What is inheritance tax and who pays it?
- Nic Round: Chartered Wealth Manager
- Feb 13
- 3 min read
Updated: 1 day ago
In the UK, inheritance tax (IHT) is a tax on the value of an estate when someone dies. It applies if the estate exceeds certain thresholds. But the rules are often misunderstood, and many people are unsure whether it will affect them.
Behind this question are usually practical concerns:
Will my family face a large tax bill?
Does everything I own count?
Can it be reduced?
Is it only for the very wealthy?
Understanding how inheritance tax works helps separate myth from reality. What is inheritance tax and who pays it?
What is inheritance tax?
Inheritance tax is charged on the value of your estate when you die.
Your estate typically includes:
Property
Savings
Investments
Personal possessions
Business interests (with possible reliefs)
After debts and certain allowances are deducted, inheritance tax may apply to the remaining value.
The standard rate is 40% on the portion above the available tax-free thresholds.
The main inheritance tax thresholds
There are two key allowances in the UK.
1. The nil-rate band
Most individuals have a £325,000 tax-free allowance.
If your estate is worth less than this, inheritance tax is not usually payable.
2. The residence nil-rate band
If you pass your main home to direct descendants (such as children or grandchildren), an additional allowance of up to £175,000 may apply.
In some cases, this can increase the total tax-free threshold to £500,000 per person.
Married couples and civil partners can often combine allowances, potentially allowing up to £1 million to pass tax-free if structured correctly.
A simple example
Imagine:
An estate worth £900,000
Married couple
Home passed to children
If full allowances are available:
£1 million combined threshold
No inheritance tax may be payable
But if a single person leaves an estate of £900,000 without additional reliefs:
£325,000 allowance
£575,000 potentially taxable
40% tax on £575,000 = £230,000
Context matters significantly.
Who actually pays inheritance tax?
Inheritance tax is usually paid by the estate before assets are distributed.
Beneficiaries do not typically receive a separate tax bill.
However, if planning has not been structured carefully, the estate may need to sell assets to fund the tax liability.
This is often where concern arises.
Common misunderstandings about inheritance tax
There are several persistent myths:
“Only millionaires pay inheritance tax.”
“Everything is taxed at 40%.”
“Giving assets away immediately removes tax risk.”
In reality:
Many estates fall below thresholds.
Only the portion above allowances is taxed.
Gifts can still be counted within seven years of being made.
Clarity reduces unnecessary anxiety.
The behavioural layer
Often the real worry is not the tax itself.
It is:
Leaving a financial burden behind
Forcing the sale of a family home
Uncertainty about rules
Not knowing whether planning is required
Inheritance tax planning is less about minimising tax at all costs and more about ensuring intentions are supported.
A more useful question
Rather than asking only:
What is inheritance tax and who pays it?
A more practical question might be:
Is my estate likely to exceed current thresholds, and if so, what options are available?
That reframes the issue from abstract tax rules to personal relevance.
And relevance is where meaningful decisions begin.
Some of the most common practical questions people ask about inheritance tax are below.
How much is inheritance tax in the UK?
The standard inheritance tax rate is 40% on the portion of an estate above available allowances.
Do spouses pay inheritance tax?
Assets left to a spouse or civil partner are usually exempt from inheritance tax.
Does inheritance tax apply to pensions?
Many pensions sit outside the estate for inheritance tax purposes, depending on structure and nomination.
Can inheritance tax be reduced legally?
Various reliefs and exemptions exist, but suitability depends on individual circumstances and timing.
A calm place to think first
If inheritance tax is on your mind, you may not need immediate action.
Often the first step is understanding:
The approximate value of your estate
Which allowances may apply
Whether thresholds are likely to be exceeded
Clarity before planning avoids unnecessary complexity.
Evoa exists to provide that quiet thinking space — before advice, before action.
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