How inheritance tax works
Inheritance tax is charged on the estate, not on you personally. There is a tax-free allowance (the nil-rate band), and anything above it is normally taxed at 40%. On top of that, there is usually an extra allowance when a home is left to children or grandchildren, and anything left to a spouse or civil partner is normally exempt altogether. The current thresholds are set by the government and change over time, so always check the live figures on GOV.UK rather than relying on a number you remember.
In practice, the great majority of estates pay nothing. Where tax is due, it is normally paid by the executor out of the estate before beneficiaries receive anything — and some of it usually has to be paid before probate is even granted. Banks will often pay HMRC directly from the deceased's frozen account for this purpose.
- Gifts to a spouse or civil partner are normally exempt
- Gifts to charity are exempt and can reduce the rate on the rest
- Some gifts made in the seven years before death can still count towards the estate
- Unused allowance can often be transferred to a surviving spouse or civil partner
Everything owned at death — property, savings, investments and possessions — minus debts.
This is a simplified estimate. It does not account for gifts made in the seven years before death, unused allowance transferred from a previously deceased spouse or civil partner (which can double the allowances), charity exemptions, or trusts. Threshold figures are held as editable settings and were last checked on the date shown. . If the estate is anywhere near the allowance, speak to a solicitor or tax adviser.
This page is general information, not tax advice. If the estate is anywhere near the threshold, includes a business, or involves gifts in the last seven years, speak to a solicitor or tax adviser before distributing anything.
Bank accounts and savings
Money in sole-name accounts is released to the executor once the bank has seen the paperwork it needs — sometimes just a death certificate for small balances, usually the grant of probate for larger ones. The executor then pays the estate's debts and tax, and distributes what is left according to the will or the rules of intestacy. Joint accounts normally pass straight to the surviving holder.
ISAs and premium bonds
An ISA loses its tax-free status when the holder dies, but a surviving spouse or civil partner can usually claim an additional ISA allowance equal to the value the deceased held — known as the Additional Permitted Subscription. Ask each ISA provider about it specifically, because it has to be claimed rather than happening automatically. Premium Bonds stay in the prize draw for twelve months after death, after which they must be cashed in or transferred.
Shares and investments
Shares held in the deceased's sole name are transferred by the executor, not sold automatically. The usual route is:
- Write to the company's registrar (or the investment platform) with the death certificate and grant of probate
- Ask for a date-of-death valuation — this fixes the value for inheritance tax and sets the base cost for any future capital gains tax
- Choose whether to sell the shares within the estate or transfer them to the beneficiary using a stock transfer form
- For certificated shares, the registrar issues a new certificate in the beneficiary's name; for platform holdings, the investments are moved to the beneficiary's account
A beneficiary who inherits shares does not pay capital gains tax at the point of inheritance. If they later sell, any gain is measured from the value at the date of death, not from what the deceased originally paid.
Pensions and life insurance
Pension death benefits and many life insurance payouts sit outside the estate, because they are paid at the discretion of trustees or under a trust. That means they often do not need probate, may not count towards inheritance tax, and are not controlled by the will — the nomination form is what matters. Ask each provider to confirm in writing whether the payment forms part of the estate.
Property
A house is transferred by the executor using the Land Registry process, usually once probate is granted. How it was owned matters: a joint tenancy passes automatically to the surviving owner, while a share held as tenants in common passes under the will. There is no capital gains tax on inheriting a home, but if it is sold later for more than its date-of-death value, capital gains tax can apply to the increase.
The order it all happens in
- Value everything as at the date of death
- Work out whether inheritance tax is due and pay what HMRC needs before probate
- Apply for probate (or confirmation in Scotland)
- Collect the assets: close accounts, transfer or sell shares, claim policies
- Pay debts, administration costs and any remaining tax
- Distribute what is left to the beneficiaries, with estate accounts
Beneficiaries should wait for the executor before spending an inheritance. If debts or tax surface later, money already distributed can be reclaimed.