What is Inheritance Tax, and Does the Estate Need to Pay It?

Inheritance Tax (IHT) is a tax on the value of a deceased person’s estate above certain thresholds. It is charged at 40% on the portion of the estate that exceeds the available tax-free allowance. A number of exemptions and reliefs can significantly reduce or eliminate the liability. Most estates do not pay Inheritance Tax.

The nil rate band

Every individual has a standard nil rate band of £325,000. Assets up to this value can pass free of IHT. The NRB has been at this level since 2009 and is frozen until at least April 2030.

The Residence Nil Rate Band

Where a residential property passes to a direct descendant, an additional allowance called the Residence Nil Rate Band (RNRB) is available, currently up to £175,000 per person. Combined with the standard NRB, a qualifying individual may be able to pass up to £500,000 free of IHT.

Transfers between spouses

Assets passing between married couples or civil partners are generally exempt from IHT at the point of the first death. Any unused nil rate band and RNRB can also be transferred to the surviving spouse’s estate.

When does IHT have to be reported?

Even if no IHT is due, the estate’s position must be reported to HMRC as part of most probate applications. For deaths from 1 January 2022, this is done through the IHT400. YouCanDoProbate performs every IHT calculation automatically and completes the IHT400 and all required supplementary schedules.