What is inheritance tax?

Inheritance tax is a tax payable out the estate of someone who has died. If a deceased person's net estate is above what's known as the nil rate band - currently £325,000 - then the amount above that figure is taxable at 40%.

If someone has died and their net estate is below the £325,000 threshold (the nil rate band) then on the face of it there will be no inheritance tax payable.

However, as a quick guide, if someone has died and their assets come to £550,000 and their debts to £125,000 then their net estate is £425,000. So, whatever is above £325,000 - £100,000 - is taxed at 40%: £40,000.


The inheritance tax system is, however, far more complicated. For example, if in the above example, the whole net estate was left by a Will to a surviving spouse or a civil partner, then no inheritance tax would be payable. They would receive £425,000.

There are a number of other exemptions available to an estate.


Inheritance tax can be extremely complex to understand. Here are some of the various reliefs which might mean that even if a net estate is over the £325,000 nil rate band, inheritance tax may not be payable:

  • Residential nil rate band. If the deceased owned a property which they lived in, and the estate is passing to a spouse or child then there may be an additional relief of up to £175,000
  • Business or agricultural property relief. If part of the estate comprised of a business which had been trading for more than 2 years, then this relief may mean the business would be exempt from inheritance tax. Similarly if the estate had an ongoing farm interest.


There are a number of aspects which need to be taken into account when deciding whether there is an inheritance tax bill to pay. For example:

  • Potentially exempt transfers. Even if it turns out that the net estate isn't taxable, you also have to consider whether the deceased made any substantial financial gifts to anyone in the preceding 7 years. If they did, these need to be 'added back' into the estate as if they were part of the deceased's assets. Inheritance tax might then be chargeable.
  • What were the gifts for? You also need to find out whether any of the gifts were, for example, wedding gifts, small gifts of less than £3,000 or from surplus income. If they were then that might mean those gifts are no added to the estate for inheritance tax purposes.

Calculating an inheritance tax liability is fraught with difficulty owing to the complexity of the UK tax system. If the value of an estate of a loved one is heading towards £325,000 it's well worth seeking the advice of a professional to administer the estate for you.

Phoenix Wills & Probate can help administer estate for personal representatives. Simple contact us: