How Inheritance Tax works: thresholds, rules and allowances
Printable version
1. Overview
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.
There’s normally no Inheritance Tax to pay if either:
- the value of your estate is below the £325,000 threshold
- you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
You may still need to report the estate’s value even if it’s below the threshold.
If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.
If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.
This guide is also available in Welsh (Cymraeg).
Inheritance Tax rates
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
Example
Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will. (The net value is the estate’s total value minus any debts.)
Reliefs and exemptions
Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged on the gift is less than 40%.
Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Contact the Inheritance Tax helpline about Agricultural Relief if your estate includes a farm or woodland.
Who pays the tax to HMRC
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).
Your beneficiaries (the people who inherit your estate) do not normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.
People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.
2. Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.
If you leave the home to another person in your will, it counts towards the value of the estate.
If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:
- you leave it to your children (including adopted, foster or stepchildren) or grandchildren
- your estate is worth less than £2 million
Giving away a home before you die
There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.
If you want to continue living in your property after giving it away, you’ll need to:
- pay rent to the new owner at the going rate (for similar local rental properties)
- pay your share of the bills
- live there for at least 7 years
Otherwise it counts as a ‘gift with reservation’ and will be added to the value of your estate when you die. (A gift with reservation is where you give something away but continue to benefit from it.)
You do not have to pay rent to the new owners if both the following apply:
- you only give away part of your property
- the new owners also live at the property
If you die within 7 years
If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.
The 7 year rule does not apply to gifts with reservation.
Further help
Call the Inheritance Tax helpline if you have questions about giving away a home. They cannot give you advice on how to pay less tax.
3. Rules on giving gifts
Inheritance Tax may have to be paid after your death on some gifts you’ve given.
Gifts given less than 7 years before you die may be taxed depending on:
- who you give the gift to and their relationship to you
- the value of the gift
- when the gift was given
You can get professional advice from a solicitor or a tax adviser about what you can give away tax free during your lifetime.
What counts as a gift
Gifts include:
- money
- household and personal goods, for example, furniture, jewellery or antiques
- a house, land or buildings
- stocks and shares listed on the London Stock Exchange
- unlisted shares you held for less than 2 years before your death
A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift.
Anything you leave in your will does not count as a gift but is part of your estate. Your estate is all your money, property and possessions left when you die. The value of your estate will be used to work out if Inheritance Tax needs to be paid.
Who does not pay Inheritance Tax
Some gifts are exempt from Inheritance Tax.
There’s no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they:
- live in the UK permanently
- are legally married or in a civil partnership with you
There’s also no Inheritance Tax to pay on any gifts you give to charities or political parties.
Using allowances to give tax free gifts
Each tax year, you can also give away some money or possessions free of Inheritance Tax. How much is tax free depends on which allowances you use.
Annual exemption
You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your ‘annual exemption’.
You can give gifts or money up to £3,000 to one person or split the £3,000 between several people.
You can carry any unused annual exemption forward to the next tax year - but only for one tax year.
The tax year runs from 6 April to 5 April the following year.
Example
In the 2022 to 2023 tax year, Mark gave £2,000 to his daughter Jane. If he died within 7 years of the gift, this would use £2,000 of his annual exemption.
In the following 2023 to 2024 tax year, Mark gave £4,000 to his other daughter Sarah. If Mark died within 7 years of the gift, this would use his annual exemption of £3,000 plus the £1,000 of annual exemption left over from the previous tax year.
Even if Mark dies within 7 years of giving these gifts, there’s no Inheritance Tax to pay.
Small gift allowance
You can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
Birthday or Christmas gifts you give from your regular income are exempt from Inheritance Tax.
Gifts for weddings or civil partnerships
Each tax year, you can give a tax free gift to someone who is getting married or starting a civil partnership. You can give up to:
- £5,000 to a child
- £2,500 to a grandchild or great-grandchild
- £1,000 to any other person
If you’re giving gifts to the same person, you can combine a wedding gift allowance with any other allowance, except for the small gift allowance.
For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.
If you make regular payments
You can make regular payments to another person, for example to help with their living costs. There’s no limit to how much you can give tax free, as long as:
- you can afford the payments after meeting your usual living costs
- you pay from your regular monthly income
These are known as ‘normal expenditure out of income’. They can include:
- paying rent for your child
- paying into a savings account for a child under 18
- giving financial support to an elderly relative
If you’re giving gifts to the same person, you can combine ‘normal expenditure out of income’ with any other allowance, except for the small gift allowance.
For example, you can give your child a regular payment of £60 a month (a total of £720 a year) as well as using your annual exemption of £3,000 in the same tax year.
The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. This is known as the 7 year rule.
If you die within 7 years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you gave it.
Gifts given in the 3 years before your death are taxed at 40%.
Gifts given 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.
Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold.
Taper relief
| Years between gift and death | Rate of tax on the gift |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Giving gifts you still benefit from
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.
Gifts with reservation include:
- giving your home to a relative but still living there
- giving away a caravan but still using it for free for your holidays
- giving away a valuable painting but still displaying it in your house
Read further guidance on when a gift with reservation counts towards the estate’s value.
Keeping records of gifts you’ve given
The person who deals with your estate will need to work out what gifts you gave in the 7 years before your death. You should keep the following records:
- what you gave and who you gave it to
- the value of the gift
- when you gave it
How Inheritance Tax on a gift is paid
Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.
Example
Sally died on 1 July 2022. She was not married or in a civil partnership when she died.
She gave 3 gifts in the 9 years before her death:
- £50,000 to her brother 9 years before her death
- £325,000 to her sister 4 years and 2 months before her death
- £100,000 to her friend 3 years before her death
There’s no Inheritance Tax to pay on the £50,000 gift to her brother as it was given more than 7 years before she died.
There’s also no Inheritance Tax to pay on the £325,000 she gave her sister, as this is within the Inheritance Tax threshold.
But her friend must pay Inheritance Tax on her £100,000 gift at a rate of 32%, as it’s above the tax-free threshold and was given 3 years before Sally died. The Inheritance Tax due is £32,000.
Sally’s remaining estate was valued at £400,000, so the estate would pay Inheritance Tax of 40% on £400,000 (£160,000).
Read further guidance on when a gift counts towards the estate’s value, how to value it and how much Inheritance Tax may be due.
4. When someone living outside the UK dies
If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.
It’s not paid on ‘excluded assets’ like:
- foreign currency accounts with a bank or the Post Office
- overseas pensions
- holdings in authorised unit trusts and open-ended investment companies
There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.
Contact the Inheritance Tax helpline if you’re not sure whether your assets are excluded.
When you will not count as living abroad
HMRC will treat you as being domiciled in the UK if you either:
- lived in the UK for 15 of the last 20 years
- had your permanent home in the UK at any time in the last 3 years of your life
Double-taxation treaties
Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived.