Not everyone pays Inheritance Tax. It's only due if your estate - including any assets held in trust and gifts made within 7 years of death - is valued over the current Inheritance Tax threshold (£325,000 in 2014 to 15).
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Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2014 to 15). The tax is payable at 40% on the amount over this threshold or 36% if the estate qualifies for a reduced rate as a result of a charitable donation.
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2014 to 15. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased's estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.
Find out more about who pays in different situations in our guides below.
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses.
An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust.
You should also review any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate (see more below).
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:
In most cases, you must pay Inheritance Tax within 6 months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding.
You can pay in yearly instalments over 10 years if the value of the estate is tied up in property such as a house.
The due dates are different if you're paying Inheritance Tax on a trust.
You have to fill out an Inheritance Tax form as part of the probate process (or confirmation in Scotland) even if no Inheritance Tax is due. Different forms are used depending on where the deceased lived, and whether there is any Inheritance Tax to pay. You must pay some or all of any Inheritance Tax due before you can get a grant of probate (or confirmation).
There are various ways to pay the Inheritance Tax due on an estate, including paying on account or paying in instalments.