Inheritance Tax: A Practical Guide for Accountants

Inheritance tax (IHT) is a tax on the estate — the property, money and possessions — of someone who has died. It's an important and often emotive area of UK tax, and understanding the basics helps individuals plan and helps accountants advise. This practical guide explains what inheritance tax is, the current thresholds and rates, the key reliefs, and how it works — in plain language. It's a core area of personal tax for ACCA and tax study. (IHT rules and thresholds change — always confirm the current position on GOV.UK before relying on figures.)

What is inheritance tax?

Inheritance tax is charged on the value of a person's estate when they die — broadly, everything they owned (property, savings, investments, possessions) less what they owed. It can also apply to certain gifts made during a person's lifetime. Importantly, IHT is only due on the value of the estate above a tax-free threshold, so many estates pay no inheritance tax at all. Where it does apply, the tax is usually paid by the executors of the estate before the assets are distributed to the beneficiaries.

The current thresholds and rate

As confirmed by GOV.UK, the key figures (frozen at these levels into the late 2020s) are:

• The nil-rate band of £325,000. No inheritance tax is due on the first £325,000 of an estate. This threshold is available to everyone.
• The residence nil-rate band of £175,000. An additional threshold available when a qualifying home is left to direct descendants (children, grandchildren). It tapers away by £1 for every £2 by which the estate exceeds £2 million.
• The standard rate of 40%. Inheritance tax is generally charged at 40% on the value of the estate above the available thresholds. A reduced rate of 36% can apply where at least 10% of the net estate is left to charity.

Because unused allowances can transfer between spouses and civil partners, a married couple can potentially pass on up to £1 million free of inheritance tax (two nil-rate bands plus two residence nil-rate bands), where the conditions are met.

Gifts and the "seven-year rule"

Inheritance tax isn't only about what you own at death — lifetime gifts can be caught too. Many gifts become fully exempt if the person survives seven years after making them (these are "potentially exempt transfers"). If they die within seven years, the gift may be brought back into the estate, though "taper relief" can reduce the tax on gifts made between three and seven years before death. There are also useful exemptions — such as an annual gift allowance and gifts between spouses — that allow some giving free of IHT. The rules here are detailed, so they need checking carefully.

Key reliefs

Several reliefs can significantly reduce or remove an IHT charge, including Business Relief and Agricultural Relief (which can give relief on qualifying business and farming assets), and the spouse exemption (transfers between spouses or civil partners are generally exempt). These reliefs are subject to conditions and have been the subject of recent reform, so current rules must be confirmed.

Why it matters for finance professionals

Inheritance tax is a core part of personal tax and estate planning, and an area where good advice has real value to clients. For accountants and tax professionals, understanding the thresholds, the rate, the seven-year rule and the main reliefs is essential — both for exams and for advising people on managing their estates. Because the figures and reliefs change, keeping current with GOV.UK is part of the job.

Frequently asked questions

What is inheritance tax?

A tax on the estate — property, money and possessions — of someone who has died, and on certain lifetime gifts. It's only due on the value above a tax-free threshold, so many estates pay none.

What is the inheritance tax threshold and rate?

The nil-rate band is £325,000, with an additional £175,000 residence nil-rate band when a home passes to direct descendants. The standard rate is 40% on value above the thresholds (36% if 10%+ is left to charity). Always confirm current figures.

What is the seven-year rule?

Many lifetime gifts become fully exempt from inheritance tax if the person survives seven years after making them. If they die within seven years, the gift may be taxed, though taper relief can reduce the charge on gifts made three to seven years before death.

How much can a couple pass on tax-free?

Because allowances transfer between spouses and civil partners, a married couple can potentially pass on up to £1 million free of inheritance tax, where the conditions (including leaving a home to direct descendants) are met.

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