Tax When Someone Dies: Inheritance Tax and Probate

When someone passes away, the practical aftermath rarely ends with the funeral. There are banks to notify, accounts to close, property to deal with, and, in many cases, a tax bill to work out. Inheritance Tax (IHT) is usually the biggest worry for families, but it is also the most misunderstood: it does not affect every estate, and the thresholds are higher than most people assume. This guide explains how IHT works in the UK, how an estate is reported and paid, what is exempt, and what probate actually involves. It is educational information, not personal advice — estates vary enormously, and professional help is worth considering in most cases.

Inheritance Tax: the Basic Thresholds

IHT is charged only on the value of a deceased person’s estate that sits above certain thresholds. Every estate has a nil-rate band of £325,000, which is taxed at 0% — in other words, if the whole estate is worth less than this, no IHT is due at all. On top of that, if the deceased’s main home is passed to a direct descendant (a child or grandchild), a residence nil-rate band of £175,000 applies, meaning the total tax-free threshold can be up to £500,000 per person. Both bands are straightforward in themselves; it is their interaction with joint assets that trips people up.

Married couples and civil partners add another layer. When one partner dies, any unused portion of their nil-rate band can be transferred to the surviving partner. Because both bands can be combined, a married couple or civil partnership can protect an estate worth up to £1,000,000 from Inheritance Tax — a far larger cushion than most people expect. Transfers between spouses and civil partners during life are handled separately and are generally exempt in any case.

The Rate Once the Threshold Is Passed

When an estate exceeds the nil-rate bands, IHT is charged at 40% on the value above the threshold. That headline rate is well known. Less well known is the concession for charitable giving: if at least 10% of the estate is left to a registered charity, the rate on the taxable portion falls to 36%. For families with a charitable intention anyway, the difference between 40% and 36% across part of an estate can be substantial, and it is worth mentioning to an adviser before the return is filed.

Reporting Within Twelve Months

The tax side of things is bounded by a hard deadline. An IHT return — form IHT400 — must be submitted to HMRC within 12 months of the date of death. The form sets out the value of the estate, any deductions, and the IHT due, and it is the document on which everything else turns: the tax cannot be settled until the value is agreed, and probate cannot properly conclude until the tax position is resolved. Late submission attracts penalties, so this is a deadline to take seriously even when the process feels slow.

How the Tax Gets Paid

There are three common routes to paying the bill. The first is simply from the estate itself, using funds already held in bank accounts or by selling assets. The second is life insurance: if a policy was written in trust, the payout goes directly to the beneficiaries and does not form part of the estate, so it can cover the tax without being taxed itself beforehand. The third concerns property. Where the estate includes a house and there are not enough liquid assets to pay the tax in one go, the IHT attributable to the property can be paid in up to 10 annual instalments, which eases a cash-flow problem many families face.

What the Tax Does Not Touch

A number of transfers are exempt from IHT entirely. Transfers between spouses or civil partners are fully exempt, provided both are UK domiciled. Gifts to registered charities are exempt. Gifts made more than seven years before death fall outside the estate altogether. And gifts made within three years of death are taxed at a reduced rate on a sliding scale, under what is called taper relief. The seven-year rule is the one that most reward advance planning — it is exactly why people are often advised to give wealth away early rather than leave everything until a will.

Probate: Grant of Probate and Letters of Administration

IHT is only half the picture. Probate is the separate legal process of dealing with someone’s estate after they die, and without it, an executor or administrator has no authority over the deceased’s money or property. When there is a will, the executors named in it apply for a Grant of Probate, a document that gives them the legal authority to close bank accounts, sell property, and distribute assets. When someone dies without a will — intestate, in legal terms — someone must apply for Letters of Administration instead. The two documents do the same job; they differ in who holds them and in how the estate is divided.

The intestacy rules determine who inherits in the absence of a will, and the order is fairly rigid: typically the spouse or civil partner first, then children, then parents, then siblings. People who intend to leave their affairs in a particular shape should hold no illusions about intestacy arranging it for them — a will exists precisely to override the default order.

A Timeline After Death

The steps broadly run as follows:

1. Register the death — with the local registrar, within 5 days (or 8 days in Scotland).
2. Apply for probate — once the death certificate is in hand, apply for a Grant of Probate or Letters of Administration.
3. Value the estate — gather details of all assets, debts, and liabilities.
4. Submit the IHT return — within 12 months of death.
5. Pay the IHT — either from the estate or via instalments.
6. Distribute the estate — once IHT is paid and probate is granted, the executor can pass assets to beneficiaries.

Getting Help

Three points are worth remembering at the end of it all: IHT does not apply to every estate, and it is charged only on value above the thresholds; proper estate planning — trusts, life insurance, and gifts — can reduce or eliminate it; and the 12-month deadline for the IHT return is strict, with penalties for late submission. Probate is also necessary to handle an estate legally, even where the estate is small. If you are dealing with a deceased person’s estate, professional advice from a solicitor or tax adviser is almost always a sound investment: the rules around thresholds, trusts, and taper relief reward people who are careful, and punish those who rush.