A Guide to Inheritance Tax in the UK: What You Need to Know

Inheritance Tax (IHT) is a tax on the estate of someone who has died.

It’s a common misconception that any inheritance you receive will automatically be taxed. The exact amount you’ll inherit – and whether it’ll be taxable or not – depends on several key aspects.

Read on to learn more about inheritance tax in the UK and how you can reduce it.

Key points:

• Most people don’t pay Inheritance Tax 📃
  Inheritance Tax only applies if an estate goes above certain thresholds. Many estates fall below these limits, meaning no tax is due at all.
• You can inherit up to £1 million tax-free as a couple 💰
  Individuals get £325,000 tax-free, or up to £500,000 if passing on a home to children. Married couples or civil partners can combine allowances, reaching up to £1 million.
• There are simple ways to reduce or avoid IHT 💹
  Leaving assets to a spouse, donating to charity, or using gift allowances can significantly lower or eliminate the tax bill.
• Gifting early can make a big difference 🎁
  The 7-year rule means gifts can become completely tax-free if you live long enough after giving them. Even within that period, taper relief can reduce the tax owed.
• You may still pay other taxes after inheriting 💶
  While inheritance itself is often tax-free, you could pay Income Tax on interest or dividends, or capital gains tax if you sell assets for a profit.
• ANNA makes tax handling much easier 🔥
  ANNA can help you track, calculate, and file everything automatically so you stay compliant without the stress.

What is Inheritance Tax in the UK?

Inheritance Tax in the UK is a tax on what someone leaves behind when they die. This includes money, property, and personal belongings, known as their ‘estate’.

IHT is usually 40%, but it applies only to the portion of the estate that exceeds the tax-free threshold.

In most cases, the tax is paid out of the estate before anything is passed on, so the people inheriting don’t have to deal with it directly, unless special arrangements are in place.

Inheritance Tax can apply to:

• The money, property, and possessions someone leaves behind
• Certain gifts they gave away in the seven years before they died, if those go over the tax-free limits

IHT: Thresholds and interest rates

The amount you can inherit tax-free in the UK depends on multiple factors, such as:

In the UK, you can get a tax-free inheritance allowance, known as the nil-rate band.

As of 2026, that amount is £325,000 per person. So, if an estate is worth less than that, there’s no inheritance tax to pay at all.

This threshold hasn’t changed in years and is expected to stay the same until at least 2030. While that might sound like a good thing, it actually means more people are getting pulled into paying inheritance tax over time, especially as house prices and overall wealth keep rising.

On top of the £325,000 allowance, there’s an extra tax-free boost of £175,000, called the residence nil-rate band, which comes with a few conditions.

It only applies if the person who passed away owned a home or part of one, and that home is left to direct descendants, such as children or grandchildren.

If you tick those boxes, the total tax-free amount can increase quite a bit, making a big difference in terms of how much inheritance tax, if any, needs to be paid.

💡Good to know:

If the total estate is worth more than £2 million, the residence nil-rate band is gradually reduced.

For every £2 above £2 million, the nil-rate band is reduced by £1.

This taper rule mainly affects higher-value estates, particularly those in areas with high property values.

5 key exemptions that reduce or eliminate IHT

There are a few major exemptions that can reduce or even eliminate IHT altogether.

1. Spouse or civil partner exemption

Anything left to a spouse or civil partner is completely exempt from IHT, regardless of the amount.

This exemption plays a major role in allowing couples to combine their allowances.

Also, 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.

Joint ownership between spouses often allows assets to pass automatically to the surviving partner without triggering tax.

2. Charitable donations

If part of the estate is left to a registered charity, it is exempt from IHT.

Additionally, if at least 10% of the estate is donated to charity, the IHT rate on the remaining estate may be reduced from 40% to 36%.

3. Annual gift allowance

You can give away up to £3,000 per year to one person or split the £3,000 between several people, without it being added to their estate for IHT purposes.

If the allowance isn’t used in one year, it can be carried forward to the next year, but only for one tax year.

4. Wedding and small gifts

You can give away as many gifts of up to £250 per person each tax year as you like, but only if you haven’t already used another allowance on that person.

Small, regular gifts, such as birthday or Christmas presents, are also usually exempt from IHT, as long as they come out of your normal income.

When it comes to weddings or civil partnerships, you can give larger tax-free gifts. The limits are:

• Up to £5,000 for a child
• Up to £2,500 for a grandchild or great-grandchild
• Up to £1,000 for anyone else

You can also combine some allowances. For example, you could give your child £5,000 as a wedding gift and still use your £3,000 annual allowance in the same tax year, either for other people or in addition to the wedding gift specifically.

The only gift type you can’t combine with a wedding gift is the £250 allowance.

5. The 7-year rule for gifts

If someone gives away assets during their lifetime and survives for at least seven years after making the gift, the gift is usually completely exempt from IHT.

However, if they die within those seven years, the gift may still be taxed.

The above taper relief applies only if the total value of gifts made in the 7 years before you die goes over the £325,000 tax-free threshold.

💡Good to know: What counts as gifts?

Gifts include:

• Money
• Household and personal goods
• Property or land
• Stocks and shares on the London Stock Exchange
• Unlisted shares that a person held for less than two years before their death

What additional taxes do you usually need to pay?

You may have to pay Income Tax and Capital Gains Tax on anything you earn or profits you make from bank interest, share dividends, and property.

Income Tax

Income Tax is the tax you pay on money you make, such as earnings from work, savings, or investments.

You also might need to pay Income Tax on anything your inheritance earns after you receive it.

So, for example, you could be taxed on:

• Interest from savings you inherit
• Dividends from shares after they’ve been passed on to you

When you receive your inheritance, the person handling the estate might give you an R185 form. It shows any Income Tax that was already paid on interest or dividends between the time the person died and the moment the inheritance was given to you.

You’ll need this form if you’re filling out a Self Assessment tax return or if you want to claim any tax back from HMRC.

Capital Gains Tax

Capital Gains Tax is a tax you pay when you sell shares, but only if you make a profit.

You also may need to pay tax if you don’t hold shares in a tax-free account or if your total gains go over your annual tax-free allowance.

You’re only taxed on the profit, not the full amount you sell the shares for.

ANNA: Sorting all your tax needs from day one

ANNA is an all-in-one business app that helps you set up your company, send and chase invoices, manage your bookkeeping, and handle tax filings like VAT, Corporation Tax, and MTD Self Assessment.

Just sign up, upload your docs, and everything else happens automatically: books, returns, and filings.

ANNA’s handy features help you manage your tax obligations:

✨ Business account including debit card for everyday payments

✨ Invoicing tools to create, send, and chase invoices

✨ Expense tracking with receipt scanning and automatic categorisation

✨ Bookkeeping features to keep your records organised

✨ Tax calculations, including Corporation Tax, so you can see what you owe in real time

✨ VAT support to help with Making Tax Digital (MTD) requirements

✨ Self Assessment tools to prepare and file your tax return directly to HMRC

What makes ANNA special?

Most platforms lock you into complicated systems and ongoing monthly fees, but ANNA takes a different approach.

Our solution is simple, fast, and built for small business owners, not accountants. This means no complicated tools and no mistakes.

📢 MTD for Self Assessment, for free

For your first year, you’re fully covered: MTD Self Assessment for Income Tax is completely free, and we’ll take care of your 2025–26 filing at no extra cost.

If you’ve already filed your 2025–26 return using another software, we’ll refund what you paid when you switch over.

Sign up for ANNA today to see how you can prepare and file taxes without lifting a finger.