How does iht work

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Last updated: April 8, 2026

Quick Answer: Inheritance Tax (IHT) is a UK tax on the estate of someone who has died, including property, money, and possessions. It applies if the estate's value exceeds the nil-rate band of £325,000 (frozen until at least April 2028), with a standard rate of 40% on amounts above this threshold. There are exemptions, such as transfers between spouses or civil partners, and a residence nil-rate band of up to £175,000 for homes passed to direct descendants. IHT must be paid within six months of the end of the month in which the death occurred, typically by the executor or administrator.

Key Facts

The nil-rate band is £325,000, frozen until at least April 2028.
The standard IHT rate is 40% on estates above the nil-rate band.
A residence nil-rate band of up to £175,000 applies for homes passed to direct descendants.
IHT must be paid within six months of the end of the month of death.
Transfers between spouses or civil partners are exempt from IHT.

Overview

Inheritance Tax (IHT) is a tax levied on the estate of a deceased person in the United Kingdom, introduced in its modern form by the Finance Act 1975, which replaced estate duty. It applies to assets such as property, money, and possessions, with the aim of taxing wealth transfers upon death. Historically, IHT has evolved from earlier taxes like estate duty (1894-1975) and capital transfer tax (1975-1986), reflecting changing policies on wealth distribution. As of 2023-2024, IHT generates approximately £7 billion annually for the UK government, accounting for about 0.8% of total tax revenue. The tax is governed by the Inheritance Tax Act 1984 and is administered by HM Revenue and Customs (HMRC), with key thresholds and rates set by annual budgets. Over time, exemptions and reliefs have been added to address concerns about fairness and economic impact, such as for agricultural or business property.

How It Works

IHT works by assessing the total value of a deceased person's estate, which includes all assets minus liabilities like debts. If the estate exceeds the nil-rate band of £325,000, tax is charged at 40% on the excess amount. There is an additional residence nil-rate band of up to £175,000 (for 2023-2024) if the main home is passed to direct descendants, such as children or grandchildren, potentially increasing the tax-free threshold to £500,000. The process involves the executor or administrator valuing the estate, reporting it to HMRC on form IHT400, and paying any tax due within six months of the end of the month of death to avoid interest charges. Exemptions include transfers to spouses or civil partners, gifts to charities, and certain small gifts made during the donor's lifetime. Reliefs may apply for business or agricultural property, reducing the taxable value by up to 100% in some cases.

Why It Matters

IHT matters because it affects estate planning, wealth distribution, and government revenue in the UK. It incentivizes individuals to use exemptions and reliefs, such as making lifetime gifts or setting up trusts, to minimize tax liabilities. For families, IHT can impact inheritance, with high-value estates facing significant tax bills that may require asset sales. Economically, IHT contributes to public funds, supporting services like healthcare and education, but critics argue it can be complex and unfair, potentially discouraging savings and investment. In practice, IHT has real-world applications in legal and financial advice, with professionals helping clients navigate rules to protect assets for future generations.