Inheritance Tax, explained and dated

Most estates pay no Inheritance Tax at all. Tax is only due on the part of an estate above the allowances, and a large majority of estates fall under them. Here is how the thresholds, rates and deadlines work — with every figure dated and linked to its GOV.UK source.

The nil-rate band

Every estate has a nil-rate band of £325,000. There is no Inheritance Tax on value up to that amount. The nil-rate band is frozen until 5 April 2031.

When someone leaves everything to a spouse or civil partner, no Inheritance Tax is due and the unused nil-rate band can transfer to the survivor. On the second death, up to a full extra nil-rate band can be added — a combined allowance of up to £650,000 before any residence allowance.

The residence nil-rate band

An additional £175,000 residence nil-rate band can apply when a home (or a share of one) passes to direct descendants — children, stepchildren, adopted or foster children, and grandchildren. Combined with transfers between spouses, a married couple passing a home to their children can reach a total allowance of up to £1,000,000.

The rates

Inheritance Tax is charged at 40% on the value of the estate above the available allowances. A reduced rate of 36% applies where at least 10% of the baseline amount of the estate is left to charity.

The “baseline amount” is the estate after debts, reliefs, exemptions and the nil-rate band — not the raw total. The 36% charity rate is a deliberate incentive and the calculation is detailed; for a real estate it is worth getting it checked.

Deadlines and interest

• Pay by the end of the 6th month after the month of death. Interest is charged on anything unpaid after that date — currently 7.75%.
• Deliver the IHT account to HMRC within 12 months of the end of the month of death, where a full account is required.