Who Pays the Inheritance Tax Bill?

When someone dies owing inheritance tax (IHT), the money comes out of their estate, the total of everything they owned, less what they owed, before a penny reaches the people named in the will. So the short answer is that the estate pays, and the person responsible for making that payment is the executor (if there is a will) or the administrator (if there is not). Beneficiaries do not receive a tax demand through the post; they simply inherit whatever is left once HMRC has been settled.

The estate settles the bill first

Inheritance tax is a tax on the estate, not on the individuals who inherit. Every estate has a tax-free nil-rate band of £325,000, and many also qualify for a residence nil-rate band of up to £175,000 where a home passes to children or grandchildren, both frozen until 2030. Anything above the available allowances is taxed at 40%. You can read the detail in our answer on the inheritance tax threshold and the wider complete guide to inheritance tax planning.

Because transfers between spouses and civil partners are exempt, a married couple can combine their allowances and pass up to £1 million between them before any tax is due. When the first partner dies there is usually nothing to pay; the bill, if there is one, tends to arise on the second estate, and it is that estate which foots it.

The executor’s duty, and personal liability

The executor or administrator (collectively, the estate’s personal representatives) must value the estate, report it to HMRC and pay what is owed. They do this with estate money, bank accounts, investments, the proceeds of selling assets, not their own. However, personal representatives can become personally liable if they distribute the estate to beneficiaries and then find there is not enough left to cover the tax, or if they fail to disclose assets. That is why careful executors settle HMRC before sharing out the inheritance.

This is a genuine risk rather than a theoretical one. An executor who hands money to beneficiaries too early can be pursued by HMRC for the shortfall. Taking care over the valuation, and holding back a reserve until HMRC issues clearance, is simply prudent. The inheritance tax planning overview sets out the responsibilities a personal representative takes on.

When a beneficiary or gift recipient pays

The main exception to “the estate pays” concerns lifetime gifts. If someone gives away money or assets and dies within seven years, that gift can use up their nil-rate band or become taxable in its own right. Where tax is due on the gift, the person who received it is primarily liable, not the estate. If they do not pay, the liability can fall back on the estate, reducing what everyone else inherits. Taper relief may cut the rate on gifts made between three and seven years before death. See how to reduce inheritance tax legally for how gifting fits into a plan.

Trustees are another example. Where assets sit in a trust, it is the trustees, not the beneficiaries or the estate, who are responsible for any inheritance tax charges that arise on the trust, such as the periodic and exit charges that can apply to certain trusts.

How the cost is really shared

Even when the estate technically pays, it is worth understanding who ultimately bears the cost. A will can direct that tax on a particular gift is met by the estate as a whole (so it comes out of the residue) or by the person receiving that specific gift. By default, tax on the UK estate is usually borne by the residuary beneficiaries: those who receive whatever is left after specific gifts. So a specific legacy of, say, £50,000 to one person may pass in full, while the residue that another person inherits shoulders the whole bill. A well-drafted will spells this out to avoid unfairness.

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