children or grandchildren. However, it tapers away for estates valued over £2 million, losing £1 of relief for every £2 over that threshold. For estates above £2.35 million, the RNRB is entirely lost.

Lifetime Gifts: The Seven‑Year Rule and Taper Relief

Many people assume IHT only applies at death, but HMRC’s definition explicitly includes lifetime gifts made within seven years of death. These are known as potentially exempt transfers (PETs). If the donor survives seven years after making a gift, it falls entirely outside the estate for IHT purposes.

Taper relief applies to gifts made between three and seven years before death, reducing the tax rate on the gift but not the value of the gift itself. For instance, a gift of £400,000 made six years before death would attract tax at 8% (after 80% taper) rather than 40%, but only if the total chargeable gifts exceed the NRB.

Mr Y, a widower, gave his daughter £500,000 in 2018. He died in 2024, six years later. The gift exceeded his £325,000 NRB by £175,000. Because the gift was made six years before death, taper relief reduces the 40% rate by 80%, resulting in an effective rate of 8% on the excess—a tax bill of £14,000 rather than £70,000. Without careful record‑keeping, Mr Y’s executors might miss this relief entirely.

Business and Agricultural Relief: The 100% Exemption

Two powerful reliefs can reduce IHT liability to zero on certain assets: Business Property Relief (BPR) and Agricultural Property Relief (APR). BPR provides 100% relief on most trading businesses and unlisted shares held for at least two years. APR provides 100% relief on agricultural land and buildings used for farming.

These reliefs are not automatic. A business that is mainly investment‑focused (e.g., a buy‑to‑let portfolio) does not qualify for BPR. Similarly, land let under a short‑term grazing licence may qualify, but land used for hobby farming without genuine commercial intent may not.

Mrs X owned a small farming business worth £1.2 million, including land, livestock, and machinery. Under APR and BPR, the entire value passed to her son free of IHT—a saving of £480,000 compared to a non‑relieved estate. However, HMRC scrutinises these claims closely, requiring detailed trading accounts and evidence of active farming for at least two years prior to death.

Cross‑Border Estates: When UK Assets Meet Non‑UK Domicile

For individuals with assets in the UK but domiciled elsewhere, IHT applies only to UK‑situated assets, not worldwide wealth. This is a critical distinction for expatriates and non‑UK residents holding UK property or investments.

A person domiciled in France who owns a £500,000 flat in London will have that flat subject to UK IHT at 40% on the excess over the NRB. However, their French bank accounts and French house are outside the UK IHT net. Double taxation treaties between the UK and many countries (including France, the US, and Australia) can provide relief to avoid paying tax twice on the same asset.

The deemed domicile rule complicates this further. Individuals who have been UK resident for 15 of the past 20 tax years are treated as UK domiciled for IHT purposes, bringing their worldwide assets into scope. This rule catches many long‑term expats who assumed their non‑UK assets were safe.

Practical Steps: What Executors and Families Should Do Now

Given the complexity, executors should begin IHT reporting as soon as possible after death. The IHT400 form must be filed and any tax paid within six months of the end of the month of death, or interest accrues at 7.75% per annum (HMRC, 2025, IHT Interest Rates). For families managing cross‑border inheritance, transferring funds efficiently is key. Some families use international payment platforms like Airwallex global account to move inheritance proceeds between jurisdictions without the high fees and slow processing times typical of traditional banks.

Other practical steps include:

• Check for unused NRB from a deceased spouse or civil partner
• Claim RNRB if the main home passes to children or grandchildren
• Review lifetime gifts made within seven years and calculate taper relief
• Apply for BPR/APR where the deceased owned a trading business or farm
• Consider a deed of variation within two years of death to redirect assets and potentially reduce tax

FAQ

Q1: What is the current IHT nil‑rate band and has it changed recently?

The nil‑rate band has been frozen at £325,000 per individual since 6 April 2009. It has not increased in 15 years. The residence nil‑rate band is £175,000 for 2024/25, also frozen until at least 2028. Married couples can combine their NRBs for a total of £650,000, plus up to £350,000 in RNRB if both qualify.

Q2: Do I have to pay IHT on gifts I gave more than seven years ago?

No. Gifts made more than seven years before death are completely exempt from IHT. However, gifts made within seven years may be subject to tax on a sliding scale. Taper relief reduces the tax rate on gifts made between three and seven years before death, starting at 20% reduction after three years and reaching 80% after six years.

Q3: How long do I have to pay IHT after someone dies?

IHT must be paid by the end of the sixth month after the month of death. For a death in January 2025, payment is due by 31 July 2025. Interest at 7.75% per annum applies from the due date on unpaid tax. HMRC allows instalments over 10 years for certain assets like property and businesses.

References

• HMRC, 2024, Inheritance Tax Manual (IHTM06001)
• Office for Budget Responsibility, 2024, Fiscal Risks Report
• HMRC, 2025, IHT Interest Rates and Penalties
• UK Government, 2024, Inheritance Tax: Residence Nil‑Rate Band Guidance
• ONS, 2024, UK Property Price Index (for NRB context)