Inheritance Tax - the basics

Not everyone pays Inheritance Tax. It is only due if your estate - including any assets held in trust and gifts made within seven years of death - is valued over the current Inheritance Tax threshold (£325,000 in 2011-12). The tax is payable at 40 per cent on the amount over this threshold.

What is Inheritance Tax?

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 2011-12).

Increased threshold for married couples and civil partners

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 2011-12. 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.

• Transferring an unused Inheritance Tax threshold
• Inheritance Tax thresholds

Who is responsible for paying Inheritance Tax?

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 the guides below.

• Tax when you inherit money, assets or property
• Who pays Inheritance Tax?
• Inheritance Tax and trusts

Valuing an estate to see if Inheritance Tax is due

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).

• How to value the estate of someone who has died - the basics
• Valuing an estate for Inheritance Tax - worked example

Inheritance Tax exemptions and reliefs

Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax.

Spouse or civil partner exemption

Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.

Charity exemption

Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax. (see more in link below)

Potentially exempt transfers

If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.

Annual exemption

You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year’s allowance first.

Small gift exemption

You can make small gifts of up to £250 to as many individuals as you like tax-free.

Wedding and civil partnership gifts

Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

Business, Woodland, Heritage and Farm Relief

If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

• Inheritance Tax when passing on money or property
• Inheritance Tax exemptions and reliefs
• Tax efficient giving to charity - the basics

Deadline for paying Inheritance Tax

In most cases, you must pay Inheritance Tax within six 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 annual instalments over ten 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.

• More about Inheritance Tax due dates
• Paying Inheritance Tax in yearly instalments
• When and how interest is charged on Inheritance Tax

Inheritance Tax and probate forms

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).

• Inheritance Tax and the probate process
• Find the right Inheritance Tax and probate forms

How to pay Inheritance Tax

There are various ways to pay the Inheritance Tax due on an estate, including paying on account or paying in instalments.

• How to make an Inheritance Tax payment
• How to make an Inheritance Tax payment on account
• Other ways to fund an Inheritance Tax payment
• Paying Inheritance Tax in yearly instalments

More useful links

• What to do about tax and benefits after a death