The first £325,000 of the estate is tax-free (nil-rate), and the 40% tax only applies to the rest of the estate.
There are some exemptions to Inheritance Tax. For example, if you leave all your estate to your husband, wife or civil partner, then no Inheritance Tax will be payable, but it must be the entire estate left to them. When a spouse or civil partner dies, any unused part of their £325,000 nil-rate band can be passed on to their surviving partner.
Anything you leave to a charity will be exempt from Inheritance Tax. Also, if you leave 10% of your estate or more to charity, then a reduced rate of 36% may apply to what is left over. Rules apply so seek advice if you are planning to do this.
You may want to gift money and property to your relatives or friends before you die. Be aware that gifts made even while you are alive could be liable for Inheritance Tax, depending on how much they were and when they were given. However, gifts of up to £3,000 in each tax year are exempted, as are small gifts to individuals and some wedding or civil partnership gifts.
If you are thinking of giving away money or property before you die, make sure you know the rules beforehand, to avoid any unexpected Inheritance Tax bills. Find out more about those rules and exemptions on GOV.UK.
For more information, read the factsheet Dealing with an estate:
Dealing with an estate factsheet (PDF 198 KB)
Changes to Inheritance Tax
The Government has announced that those leaving their homes, or the sale proceeds of their homes, to their direct descendants (children, grandchildren etc) will be entitled to an additional exemption from inheritance tax of up to £100,000 from April 2017. This amount will increase by £25,000 each year until it reaches £175,000 in April 2020.
How this applies will be subject to conditions and depends on the total value of the estate and the home.
Find out more about the Government’s plans for inheritance tax.