How Inheritance Tax Works
Estate valuation, gifting rules, trusts, and how and when the tax is paid.
The starting point is working out the value of everything in your estate at the date of death: your home and any other property, savings and investments, pensions (from April 2027), vehicles, and personal possessions — less any outstanding debts, mortgages and funeral costs. What's left is the "net estate," which is then measured against your available tax-free allowances.
Gifts made during your lifetime can also affect your Inheritance Tax position. Most lifetime gifts to individuals are known as "potentially exempt transfers" — if you survive seven years after making the gift, it falls outside your estate entirely and no Inheritance Tax is due on it.
If you die within seven years, the gift may still be counted as part of your estate, with a reducing rate of tax ("taper relief") applying the longer you survived after making it:
| Years between gift and death | Tax rate applied |
|---|---|
| Less than 3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% |
There are also annual allowances that let you gift money away immediately, with no seven-year wait — including a yearly gift allowance and an exemption for small gifts and wedding gifts. Used consistently, these can meaningfully reduce the value of an estate over time.
Trusts are a way of setting assets aside for specific beneficiaries, under terms and conditions you control, often with Inheritance Tax benefits as part of a wider plan. They can be useful for passing on wealth to children or grandchildren, protecting assets for vulnerable beneficiaries, or managing how and when beneficiaries receive an inheritance. Trusts have their own tax rules and can be complex to set up correctly, which is why we work with trusted solicitors when a trust may be the right solution.
Inheritance Tax is generally due within six months of the end of the month in which the death occurred, and it's usually paid by the executors or administrators of the estate — often before probate can be granted and assets distributed to beneficiaries. Various payment options exist, including instalment arrangements for certain assets such as property. Executors who don't plan for this in advance can face real cash-flow pressure, which is one of the reasons early planning matters.