Inheritance Tax and Expected Estates Explained: What You Need to Know

Inheritance tax can feel complex and overwhelming at a time when families are already dealing with the emotional impact of losing a loved one.

Understanding how it works, when it applies, and whether an estate qualifies as an “excepted estate” can make the probate process significantly smoother and reduce the risk of delays or unnecessary tax reporting.

The importance of understanding inheritance tax continues to grow. HM Revenue & Customs (HMRC) reported that receipts reached £7.5 billion in 2023/24 tax year, underlining the increasing significance of how estates are assessed and taxed.

This blog explains inheritance tax in the UK, how estates are assessed, what qualifies as an excepted estate, and what recent changes mean for executors and families.

What Is Inheritance Tax in the UK?

Inheritance tax is a tax charged on the value of a person’s estate when they die. The “estate” includes everything they owned at the time of death, including:

• Property (such as a family home)

• Savings and bank accounts

• Investments and shares

• Personal possessions such as jewellery, vehicles, and valuables

It is important to understand that inheritance tax is calculated based on the total value of the estate, not just cash assets.

In addition to assets owned at the time of death, certain gifts made during the seven years before death may also be included when calculating inheritance tax. This is known as the “seven-year rule” and can significantly affect whether tax is payable.

Lifetime transfers into a trust can also affect whether tax is payable.

How Is Inheritance Tax Calculated?

Inheritance tax is usually assessed based on the total net value of the estate after debts and liabilities have been deducted.

Key elements include:

• Solely owned assets

• The deceased’s share of jointly owned assets

• Gifts made within seven years of death (subject to exemptions)

• Certain lifetime transfers that may still be relevant for tax purposes

The standard inheritance tax threshold in the UK is known as the nil rate band, currently set at £325,000. Estates valued below this threshold are usually not subject to inheritance tax.

If the estate exceeds this threshold, inheritance tax is typically charged at 40% on the amount above the allowance, although various exemptions and reliefs may reduce the overall liability.

What Is the Nil Rate Band?

The nil rate band is the amount of an estate that can be passed on before inheritance tax becomes payable.

Key points include:

• The standard nil rate band is £325,000

• Married couples and civil partners may be able to transfer any unused allowance to the surviving partner

• This can effectively increase the threshold available on the second death

This allowance is a key factor in determining whether an estate is taxable and whether a full inheritance tax return is required.

Do Gifts Affect Inheritance Tax?

Yes. Certain gifts made during a person’s lifetime can be included in inheritance tax calculations if they were made within seven years of death.

Common examples include:

• Cash gifts to family or friends

• Transfers of property or assets

• Large financial gifts exceeding exemptions

However, not all gifts are taxable. There are important exemptions, including:

• The annual exemption of £3,000 per tax year

• Small gift allowances

• Gifts made from regular income (in some circumstances)

If the person survives seven years after making a gift, it will usually fall outside of inheritance tax calculations altogether, unless the person retained a benefit from the asset gifted.

Understanding how gifts are treated can be complex, particularly where large transfers or trusts are involved. Speak to a specialist here.

What Is an Excepted Estate?

An excepted estate is an estate that does not require a full inheritance tax account (known as form IHT400) to be submitted to HMRC before applying for probate.

Instead, a simplified process can be used because the estate is either:

• Below the inheritance tax threshold, or

• Fully exempt from inheritance tax due to reliefs or exemptions

Understanding whether an estate qualifies as “excepted” is important because it can significantly reduce administrative work for executors and speed up the probate process.

Types of Excepted Estates

There are currently three main types of excepted estates in the UK.

1. Low Value Estates

A low value estate is one where:

• The deceased was domiciled in the UK

• The total value of the estate (including gifts and jointly owned assets) is below the nil rate band (£325,000)

In some cases, the threshold may be higher if the deceased’s spouse or civil partner did not fully use their own nil rate band, allowing unused allowances to be transferred.

These estates are typically straightforward and often do not require a full inheritance tax return.

2. Exempt Estates

An exempt estate is one where the estate is below £3 million and there is no inheritance tax liability due to exemptions such as:

• Everything passing to a surviving spouse or civil partner

• The estate passing to charity, which is exempt from inheritance tax

Even though the estate may be larger in value, exemptions reduce the taxable amount below the threshold, meaning a simplified reporting process applies.

3. Non-UK Domiciled Estates

These apply where the deceased:

• Was not domiciled in the UK at the time of death

• Had never been UK domiciled during their lifetime

In these cases, only certain UK-based assets are considered, such as:

• Cash held in the UK

• UK shares or securities

If the value of these assets falls within HMRC thresholds, the estate may still qualify as excepted.

What Has Changed in Excepted Estate Rules?

Recent changes to inheritance tax regulations have significantly expanded the number of estates that qualify as excepted estates.

Key updates include:

• The gross estate threshold increased from £1 million to £3 million

• The lifetime gifts threshold increased from £150,000 to £250,000

• The threshold for chargeable trust property increased to £250,000

• Greater flexibility for claiming unused spousal nil rate band allowances

• Simplified reporting requirements for straightforward estates

• Updated rules for non-UK domiciled individuals with UK property or assets

These changes mean that many more estates can now avoid completing a full inheritance tax account.

Do You Still Need to Complete Inheritance Tax Forms?

Even if an estate is excepted, some form of reporting is still required when applying for probate.

However, in many cases:

• The full IHT400 form is no longer required

• A simpler reporting process may apply instead

The exact form of the reporting needed depends on the size and complexity of the estate, as well as whether exemptions or reliefs apply.

It is important not to assume that no inheritance tax paperwork is required simply because no tax is due.

Does an Excepted Estate Still Need Probate?

Yes, in many cases a Grant of Probate (or Letters of Administration if there is no Will) will still be required.

Probate is often needed to:

• Access bank accounts

• Sell or transfer property

• Administer the estate legally

Even where inheritance tax is not payable, probate requirements still apply depending on asset types and values.

Why Professional Advice Is Still Important

Even with simplified rules for excepted estates, inheritance tax and probate can still be complex.

Professional advice can help to:

• Ensure the estate is correctly valued

• Identify applicable exemptions and reliefs

• Avoid delays in probate applications

• Reduce the risk of errors or HMRC queries

• Provide clarity for executors during a difficult time

Executors have legal responsibilities, and mistakes can lead to personal liability in some cases, so guidance is often highly

In Summary

Inheritance tax rules have become more flexible in recent years, meaning many more estates now qualify as excepted estates and avoid the need for full inheritance tax reporting. However, the rules remain detailed and every estate must be assessed carefully to ensure compliance.

Understanding the basics of inheritance tax, the nil rate band, and the classification of estates is essential for executors and families dealing with probate.

From April 2027, there are significant changes being introduced which will mean that pensions now form part of a taxable estate and so further reporting using an IHT400 is likely to be necessary.

If you are unsure about your responsibilities or whether an estate requires a full inheritance tax return, please do contact us.
Need Advice?

For further information or tailored guidance on inheritance tax or probate matters, please contact me on 01332 364436 or at s.hilliard@timms-law. Or visit our website for more information.

 

Frequently Asked Questions

What is the inheritance tax threshold in the UK?

The standard threshold is £325,000, known as the nil rate band.

Do all estates pay inheritance tax?

No. Many estates fall below the threshold or qualify for exemptions.

What is an excepted estate?

An estate that does not require a full inheritance tax account because it is below the threshold or fully exempt.

Do gifts always count towards inheritance tax?

No. Only certain gifts made within seven years may be included, and exemptions may apply.

Is probate always required?

Not always, but it is commonly required depending on the type and value of assets.