What tax do you pay on death?

Three taxes can arise when someone dies: inheritance tax on the estate, capital gains tax if assets are sold during the administration, and income tax on money the estate earns before it's distributed. Inheritance tax gets all the attention, but most estates pay none — only around 1 in 20 deaths in the UK results in an inheritance tax bill.

This guide covers the UK; the figures are the same across all four nations because these are UK-wide taxes.

Inheritance tax

Inheritance tax (IHT) is charged at 40% but only on the part of the estate above the tax-free thresholds. Three thresholds matter:

The nil-rate band: £325,000. Every estate gets this. It has been frozen at £325,000 since 2009 and will stay frozen until at least April 2031, which is why more families are caught each year.

The residence nil-rate band: £175,000. An extra allowance that applies when a home (or its sale proceeds) is left to children or grandchildren. It tapers away for estates worth over £2 million, losing £1 for every £2 above that line.

Anything left to a spouse or civil partner: unlimited and tax-free. Whatever the amount, transfers between spouses are exempt. For estates over £3m, IHT forms are filed but no tax is due.

Moreover, a spouse's unused allowances transfer. When the second of a married couple dies, their estate can claim both sets of nil-rate bands: up to £650,000, plus up to £350,000 of residence allowance if the home goes to direct descendants. A couple can therefore pass on up to £1 million tax-free.

A worked example: David dies leaving an estate of £600,000, including a house left to his daughter. His estate claims £325,000 plus £175,000 = £500,000 tax-free. The remaining £100,000 is taxed at 40%, a bill of £40,000.

The charity discount

Gifts to charity are exempt from IHT entirely. There is also a discount on the rest: if at least 10% of the net estate goes to charity, the rate on the taxable portion drops from 40% to 36%. On larger estates this means a meaningful gift to charity can cost the other beneficiaries surprisingly little, and wills are sometimes varied after death to take advantage of it.

Two things to watch

Gifts in the last seven years. Gifts the deceased made in the seven years before death count back into the estate, using up the nil-rate band first. Executors must make genuine enquiries about lifetime gifts, this is the area HMRC scrutinises most.

Pensions join the estate from April 2027. Unspent pension pots currently sit outside IHT. For deaths from 6 April 2027 they will be included, which will push many more estates over the threshold. Pensions left to a spouse remain exempt.

IHT is due within six months of the end of the month of death, and the return within twelve. Tax on property can be paid in ten annual instalments.

Capital gains tax

Death itself triggers no capital gains tax, instead all assets are "uplifted" to their market value at the date of death. This means the gain made during the deceased's lifetime is wiped out. If your father bought shares for £20,000 that were worth £100,000 when he died, that £80,000 gain is never taxed.

CGT only enters the picture if the estate sells assets during the administration for more than their date-of-death value. The estate gets a £3,000 annual exemption (for the year of death and the two following years), and pays 24% on gains above it. Sales of residential property must be reported and the tax paid within 60 days.

Simply transferring assets to beneficiaries triggers nothing, they inherit at the uplifted value, and their own CGT clock starts from there.

Income tax

Up to the date of death, the deceased's income is taxed as normal. HMRC reconciles the final position, and because the full year's personal allowance applies to a part-year of income, the outcome is often a refund to the estate rather than a bill.

During the administration, the estate pays basic-rate tax on income it receives (20% on interest and rent, 8.75% on dividends) with no personal allowance. If the estate's income is £500 or less in a tax year, nothing is reported and nothing is paid. ISAs keep their tax-free status for up to three years after death.

Beneficiaries receive estate income with a credit for the tax already paid, and settle any difference at their own rate.

The short answer

Most estates pay no tax at all. If everything passes to a spouse, there is usually nothing to pay. The estates that do pay are typically worth more than £500,000 in the hands of a single person - even then, the charity discount, the spousal transfers and the CGT uplift can reduce the bill considerably.