Will you have to pay Inheritance Tax? The rules explained…

Inheritance Tax (IHT) is often dubbed the UK’s “most hated tax.” In 2025, the TaxPayers’ Alliance found that 46% of survey respondents named IHT as the UK’s least fair tax.

But what is IHT, and who has to pay it?

Despite being the most unpopular tax, IHT bills might not be as common as you think. According to HMRC, in 2022/23, fewer than 1 in 20 deaths triggered an IHT charge.

That said, with the Office for Budget Responsibility forecasting that IHT receipts will rise to £14.3 billion by 2029/30 (compared to £7.5 billion in 2023/24), it’s important to understand whether your estate could be taxed after you pass away. That way, you can plan accordingly and help ensure as much of your wealth passes to loved ones as possible.

The IHT regime is complex. Read on to learn how it works, how much your estate could be taxed, and the steps you can take now to mitigate a potential IHT bill.

Inheritance Tax may be levied on your wealth after you pass away

When you die, your estate may be subject to IHT. This is typically charged at 40%, but the rate may be lower in some circumstances.

To calculate your IHT charge, the following are usually counted in your estate:

• Money: Including any current accounts, savings accounts, and money owed to you.
• Property: Including your home, additional properties (such as rentals), land, and business property.
• Investments: Any stocks, shares, bonds, or other investments held in your name.
• Possessions: Everything you own, from handbags to antique furniture.
• Life insurance: Policy payouts not held in trust.

From April 2027, unused funds held in a pension scheme are also set to be included in your estate for IHT purposes, as well as any death benefits offered by your pension provider.

Some liabilities may be deducted to calculate your gross estate, such as:

• Bills
• Mortgages
• Credit card debts and loans
• Certain funeral expenses.

Your gross estate is then used to calculate your IHT bill. However, not every estate will attract a charge, as explained below.

Inheritance Tax is typically only charged on assets exceeding your nil-rate band

Some or all of your estate may be exempt from IHT. Typically, IHT is only charged on assets exceeding the tax-free threshold, known as your “nil-rate band.”

In 2025/26, the standard nil-rate band is £325,000. You may also have a residence nil-rate band of £175,000 if you leave a primary residence to a direct descendant, such as your child or grandchild. If so, up to £500,000 of your estate may be exempt from IHT.

What’s more, if you’re married or in a civil partnership, any unused nil-rate band can usually be passed to the surviving spouse. IHT generally isn’t charged on assets passed to a spouse. So, together, you may be able to leave up to £1 million to loved ones before triggering an IHT bill.

The nil-rate bands are expected to remain frozen at their current values until at least 2031. With the standard nil-rate band having stayed at the same level since 2009, and the residence nil-rate band since 2020, the portion of your estate liable to IHT could be growing as the value of your assets rises.

A Financial Planner could help you determine the current value of your estate to calculate how much of your wealth, if any, will be subject to IHT.

Learn more about our Inheritance Tax planning support.

Inheritance Tax is usually due within six months of your death

Your estate’s IHT bill is usually paid by the executor named in your will, or your estate’s administrator if you die without a will. Payments are commonly made using:

• Funds within the estate (such as cash in a bank account)
• Money from the sale of assets (such as property, possessions, or investments)
• A life insurance payout.

After the sixth month following your death, HMRC will usually start charging interest on any unpaid IHT. If the funds are coming from the sale of assets, this might not be enough time for your executor to complete the sale. As such, it could be worth setting funds aside, such as in a bank account, trust, or insurance policy, to cover your estate’s IHT bill and avoid costly interest charges.

You may be able to mitigate your estate’s Inheritance Tax liability

Often, there are numerous steps you can take to help reduce your estate’s IHT bill. Some of these steps will be more effective if carried out over several years, so it’s never too soon to start estate planning.

For example, you might consider:

• Gifting wealth in your lifetime using the exemptions explained in our recent article: Why gifting your wealth early could have a greater impact on your beneficiaries
• Placing assets in trust, in which case IHT may be charged at a reduced rate
• Donating 10% or more of your net estate to charity, which can reduce your IHT rate to 36%
• Taking advantage of any applicable Business Relief for up to 100% IHT relief on some assets.

The most appropriate measures for you will depend on your estate, personal circumstances, and preferences. You may wish to consult with a Financial Planner to create a comprehensive estate plan.

Get in touch

For estate planning support, email us at enquiries@pen-life.co.uk or call 01904 661140 to find out how we could help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.