What is inheritance tax? The basics

Inheritance Tax, or IHT, can feel overwhelming. It’s a highly emotive topic. It’s not just numbers on a page – it’s deeper than that. It’s about the people you love, who loved you and what happens to everything you’ve worked for.

Whether you’re planning to leave something to someone, or you’ve just received an inheritance yourself, the practicalities can feel daunting … especially at sensitive times.

By understanding the basics, you’ll be in a stronger position to make confident decisions about your estate.

But please note, IHT is complicated. Rules are subject to change (let’s take the speculation that’s surrounded the 2025 Autumn Budget for example). And your tax position depends on your circumstances. Don’t rely on this alone – consider professional advice to put an effective plan in place.

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What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on your estate - everything you own - when you die. The standard rate is 40%, but it only applies to the part of your estate above the available tax-free allowances. If you leave at least 10% or more of your net estate to charity or a Community Amateur Sports Club (CASC), the rate may fall to 36%.

Who actually pays?

The tax is usually paid out of the estate by the person sorting out the will (the executor).

Beneficiaries don’t normally pay IHT themselves, though they may face other taxes later (for example, income tax on rental income from an inherited property).

If there’s no IHT to pay, the estate may still need to be reported to HMRC as part of the probate process. Gifts made in the seven years before death can also be brought into the calculation (there’s more about gifting below). 

The rules and thresholds today

Everyone gets two allowances: a ‘nil-rate band’ (NRB) of £325,000 and a ‘residence nil-rate band’ (RNRB) of £175,000 if you leave your home to direct descendants such as children, stepchildren, adopted or foster children, or grandchildren.

Spouses and civil partners can combine allowances, which means many couples can pass on up to £1 million free of IHT once both have died (as long as the RNRB conditions are met).

The RNRB reduces for larger estates worth more than £2 million - it’s reduced by £1 for every £2 above the limit. The government has frozen these thresholds until the end of the 2029/30 tax year. Because asset values tend to rise, more estates may fall into IHT over time.

More information on the GOV.UK website.

How does IHT work on investments?

Stocks and shares, along with investment funds (including those held in ISAs), are valued at market value on the date of death. They count towards your estate’s value unless left to a charity or a community amateur sports club.

Investments held overseas are also included and may face local estate taxes in the country where they’re based. It’s worth checking the local rules.

Most UK pension assets - including those held in a Fidelity Self–Invested Personal Pension (SIPP) - aren't currently counted as part of your estate. However, this is due to change on 6 April 2027.

Lifetime gifts – the 7-year rule in a nutshell

Most gifts to individuals are known as ‘potentially exempt transfers.’ If you live for seven years after giving the gift, it usually won’t be counted as part of your estate. If you die within seven years, the value of the gift may be added back into your estate for tax purposes. Taper relief can reduce the tax due on gifts made three to seven years before death. Small exemptions apply, such as the £3,000 annual allowance or gifts made from regular surplus income. Keep a record of all gifts in case they’re checked later.

Watch: What people get wrong about the 7-year rule

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.