Probate and Inheritance Tax Explained

Inheritance Tax (IHT) is one of the most misunderstood aspects of probate. Many people assume it is a straightforward percentage applied to everything a person owns. In reality, the rules around what is taxable, what is exempt, and what allowances apply make IHT one of the more complex areas of UK tax.

What is Inheritance Tax?

Inheritance Tax is a tax on the value of a deceased person’s estate above a certain threshold. The current standard rate is 40% on the portion of the estate that exceeds the applicable nil rate band. Most estates do not end up paying Inheritance Tax.

The Inheritance Tax threshold: the nil rate band

Every individual has a nil rate band of £325,000. This is the amount that can pass free of IHT. The nil rate band has remained at this level since 2009 and is frozen until at least April 2030.

The Residence Nil Rate Band

An additional allowance of up to £175,000 is available where a residential property is left to a direct descendant such as a child or grandchild. This is the Residence Nil Rate Band (RNRB). Combined with the standard nil rate band, individuals may be able to pass up to £500,000 free of IHT where a qualifying property is involved.

Transferring allowances between spouses

When a married person or civil partner dies and leaves everything to their surviving spouse, no IHT is due. Any unused nil rate band and RNRB can be transferred to the surviving spouse’s estate, potentially doubling the allowances available on the second death.

Gifts and the seven-year rule

Gifts made during the deceased’s lifetime may be relevant to the IHT calculation. Some gifts are exempt regardless of when they were made. Others are potentially exempt transfers (PETs) and fall outside the estate only if the person who made them survived for seven full years afterwards.

Which HMRC form is required?

For deaths on or after 1 January 2022, most estates going through probate will need to complete the IHT400, regardless of whether IHT is actually due. The IHT400 is accompanied by supplementary schedules covering specific categories of assets and specific exemptions or reliefs.

How does YouCanDoProbate handle IHT?

As you enter information about the estate, YouCanDoProbate performs every calculation, determines which exemptions and reliefs apply, and populates every relevant section of the IHT400 and its schedules. The platform was independently assessed by the ICAEW to confirm its accuracy and compliance. You supply the facts; the platform applies the rules.