Inheritance Tax on Death: A Brief Guide on Exemptions, Reliefs and Responsibilities

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Inheritance Tax (“IHT”) is one of the most complex areas of private client law, not because the headline rate is difficult to understand, but because liability depends on a web of exemptions, reliefs, historic gifts and estate structure. Following a death, executors are often required to navigate this framework under significant time pressure, while dealing with bereavement and family dynamics.

At Step Legal, we frequently advise executors and beneficiaries who are surprised to discover either that IHT is payable at all, or that more tax is due than anticipated. This article takes a detailed look at how IHT operates on death, who is responsible for paying it and how key reliefs  including the Residence Nil-Rate Band, lifetime gift exemptions, Agricultural Property Relief and Business Property Relief can dramatically affect the final position. 

These are all things that our reputable Wills and Probate team, headed by experienced solicitor Shabana Khairi, help clients with on a daily basis. 

Who Pays Inheritance Tax on Death?

A common misconception is that beneficiaries are personally responsible for paying IHT. In most cases, this is not correct.

The Primary Responsibility: Executors or Administrators

On death, the legal responsibility for calculating, reporting and paying IHT rests with the personal representatives of the estate:

• Executors, where there is a valid will; or
• Administrators, where the deceased died intestate.

They must:

• identify and value all assets and liabilities as at the date of death;
• determine which exemptions and reliefs apply;
• submit the relevant IHT forms to HMRC; and
• ensure that any tax due is paid, often before probate is granted.

Although IHT is technically payable by the estate, in some circumstances the tax burden may fall on specific beneficiaries, depending on:

• the terms of the will;
• the nature of the asset received; and
• whether the asset passes outside the estate (for example, via trusts or lifetime gifts).

This is an area where careful drafting and early advice can prevent disputes and unintended consequences.

The Nil-Rate Band and Transferable Allowances

Every individual benefits from a nil-rate band (NRB), currently £325,000. The value of the estate up to this threshold is taxed at 0%.

Where assets pass between spouses or civil partners, any unused NRB can usually be transferred to the survivor, potentially allowing up to £650,000 to pass free of IHT on the second death.

However, this is not automatic. Accurate records and correct claims must be made by the executors of the second estate something we routinely assist with at Step Legal.

The Residence Nil-Rate Band (RNRB)

What Is the Residence Nil-Rate Band?

The Residence Nil-Rate Band (RNRB) is an additional allowance designed to reduce the IHT burden on family homes. It applies where:

• the deceased owned a qualifying residential property; and
• that property (or its value) is left to direct descendants (including children and  grandchildren).

When available, the RNRB can add up to £175,000 per person to the nil-rate threshold, potentially increasing the combined allowance for a married couple or civil partners even further. However, the RNB does taper away by £1 for every £2 the total estate exceeds £2 million. The RNRB is completely lost if the estate’s value is £2.35 million or more. 

Key Complications and Pitfalls

The RNRB is one of the most technically demanding areas of IHT law. Common issues include:

• properties held in certain types of trust;
• downsizing or sale of the family home before death; and
• wills that fail to leave the property in a qualifying way.

In practice, many estates lose the benefit of the RNRB not because they are ineligible, but because the legal structure does not align with the statutory requirements. Reviewing wills and estate planning arrangements during lifetime is often crucial.

Lifetime Gifts and the Seven-Year Rule

Lifetime gifts can significantly affect the IHT position on death, sometimes in unexpected ways.

Potentially Exempt Transfers (PETs)

Most outright gifts to individuals are potentially exempt transfers. If the donor survives seven years from the date of the gift, it falls outside the IHT net entirely.

If the donor dies within seven years:

• the value of the gift may become chargeable; and
• it will be taken into account when calculating the IHT payable on death.

Taper Relief

Where death occurs between three and seven years after the gift, taper relief can reduce the tax payable on that gift. Importantly:

• taper relief reduces the tax, not the value of the gift; and
• it only applies once the nil-rate band has been exceeded.

This distinction is frequently misunderstood and can lead to incorrect calculations by executors.

Exempt Lifetime Gifts

Certain gifts are immediately exempt, including:

• the annual exemption (£3,000 per tax year, which can be combined with any unused annual exemption from the tax year prior or tax year proceeding, meaning you can have a maximum of £6,000 worth of annual exemption)
• small gifts of up to £250 per recipient;
• gifts in consideration of marriage or civil partnership (within limits set by relation to marrying parties); and
• normal expenditure out of income, provided strict conditions are met.

The last of these gifts from surplus income is particularly valuable but also heavily scrutinised by HMRC. Detailed records are essential to support such claims.

Agricultural Property Relief (APR)

What Is APR?

Agricultural Property Relief can reduce the taxable value of qualifying agricultural property by 50% or 100%, depending on the circumstances. It may apply to:

• agricultural land;
• pasture;
• certain farm buildings; and
• farmhouses (subject to occupation and character tests).

Common Issues with APR

APR is highly fact-specific. HMRC will closely examine:

• whether the property was occupied for agricultural purposes;
• how long it was owned and used;
• whether the farmhouse is of a character appropriate to the land; and
• whether any non-agricultural use disqualifies part of the relief.

At Step Legal, we can provide some advice in relation to our legal services in accordance with the Financial Services and Markets Act 2000 (FSMA 2000) and SRA guidelines. However, do note that significant changes will be taking place in regard to APR from the 6^th April 2026 onwards. 

For tailored financial advice please seek advice from an independent financial advisor.

Business Property Relief (BPR)

Scope of BPR

Business Property Relief can reduce the taxable value of qualifying business assets by 50% or 100%, including:

• interests in unquoted trading companies;
• certain shares listed on alternative markets; and
• business assets used in a partnership or sole trade.

Whether you are eligible for 50% or 100% relief can be discussed in more detail with one of our experienced solicitors here at Step Legal. 

HMRC Scrutiny and Risk Areas

BPR is one of the most valuable IHT reliefs, and accordingly one of the most challenged. HMRC frequently investigates:

• whether the business is genuinely trading rather than investment-based;
• the level of non-trading activities; and
• the ownership and use of business assets.

Poor record-keeping or assumptions about eligibility can result in substantial unexpected tax liabilities. 

Why IHT Problems Often Arise After Death

In our experience, IHT issues usually stem from:

• outdated wills that no longer reflect current law or family circumstances;
• lack of clarity around lifetime gifts;
• misunderstanding of complex reliefs; and
• failure to seek advice until it is too late to restructure.

Once death has occurred, options are limited. Executors must work with the estate as it stands, often under time pressure and HMRC scrutiny.

How Step Legal Can Help

At Step Legal we can provide tailored advice on drafting wills and administering probate, all whilst keep you informed about exemptions and taxes in line with the FMSA 2000 rules and regulations.

Our approach is practical, thorough and compassionate.

Conclusion: Clarity, Planning and Proper Advice

Inheritance Tax on death is rarely straightforward. While the headline rules appear simple, the reality is shaped by lifetime decisions, asset structures and technical reliefs that demand careful analysis.

So, if you’re looking for a solicitor who combines expertise and technical knowledge with care and unwavering dedication to your matter, Step Legal is here to help.

Contact us at 0800 195 6412 today.

You can also enquire our email: enquiries@steplegal.co.uk