What is Inheritance Tax (IHT)? Definition, Rules & How to Pay It in the UK

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax charged on the value of a deceased person’s estate. In the UK, it generally applies when an estate exceeds the IHT threshold, which is currently £325,000. IHT is typically charged at 40% on anything above that threshold.

In this guide, we explain the inheritance tax definition, inheritance rules in the UK, how IHT is calculated, who pays it, and your options if you can’t afford it. We’ll also include expert commentary, real examples, and up-to-date IHT rules for 2025.

“Understanding inheritance tax is vital for families navigating a difficult time. Our goal is to demystify the rules and help you find the best way forward.” — Sam Pinson, Head of Operations, Level

How much is Inheritance Tax?
Who pays Inheritance Tax?
When do you pay Inheritance Tax?
What do you pay Inheritance Tax on?
Inheritance Tax gifts & exemptions
How to pay Inheritance Tax?
What happens if you can’t afford to pay Inheritance Tax?
How to get a loan to pay Inheritance Tax?

How much is Inheritance Tax?

Example: If an estate is valued at £500,000, under the standard individual allowance of £325,000, Inheritance Tax is charged on the amount above the threshold — in this case, £175,000. At the standard IHT rate of 40%, the tax due would be £70,000. 

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Who pays Inheritance Tax?

If there is a Will, the Executor is responsible for calculating and paying the IHT bill. If there is no Will, the Administrator (also called the Personal Representative) handles this duty.

Once the tax has been paid, the Executor or Administrator can apply for a Grant of Probate, which is a legal document giving them authority to deal with the estate.

“Our clients are often surprised to learn that inheritance tax must be paid upfront, before any money or property is passed on. Planning for this in advance can save time and stress.” — James Emery, Sales Director, Level

Probate and IHT

The Executor or Administrator must request Grant of Probate, it allows for the legal process of administering a deceased person’s estate. It gives the executor the right to deal with the deceased person’s property, money, and possessions. However, it can’t be issued until IHT has been paid. Without it, assets cannot be sold, funds cannot be accessed, and beneficiaries cannot receive their inheritance.

There are also exemptions from IHT for people who die in active service in the armed forces, police, fire service, or while responding to emergency situations. This exemption also applies if a person is injured on active service and has their death hastened by the injury and even if they have left active service at the time of their death.

Does a spouse pay Inheritance Tax?

Married or registered civil partners do not have to pay any Inheritance Tax on any asset left by their spouse. When the second partner dies, the Estate qualifies for a married couple’s transferable allowance, which is the sum of two single people’s allowance, or £650,000 (providing none of the IHT threshold was previously used). The person who then inherits this Estate is only liable to pay tax on anything over the £650,000. This extra transferable element is known as Transferable Nil Rate Band (TNRB).

Do Cohabiting Couples Pay IHT?

Unmarried couples do not benefit from these exemptions. Jointly owned property can pass to the surviving partner, but IHT will still be due if the total estate exceeds the threshold.

Without a Will, the property can still be transferred to you through the ‘right of survivorship’ and the same Inheritance Tax rules would apply. However, there’s also a risk that a surviving partner may not inherit anything automatically, as the family members of your partner would have a right to claim their share of other assets left.

Check inheritance rights for cohabiting couples – Citizens Advice

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When do you pay Inheritance Tax?

There are important dates to be aware of with regards to paying Inheritance Tax. If payments are not made before the deadline, HMRC starts charging interest. Here’s are the key things to note about when to pay IHT:

• It must be paid within six months of the date of death
• It must be paid before probate is granted
• Interest (currently 3.75%) is charged on late payments

It may be possible to pay IHT in annual instalments (for up to 10 years), if the estate is comprised of highly illiquid assets. You must speak to HMRC first.

What do you pay Inheritance Tax on?

IHT is paid on the total value of the Estate left by the deceased. You pay IHT on:

• Property
• Bank accounts
• Investments (stocks, ISAs)
• Vehicles
• Valuable items (art, jewellery)
• Life insurance policies not written in trust

However, Inheritance Tax is worked out using the net value of the Estate. If debts, such other taxes or expenses incurred in managing the Estate, need to be paid, then you’ll only pay IHT on the remaining amount that exceeds the Inheritance Tax threshold. Deductible debts:

• Mortgages
• Funeral expenses
• Credit card debts
• Legal and professional fees relating to the estate

Example calculation, assuming a single person Inheritance Tax threshold of £325,000:

Estate value: £600,000

Debt: £160,000

Net estate: £440,000

Taxable amount: £440,000 – £325,000 = £115,000

IHT at 40% = £46,000

Do you pay Inheritance Tax on a house?

You pay IHT on property just like any other part of the estate. However, the Residence Nil Rate Band (RNRB) offers additional relief if the property is passed to children or grandchildren.

If the house that was the primary residence of the deceased has been left to direct descendants, then they can access a further tax-free allowance of up to £175,000 per person, which is in addition to the £325,000 single person Inheritance Tax threshold. This is called the ‘Residence Nil Rate Band’ (RNRB) and it can be passed on to children and grandchildren only. This means that Inheritance Tax may not be due on the first £500,000 of the Estate per individual.

Residence Nil Rate Band Taper Table

Do you pay IHT on gifted money?

While someone is still alive, they can gift as much as they want, to anyone they want, in the form of ‘potentially exempt transfers’ (PETs). However, if that person passes away, those gifts (or PETs) can then be included in the Estate of the deceased person. Under the current rules, if the gift is given before death, and the donor lives for more than seven years after any assets were given, it will be IHT exempt. However, if the donor dies sooner, tax will be charged on the gifts at various levels if the Inheritance Tax threshold is reached.

Gifts use up the Inheritance Tax threshold before other assets such as property and values are calculated as what they were worth at the time of donation. Inheritance Tax must be paid on all gifts above the threshold if they are not exempt.

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Are there any gifts that are exempt?

Yes. Certain types of gifts are completely exempt from IHT:

• Gifts to a spouse or civil partner
• Gifts to charities
• Wedding gifts:
  • Parents: £5,000
  • Grandparents: £2,500
• Annual exemption: Up to £3,000
• Small gifts exemption: £250 per person per year
• Gifts for living costs of dependent relatives or children

Moneyhelper – a guide to gifts and exceptions

How to pay inheritance tax before Probate

An Executor or Administrator can pay Inheritance Tax from their own bank account. You can do this online, using your IHT reference number or by telephone banking, CHAPS or BACS, and/or at the bank. They can also make the payment from any joint accounts held with the deceased.

HMRC requires forms IHT400 and IHT421 to be submitted before probate is issued. Processing usually takes 20 working days.

Pay your Inheritance Tax bill – GOV.UK

What happens if you can’t afford to pay?

Lots of estates are asset-rich and cash poor. Estates risk being ‘locked’ because Inheritance Tax is due within six months of death. When it comes to property, the only way to pay the Inheritance Tax (IHT) bill is from personal funds or with a traditional personal bank loan. As the property cannot be sold until the IHT has paid in full. Unfortunately, this is a common occurrence and is a classic ‘chicken and egg’ situation.

The Executor (you) or Administrator needs the Grant of Probate before they can start liquidating the Estate assets to settle the IHT bill. However, it is not possible to get the Grant of Probate until the IHT is paid. In certain circumstances, assets such as property might take longer to sell. In this case, you can pay for your Inheritance Tax in annual instalments over 10 years. The first payment is due six months after the person’s death. You’ll only be liable for interest on that Inheritance Tax payment if you pay late. If you can’t afford to pay in full, interest will be charged on the total value of both the outstanding tax plus any instalments that haven’t been paid. Once you have sold the assets, any outstanding balance must be paid in full.

Inheritance Tax Loan

Each year an estimated 2,000 families are unable to afford the average up front IHT bill of around £220,000. If you find yourself saying “I can’t afford to pay Inheritance Tax”, you are not alone. Level has therefore designed a unique Estate Expense & Inheritance Tax Loan to help you pay IHT. With this solution, there are:

Benefits:

• No personal liability
• No credit checks
• No charge on property
• No monthly repayments
• No Will required

This loan is paid directly to HMRC, enabling you to obtain probate and move forward.

Learn more about IHT loans – Level

How to get a loan to pay Inheritance Tax from Level

Level’s Estate Expense & IHT Loan is paid directly to HMRC. Allowing families to start the Probate process and receive their inheritance. Regulated by the Financial Conduct Authority, we have made it as easy as possible for you. Either get a quote or apply today. Our team is hand to help you and answer any questions on 020 7205 2870. We also offer Inheritance Advance, a product for Beneficiaries who want to access their inheritance quickly.