Inheritance Tax Explained: What It Is, Who Pays It, and How to Manage It

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.

This guide explains the inheritance tax definition, the rules in the UK, how IHT is calculated, who pays it, and your options if you cannot afford it. We include expert commentary, real worked 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?

Example: if an estate is valued at £500,000, IHT is charged on the amount above the £325,000 nil-rate band – in this case, £175,000. At 40%, the tax due would be £70,000.

For a full breakdown of how to calculate your IHT liability, use our Inheritance Tax calculator or read our guide to calculating Inheritance Tax. For the latest rule changes coming into effect between 2025 and 2030, see our IHT rule changes guide.

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 known as the Personal Representative) handles this duty.

Once the tax has been paid, the executor or administrator can apply for a Grant of Probate – the legal authority to deal with the estate’s assets.

“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 must obtain a Grant of Probate before they can legally administer the estate – but it cannot 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 IHT exemptions for people who die in active service in the armed forces, police, fire service, or emergency services. This exemption also applies where a person is injured on active service and their death is hastened by that injury, even if they had since left active service.

Does a spouse pay Inheritance Tax?

Married or registered civil partners do not pay any Inheritance Tax on assets left by their spouse. When the second partner dies, the estate qualifies for the Transferable Nil Rate Band (TNRB) – the combined allowance of both individuals, totalling up to £650,000, provided none of the threshold was previously used.

Do cohabiting couples pay Inheritance Tax?

Unmarried couples do not benefit from the spousal IHT exemption. 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, a surviving partner may also not inherit automatically – family members of the deceased have a right to claim under intestacy rules.

For further guidance, Citizens Advice covers inheritance rights for cohabiting couples in detail.

When do you pay Inheritance Tax?

There are important deadlines to be aware of. Missing them means HMRC starts charging interest – currently at 7.75% per annum on late payments (effective from 9 January 2026, following the Bank of England base rate reduction). Key points:

• IHT must be paid within six months of the date of death
• It must be paid before probate is granted
• Interest at 7.75% per annum is charged on any late payments

For property-heavy estates with limited liquid assets, it may be possible to pay IHT in annual instalments over up to 10 years – but you must apply to HMRC first. Read more in our guide to when and how to pay Inheritance Tax.

What do you pay Inheritance Tax on?

IHT is paid on the total net value of the estate – that is, all assets minus any outstanding debts. Assets that form part of the estate include:

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

Deductible debts that reduce the taxable value include:

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

Do you pay Inheritance Tax on a house?

Property is included in the estate like any other asset. However, if the deceased’s main residence is left to direct descendants (children or grandchildren), the Residence Nil Rate Band (RNRB) provides an additional tax-free allowance of up to £175,000 per person – on top of the standard £325,000 nil-rate band. This means IHT may not be due on the first £500,000 of an individual’s estate.

The RNRB tapers for larger estates:

Inheritance Tax gifts and exemptions

Do you pay IHT on gifted money?

Gifts made during a person’s lifetime can form part of the estate for IHT purposes, depending on when they were made. These are known as potentially exempt transfers (PETs). If the donor lives for more than seven years after making the gift, it is fully IHT exempt. If they die within seven years, taper relief applies:

Are there any gifts that are exempt from IHT?

Yes. Certain gifts are completely exempt regardless of when they are made:

• Gifts to a spouse or civil partner
• Gifts to charities
• Wedding gifts – up to £5,000 from parents, £2,500 from grandparents
• Annual exemption – up to £3,000 per year (unused allowance can carry forward one year)
• Small gifts exemption – up to £250 per person per year
• Gifts for the living costs of dependent relatives or children

For a full overview of gifting rules, MoneyHelper’s guide to gifts and IHT exemptions is a useful reference. Our own IHT guide also covers the annual exemption in detail.

How to pay Inheritance Tax

An executor or administrator can pay IHT from their own bank account using the IHT reference number – online, by telephone banking, CHAPS, BACS, or at the bank. Payment can also be made from joint accounts held with the deceased.

Before applying for probate, forms IHT400 and IHT421 must be submitted to HMRC. Processing typically takes 20 working days.

Pay your Inheritance Tax bill – GOV.UK

What happens if you can’t afford to pay?

Many estates are asset-rich but cash-poor. IHT is due within six months of death – but property cannot be sold until probate is granted, and probate cannot be granted until IHT is paid. This is the classic catch-22 that affects thousands of families every year.

The executor needs the Grant of Probate before they can liquidate estate assets to settle the bill – but cannot get the grant until the bill is paid. For property-heavy estates, HMRC allows payment in annual instalments over up to 10 years, with the first instalment due six months after death. Interest at 7.75% per annum accrues on any outstanding balance.

For more detail on all available options, read our guide to when and how to pay Inheritance Tax and our blog post on timing and payment methods.

How to get a loan to pay Inheritance Tax

Each year an estimated 2,000 families are unable to afford an average upfront IHT bill of around £220,000. If you are in this position, you are not alone – and there is a practical solution.