Inheritance Tax (IHT) is the tax payable on a deceased person’s estate (property, money and other possessions) above a certain value. In practice, the majority of estates in the UK will not be liable to pay IHT. For some estates, inheritance tax is central to probate, yet many bereaved families are unclear about what it is, how it applies, and when or how it should be paid.
“Most people are aware of IHT,” says David Wilkie, Chartered Accountant at Wilkie Randall. “But you could ask 100 people on the street what it is and what it involves, and I suspect you'd get 100 different answers. So, there are a lot of misconceptions.
“IHT is a tax on wealth, rather than one of our many regular taxes on income,” he explains. “In most cases it's a one-off tax, and it's a tax that applies when someone has died. It’s basically a way for the government to take a slice of people’s wealth after death.
“When anyone dies in the UK,” he explains, “IHT is something we have to consider and ask: is it going to be relevant to their estate?” Whether or not IHT needs to be paid depends on the value of the estate on death (which includes gifts given in the seven years before the death), and there are thresholds that need to be met before IHT is payable.
“In terms of how the tax is calculated,” says David, “it’s about assessing the wealth of somebody when they die. So, you look at what they owned on the day they died.” This might be money in bank accounts, real estate, investments, personal possessions, or businesses they had shares in.
“There are many different things we look at,” he explains. “And some can be quite niche, such as music or other royalties. But essentially, anything that's in someone’s name when they die, you have to consider whether it's relevant to IHT. That’s not the same as saying that everything will be taxed, but will it be relevant to IHT?”
You also need to look at gifts, for example money, personal goods, or property, that the deceased person gave away before they died. Gifts given less than seven years before death might be taxed, depending on:
- who they were given to and their relationship to the deceased person;
- the value of the gift; and/or
- when the gift was given.
In calculating the value of the estate, you then also have to consider any debts, such as unpaid utility bills, the outstanding mortgages on a property, and money owed on credit cards, which become liabilities of the estate.
Tax-free elements
“Like many taxes, there is a tax-free element on what is assessed,” says David. “So, every UK taxpayer will get a tax-free amount, which is currently £325,000 per person. This amount hasn't changed for a long time, but is, of course, a decision for the government of the day.” The standard IHT rate is 40%, which is only applicable to that part of the estate above the threshold of £325,000.
Normally, there won’t be any IHT if either:
- the estate’s value is below £325,000; or
- the deceased person left everything above the £325,000 threshold to their spouse, civil partner, a charity, or a community amateur sports club.
If someone gives away their home to their children or grandchildren, the threshold can increase to £500,000 (although the rules for this can be complicated). And if you’re married or in a civil partnership, any unused threshold from the first spouse/civil partner to die can be added to the surviving partner’s threshold on their death.
Who and when
It’s also important to understand who pays IHT, and when in the probate process it needs to be paid. “IHT is a bit of a misnomer,” says David. “And it can lead people to think that whatever you inherit is going to be taxed. But beneficiaries don’t usually pay tax on things they inherit, although they might have related tax to pay.”
Instead, the responsibility for paying IHT falls on the executors named in the will, if there is a will, and they will pay the IHT out of funds from the estate. Where there isn't a will, it falls on those personal representatives who sort out the affairs of somebody after they die.
Broadly speaking, IHT is payable by the end of the sixth month after the date of death and, if it’s not paid by that point, the government will start charging interest. “You therefore need to pay between six and seven months after somebody dies,” explains David.
“That's quite alarming for a lot of people,” he acknowledges. But there are allowances made within the tax rules for certain assets that are potentially difficult or slow to sell. For example, for some assets which may take time to sell, including houses or certain shares, payment can be split into equal instalments over ten years, but the tax must be paid in full once the asset is sold.
“While the rule is that you have to pay IHT between six and seven months after the death, the reality is some people, even with quite simple cases, won't meet that deadline,” says David. “It's quite a short period.” Cases sometimes only come to an accountant in month five or six after somebody's died and gathering the necessary information can take a long time or paperwork can be delayed.
To support clients, accountants usually provide an estimated calculation, suggesting that, if there’s some doubt, the client overpays slightly to avoid interest. “If things are delayed, for whatever reason, at least pay your tax and have that worry taken away,” advises David.
Broadly speaking, IHT is only paid once but, in some cases, it has to be revisited. “If you're making an estimate of IHT to meet the deadline, you don't have those precise calculations on the estate,” David explains. So, you might have to go back to HMRC (HM Revenue and Customs) to reclaim overpaid IHT or, more frequently, pay more because new assets or issues have come to light.
Common misconceptions
There are many misconceptions about IHT, most of which revolve around how the tax is applied and paid. Debbie Rafferty, Senior Tax Manager at Sumer Probate, observed for example, that one of the most common misconceptions she sees is that probate can be obtained without paying any IHT first. Another is that executors believe they must pay the IHT personally. Under the Direct Payment Scheme, executors can ask a bank or building society to pay some or all the IHT due directly from the deceased person’s accounts.
“People sometimes also misunderstand how taper relief works on gifts made during someone’s lifetime,” she adds. The timing of the gift in relation to death is critical in such cases. Taper relief on a sliding scale (with reduced IHT rates) is applied to gifts made three to seven years before death. It only applies if the total value of gifts made in the seven years before death is over the £325,000 tax-free threshold. More information and examples can be found on the HMRC’s Inheritance Tax Manual web page.
Additionally, certain lifetime gifts are exempt from IHT, including annual gifts up to £3,000, small gifts of £250 per recipient, gifts on marriage or civil partnership, regular gifts from surplus income, and gifts to spouses or charities. You can find further information on the government website: How Inheritance Tax works: thresholds, rules and allowances: Rules on giving gifts - gov.uk
A common misconception David encounters is that clients assume all necessary taxes were paid by the deceased. “A client might say to me: ‘I’ve been told I should talk to you about IHT because my father’s died and he was quite wealthy. But it's all OK because I know he paid all his taxes before he died’.”
David suspects this view is usually based on the idea that because someone has all their financial affairs well arranged in their lifetime, then there won’t be any financial issues to worry about after death. “But you simply can't prepay your IHT,” emphasises David. “It can only be dealt with after death.”
Another misconception is that IHT isn’t relevant because the person who died “wasn’t very wealthy”. “But it’s always something that needs looking at if you’re responsible for an estate,” emphasises David. “You can perhaps rule it out very quickly, but it's something everyone should consider.”
He adds that some clients may think: “Mum's just died, and because Dad died before her, she inherits all of his tax-free amounts, so we’ve got a double tax-free amount for IHT”. But this is not always the case. “When the father died, he may have made gifts during his lifetime that reduced his tax-free amount,” explains David. “Or he might not have left everything to the mother in his will. And when you're trying to work out IHT, these things are relevant.”
Taking advice
IHT is a hugely important tax,” stresses David. “So, it's important to get IHT advice if you’re administering an estate, and also to get advice on it before you die.”
ICAEW-accredited firms are particularly well-equipped to deal with this area of probate because of their wider expertise and background. “In the probate process, probably the most significant element is getting the IHT right and as accountants, this is our bread and butter. It’s what we do,” explains James Gare, partner at Sumer Probate.
“As accountancy and tax professionals, IHT is part of our initial training and exams, so it is embedded in accountancy firms,” says Debbie. “And we also work regularly with valuers and with independent financial advisers, so we can pull in that information too.”
“If you go to a solicitor for probate,” adds David, “they might outsource IHT matters to an accountant anyway. But as ICAEW-accredited probate practitioners, we can calculate the IHT and assist with the whole probate process, doing everything (apart from conveyancing) as a one-stop-shop solution.”
“There are also opportunities during the probate process to make the distribution of someone’s estate more tax efficient, which accountancy firms routinely consider,” according to James. In some cases, while handling probate, a potential for greater tax efficiency is identified, such as through a deed of variation, which changes the details in a will to determine how an estate is distributed. It’s a good idea to seek advice about what might be right for your circumstances.
Looking ahead
For many years, the world of IHT has remained relatively stable, but it is a tax that successive governments have considered amending and there may be changes in future. For example, the November 2024 budget included changes to agricultural and business property relief, and IHT now includes most unused pension funds within estate valuations for IHT purposes.
Reflecting on these recent changes, David observed that IHT may become a more interesting and complex area of expertise over the next few years. This could make getting the right advice at the right time even more important for families and others involved in administering estates.
Support for consumers
- Legal services (probate) hub for consumers
- A guide for lay executors
- A guide for beneficiaries
- Read more on 'Why choose an accountant for probate'
- How to value an estate for Inheritance Tax and report its value: Estimate the estate’s value - gov.uk
- How Inheritance Tax works: thresholds, rules and allowances: Overview - gov.uk
Editor’s note: This article is the first in a two-part series designed to help consumers understand key aspects of the probate process. The series also highlights the valuable expertise ICAEW-accredited probate practitioners can bring to this complex area.
