What is Inheritance Tax?
Inheritance Tax is a tax to His Majesty’s Revenue and Customs (HMRC) paid based on the value of an estate left behind when someone dies.
When you inherit cash, possessions and property it’s referred to as an “estate”. Anything with material value is included in an “estate” and that estate is subject to taxation, depending on its total value.
There are are some circumstances where Inheritance Tax is not necessary, or where it’s possible to reduce it:
Inheritance Tax exemptions
Sometimes you won’t need to pay Inheritance Tax. For example, you won’t owe any tax in the following circumstances:
The value of your inheritance is less than £325,000
The estate has been left to you by your spouse or civil partner.
How much is Inheritance Tax in 2025?
Inheritance Tax is 40% above the relevant threshold. The threshold for paying Inheritance Tax varies slightly, depending on who has left you an estate.
Anything above this threshold is taxed at 40% (although there are a few exemptions to the rate, explained in the next section):
What’s the threshold?
The standard Inheritance Tax threshold is £325,000
Inheritance Tax is payable on the value of an estate that is greater than £325,000.
For example, if you inherit an estate worth £600,000 from someone who isn’t your parent or grandparent, you’ll pay 40% tax on £275,000. In this case, £110,000 would be owed.
Inheritance Tax threshold for direct descendants is £500,000
If your parent or grandparent has died and left you an estate, then the threshold for paying Inheritance Tax is payable on the value greater than £500,000. So, if you inherit an estate worth £600,000, you’ll pay 40% tax on £100,000. In this case, £40,000 would be owed.
However, the second scenario only applies if the total estate you’re inheriting is worth less than £2 million.
On estates worth £2 million or more, the threshold will decrease by £1 for every £2 above £2 million that the estate is worth.
For example, on an estate worth £2,000,002, the threshold would decrease to £499,999 , so you would pay Inheritance Tax on the remaining £1,500,003.
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Do debts held have any impact on Inheritance Tax?
Yes, if the person leaving you their estate owed money in the form of debts, the value of their estate is calculated minus any debts.
For example, if you inherit a home worth £600,000 on which there is a mortgage of £100,000, the value of your estate would be £500,000 for Inheritance Tax purposes.
Are there any exceptions to the rate of Inheritance Tax?
Yes, there are a few exceptions to the rules set out above.
For example, if someone leaves 10% or more of their assets to charity, Inheritance Tax is paid at a reduced rate of 36% on some assets.
If you’ve been bequeathed a business, or a share in a business, or you’ve inherited a farm or agricultural land, you may be covered by agricultural relief. Find out more about reduced rate Inheritance Tax, consult the UK government’s handy calculator.
When does Inheritance Tax need to be paid?
Inheritance Tax needs to be paid within six months of the person’s death, after which HMRC will start charging interest.
The tax must be paid before money from the estate can be released. This means it is paid on the basis of estimated value. If a property is sold for more or less than the estimate, then the correct tax will be calculated later.
Inheritance Tax is paid to HMRC. Find out more about the rules of probate in the UK, in this guide.
Does Inheritance Tax apply to the family home?
Yes it does, but the threshold at which the tax kicks in is more generous.
The Inheritance Tax threshold rises to £500,000 if parents leave their home to their children or grandchildren.
This threshold can go up to £1 million if your parents choose to transfer their allowance (more on which, below).
Is there anything smart I can do to prepare for Inheritance Tax?
You can’t do much to reduce any Inheritance Tax you’ll have to pay, but you can make smart choices to reduce it for the estate you bequeath.
There are a number of steps you can take to reduce the amount of Inheritance Tax you pay.
Most importantly, make a will. This will ensure your assets go to who you want, and not be distributed according to government guidelines.
Secondly, make maximum use of your allowances.
Inheritance Tax allowances:
The £350,000 threshold at which Inheritance Tax kicks in is on a per-person basis.
If you are married or in a civil partnership and leave everything to your partner when you die, you will not use any of your allowance.
This means you can transfer any unused allowance to your partner when you die.
Their tax-free allowance will become £650,000 if they do not plan to leave the family home to your children (2 x £325,000), or £1 million if they do (2 x £500,000).
You might also decide to give away money during your lifetime to ensure your estate is under the threshold.
Inheritance Tax reduction tips:
The level at which the tax kicks in can be as high as £1 million if you pool your tax-free allowance with your partner and leave your home to your children
You can reduce your Inheritance Tax bill by giving away money during your lifetime, as long as you stick to certain rules (see below)
You can further reduce your Inheritance Tax bill by having life insurance policies written into trust. This is very simple to do and will mean that any payouts are excluded from Inheritance Tax calculations.
How much money can you give to a family member tax-free in the UK?
You don’t have to wait until you die to give money to your family.
You can give away £3,000 each tax year without paying Inheritance Tax.
This is known as the annual exemption.
You can give up to £3,000 to one person or split it between several people.
If you don’t use the full allowance in one year, you can carry it forward to the next tax year.
You can also give £250 per person to as many people as you want each tax year. This is known as the small gift allowance.
You can’t use this allowance if you have used another allowance for the same person.
You can also give money to someone tax free if they are getting married.
You are allowed to give £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else.
Money for birthday or Christmas gifts is also exempt from Inheritance Tax. Payments from your regular income to help with another person’s living costs are tax-free too.
Is there any other way to avoid Inheritance Tax on my parent’s home?
If your parents wish to, they could give you their property before they die.
However, it will only be free of Inheritance Tax if two conditions are met:
First, your parents must live for at least seven years after giving it to you. This is known as the seven-year rule. (See below for more details)
Secondly, your parents cannot continue to live there or even stay there for holidays for free.
If your parents still wanted to live in the home but gift it to you, this is known as a gift with reservation. In these circumstances, you will still have to pay Inheritance Tax on it when they die.
The only exception is if they pay you rent at a market rate, as well as pay the bills. Again, they must live there for at least seven years.
What is the seven-year rule on Inheritance Tax?
The seven-year rule means that no Inheritance Tax is payable on gifts of money or property received seven years before someone dies.
If someone who has bequeathed a gift to you dies before seven years is over, Inheritance Tax is charged on a sliding scale.
Within three years of giving the gift, Inheritance Tax is charged at 40%.
Three to four years later it is charged at 32%, falling to 24% after four to five years, 16% after five to six years and 8% after six years.
Don’t have the money to pay Inheritance Tax?
The fact that it’s not possible to sell a home you have inherited until Inheritance Tax has been paid creates a problem for many people.
There are special loan products available to tide you over while you pay Inheritance Tax and then sell the property you were left.
Talk to an independent financial advisor about your options.
Find out 10 ways to avoid inheritance tax and read our full guide to selling a home after someone dies
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