April 10, 2024

How Inheritance Tax Works In The UK: A Comprehensive Guide


In the UK, when someone passes away and leaves behind assets like money, property, or other valuables, there's a tax called inheritance tax that comes into play. 

Think of this tax as the government's way of taking a portion of the estate that's passed down, but only if it exceeds a certain value. 

The key to gaining the upper hand on this particular tax is to understand your rights and responsibilities when it comes to inheritance and ensure that you can make the most of what's been left behind. 

In this blog post, I’m going to simplify the concept of inheritance tax for you and walk you through how this tax is calculated, what counts towards it, and the various ways you might reduce the amount that needs to be paid. 

Let’s get started!

What is Inheritance Tax?

Inheritance Tax (IHT), also known as estate tax, is a levy imposed by the UK government on the value of your estate after you die. It applies to the total value of your assets, including property, possessions, money, and investments.

How much IHT you'll need to pay depends on the value of your estate and whom you decide to give away your assets to. 

Here's a breakdown of the key points about IHT:

  • It's a tax on the estate of someone who has passed away.
  • It's only charged on the part of the estate that exceeds the tax-free threshold (currently £325,000 as of 2024).
  • It's important to note that IHT is triggered by various events, not just death. These events can include giving away assets above a certain amount during your lifetime.

What Constitutes an Estate?

An estate isn't just your home; it's a combination of your total assets, including money, properties, and even your cherished comic book collection. 

Knowing what's included as part of your estate is the first step in understanding potential inheritance tax implications.

If your estate is worth more than the inheritance tax threshold, there might be tax to pay. But don't worry, there are various exemptions and allowances that can significantly reduce or even eliminate the tax bill.

Do I Need to Pay Inheritance Tax?

Whether you'll need to pay Inheritance Tax depends on the total value of your estate and how it's distributed. 

There are two key factors that determine your IHT liability:

  1. Inheritance Tax Thresholds: What You Need to Know

The good news is that there's a tax-free threshold for Inheritance Tax. 

This means that if the total value of your estate is below this threshold, your beneficiaries won't have to pay any IHT.

As of April 2024, the Inheritance Tax threshold in the UK is £325,000. This threshold can be the line between a sizable tax bill and tax-free inheritance for your loved ones.

Here's how the threshold applies:

  • If the value of your entire estate is less than £325,000, no Inheritance Tax is due.
  • If your estate is worth more than £325,000, only the amount exceeding the threshold is taxed at the standard IHT rate of 40%.

For example, imagine your estate is valued at £400,000. You would subtract the £325,000 threshold, leaving £75,000 that would be subject to Inheritance Tax at 40%. 

In this scenario, your beneficiaries would owe £30,000 (40% of £75,000) in IHT.

  1. Allowances and Exemptions: Reducing Your Taxable Amount

Exemptions and allowances are your best friends in reducing IHT. 

From the nil-rate band to gift allowances, understanding these can significantly reduce the amount of tax payable.

There are some situations where you might be exempt from paying Inheritance Tax altogether, or qualify for reliefs that reduce your IHT bill. 

Here are some key exemptions and reliefs to be aware of:

  • Leaving everything to a spouse, civil partner, charity, or community amateur sports club: If you leave your entire estate to your spouse, civil partner, a registered charity, or a community amateur sports club, your estate won't be subject to Inheritance Tax regardless of its value.
  • The Residence Nil Rate Band (RNRB): This is a valuable relief that can potentially increase the tax-free threshold for your estate. The RNRB allows you to pass on the value of your main residence to your direct descendants (children, grandchildren, adopted children, or stepchildren) tax-free.

There are some eligibility requirements for the RNRB:

  • The property must have been your main residence at some point.
  • You must be leaving the property to your direct descendants.
  • Your estate must be below a certain threshold (£2 million as of 2024).

The amount of RNRB you can utilise depends on the value of your estate and the availability of unused RNRB from a deceased spouse. We'll explore how to transfer unused RNRB later in the blog post.

Understanding these exemptions and reliefs can significantly reduce your potential IHT liability.

How Much Inheritance Tax Will I Pay?

The amount of Inheritance Tax you'll pay depends on the total value of your estate after subtracting the tax-free threshold and any applicable reliefs. 

Here's a closer look at how your IHT bill is determined:

The Inheritance Tax Rate:

The standard Inheritance Tax rate in the UK is currently 40%. 

This rate applies to the portion of your estate that exceeds the tax-free threshold. However, this rate can vary under certain conditions, such as when you donate a part of your estate to charity.

There is a reduced rate of 36% available for estates that leave at least 10% of their net value (total estate value minus debts) to charity.

Calculating Your IHT Bill:

Calculating your inheritance tax bill involves understanding the total value of your estate and applying deductions for any allowances or exemptions you're eligible for. 

Here's a step-by-step breakdown of how to calculate your potential Inheritance Tax liability:

  1. Determine the total value of your estate: This includes all your assets like property, possessions, money, investments, and life insurance payouts.
  2. Subtract the tax-free threshold: Deduct the current £325,000 threshold from the total value of your estate.
  3. Factor in any applicable reliefs: If you qualify for reliefs like the Residence Nil Rate Band (RNRB), subtract the relief amount from the value exceeding the threshold.
  4. Calculate the taxable amount: This is the remaining amount after subtracting the threshold and any reliefs.
  5. Apply the Inheritance Tax rate: Multiply the taxable amount by the standard IHT rate (40%) or the reduced rate (36% if applicable).


Let's say your estate is valued at £500,000, and you don't qualify for any reliefs. 

Here's how to calculate your potential IHT bill:

Estate value: £500,000
Threshold deduction: - £325,000
Taxable amount: £175,000 ( £500,000 - £325,000)
IHT at 40%: £70,000 ( £175,000 x 40%)
Therefore, in this scenario, your beneficiaries would have to pay £70,000 in Inheritance Tax.

By understanding these factors and performing this calculation, you can get a rough estimate of your potential IHT liability. 

Minimising Your Inheritance Tax Bill

Yes, there are legal ways to reduce your inheritance tax bill! 

From life insurance policies to the benefits available to married couples. Fortunately, there are several strategies you can consider to minimize your IHT liability. Here are some key approaches:

Planning Strategies:

  1. Utilising tax-efficient investments: Certain investments like Individual Savings Accounts (ISAs) and pensions offer tax advantages, including exemption from Inheritance Tax.
  2. ISAs: Contributions to ISAs are typically tax-free, and any gains generated within the ISA are also free from IHT. This makes ISAs a valuable tool for growing your wealth and passing it on to your beneficiaries tax-efficiently.
  3. Pensions: Pensions are generally not included in your estate for Inheritance Tax purposes. This means the value of your pension can be passed on to your beneficiaries without incurring IHT.
  4. Gifting strategies: Gifting assets while you're alive can be a way to reduce the size of your estate and potentially lower your IHT bill. However, there are rules and limitations to be aware of:
    1. The annual exemption: You can give away up to £3,000 per year without any Inheritance Tax implications.
    2. Gifts out of income: Regular gifts from your surplus income (after reasonable living expenses) are generally exempt from IHT.
    3. Gifts with reservation of benefit: If you continue to benefit from an asset you've gifted (e.g., living in a house you've given to your child), it may still be considered part of your estate for IHT purposes.
  1. Life insurance policies to cover IHT costs: Taking out a life insurance policy specifically to cover your potential IHT liability can be a smart strategy. The payout from the policy can be used to pay your IHT bill, ensuring your estate goes to your loved ones with minimal tax burden.

Getting Help with Inheritance Tax

Inheritance Tax planning can be a complex process, especially for those with significant assets or intricate family situations. 

Here's why seeking professional help can be beneficial:

The Role Of Financial Advisors:

A qualified financial advisor can provide invaluable guidance on navigating the intricacies of Inheritance Tax. Here's how they can assist you:

  • Evaluating your IHT liability: They can assess your estate's value, potential reliefs, and tax implications.
  • Developing a personalized IHT strategy: Based on your unique circumstances and financial goals, they can recommend strategies to minimise your IHT bill.
  • Considering all the options: Financial advisors are knowledgeable about various IHT planning options, including tax-efficient investments, gifting strategies, and life insurance solutions.
  • Staying up-to-date on IHT regulations: Inheritance Tax rules and thresholds can change over time. Financial advisors keep themselves informed about these changes and can ensure your plan remains compliant.

At ASWATAX, we have qualified financial advisors who are up to date on the latest IHT regulations and would assist you with all the expert advice you need to minimize your IHT bill. You can always reach out to us here.

Government Resources:

The UK government provides a wealth of information on Inheritance Tax that could be extremely beneficial to you. Here are some resources you can access:

  • GOV.UK - Inheritance Tax: https://www.gov.uk/inheritance-tax This website offers a comprehensive guide to Inheritance Tax, including information on calculating your IHT, reliefs and exemptions, and getting professional advice.
  • Inheritance Tax calculator: https://www.gov.uk/inheritance-tax-reduced-rate-calculator This online tool can help you estimate your potential IHT liability. However, it's important to remember that this is just an estimate, and a more accurate assessment might require professional assistance.


While Inheritance tax can often appear like some crazy maths test to the average person, with the aid of a professional you will find the process to be quite seamless.

And with the right knowledge and strategies in your tool belt as well, you can ensure your estate is managed efficiently, minimising tax liabilities and maximising what you can pass on to your loved ones. 

Remember, tax planning is not about evasion; it's about understanding the rules and making them work in your favour.

Thanks for reading!

Meet Omar

Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Omar and ASWATAX can do for you.

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