What Is Inheritance Tax in the UK? A Plain-English Guide for Migrants (2026)

Inheritance Tax rarely comes up in daily conversation, which is exactly why it catches so many families off guard. For someone who has recently moved to the UK, the confusion runs deeper still: does this tax apply because of where you were born, your passport, or simply how long you’ve been living here? The answer changed in 2025, and it changed for everyone — British-born and foreign-born alike.

This guide explains what Inheritance Tax actually is, who has to pay it, and — because ProsperAbroad exists for migrants building a life in Britain — exactly how the residence-based rules introduced in 2025 affect anyone who wasn’t born in the UK.

What Is Inheritance Tax, in Simple Terms?

Inheritance Tax is a one-off tax charged on a deceased person’s estate — the total value of everything they owned, including property, savings, investments, and possessions, minus any debts. It is paid before assets are handed to beneficiaries, not by the people inheriting them directly.

Every individual has a tax-free allowance called the nil-rate band. For the 2026/27 tax year, this is £325,000. Anything in the estate above that threshold is usually taxed at a flat 40%. This threshold has been frozen since 2009, and the government has confirmed it will stay frozen until at least April 2030 — so as property and savings values rise, more ordinary estates get pulled into the IHT net each year.

How Much Can You Pass On Tax-Free?

Most people have more than one allowance to work with. On top of the £325,000 nil-rate band, there’s a residence nil-rate band of up to £175,000 if you leave your main home to children, grandchildren, or other direct descendants. Married couples and civil partners can also pass any unused allowance to each other, effectively doubling what a household can shield from tax.

Two things soften the blow further. Transfers between spouses and civil partners are usually completely exempt from IHT (more on the migrant-specific catch below). And if at least 10% of the net estate is left to charity, the rate on the rest drops from 40% to 36%.

The Rule That’s Different If You Weren’t Born in the UK

This is the section most generic IHT guides skip, and it’s the one that matters most here. Until April 2025, whether your overseas assets were taxed in the UK depended on your domicile — a slippery legal concept tied to where you considered your permanent home to be, often for life, regardless of where you actually lived.

From 6 April 2025, domicile was scrapped for tax purposes and replaced with a residence-based test. You are now classed as a long-term resident (LTR) if you have been UK tax resident for at least 10 of the previous 20 tax years. Once you cross that line, your worldwide estate — property, savings, and investments held anywhere in the world — becomes subject to UK Inheritance Tax, not just what you own inside the UK.

• Newly arrived migrants: only UK-based assets are in scope until you become a long-term resident.
• After 10 years of UK residence: your global estate is in scope, wherever the assets are held.
• If you later leave the UK: you don’t escape immediately. A “tail” period keeps your worldwide assets exposed to UK IHT for between three and ten years after departure, depending on how long you were resident before you left.

In practice, this means a longstanding assumption — “I’m not British, so my property back home isn’t the UK’s business” — no longer holds once someone has settled in Britain for a decade. It’s a significant planning point for anyone who owns property, savings, or a family business outside the UK.

Married to a UK Resident? There’s a Catch

Gifts and inheritances between spouses and civil partners are normally exempt from IHT with no upper limit — but only when both partners have the same long-term residence status. Where one spouse is a long-term resident and the other isn’t, the unlimited exemption doesn’t apply. Instead, transfers to the non-LTR spouse are capped at £325,000; anything above that can be taxed at the standard rate.

A non-LTR spouse can elect to be treated as a long-term resident to unlock the full exemption, but doing so brings their own worldwide estate into the UK tax net too — a trade-off worth discussing with a qualified adviser rather than guessing at.

Giving Money Away While You’re Alive: The Seven-Year Rule

Many people try to reduce a future IHT bill by gifting money or property before they die. Most such gifts are called Potentially Exempt Transfers (PETs) — they become completely tax-free only if the giver survives for seven years afterwards. If they die sooner, the gift may be pulled back into the estate for tax purposes, though taper relief reduces the rate the longer the giver survived.

Taper relief only reduces tax on the portion of a gift that falls above the nil-rate band, so it mainly helps with larger gifts. Some gifts sidestep the seven-year rule entirely and are exempt straight away: up to £3,000 per person per year (the annual exemption), small gifts of up to £250 per person, certain wedding gifts, and regular gifts made out of surplus income rather than capital.

Who Actually Pays It, and When?

IHT is paid by the deceased’s estate — usually by the executor or personal representative named in the will — before assets are distributed to beneficiaries, not out of the beneficiaries’ own pockets afterwards. It’s typically due within six months of the end of the month in which the death occurred; HMRC charges interest on late payments. Executors report the estate’s value using the relevant HMRC form and, if IHT is due, often need to arrange payment before probate is granted — sometimes drawing on the deceased’s own bank funds via the “direct payment scheme,” since banks can release money for this purpose even before probate completes.

Common Misconceptions

• “I’m not British, so my overseas property is safe.” Not anymore. Once you’ve been UK resident for 10 of the last 20 years, worldwide assets count.
• “My children will have to pay tax on what they inherit.” Beneficiaries don’t pay IHT directly — the estate settles it before assets are passed on.
• “Leaving everything to my spouse solves the problem.” It defers it. On the second death, the combined estate is assessed in full, which is why many couples still need a plan.
• “Only the wealthy need to think about this.” With property values rising and the threshold frozen since 2009, a modest home plus savings and a pension can be enough to trigger a liability.

Legal Ways to Reduce a Future Bill

Nobody can eliminate IHT through guesswork, but a few well-established strategies consistently reduce exposure:

• Use both nil-rate bands. Structuring a will so unused allowances transfer between spouses protects more of a combined estate.
• Gift early, not urgently. Starting the seven-year clock while healthy is far more effective than large gifts made under pressure.
• Use the annual exemptions every year. The £3,000 gift allowance is lost if unused — it doesn’t roll over indefinitely.
• Consider life insurance written in trust. A policy held in trust pays out directly to beneficiaries, outside the estate, and can cover an expected IHT bill without forcing a family to sell property in a hurry.
• Leave 10% or more to charity to bring the rate on the remaining estate down from 40% to 36%.
• Get residence-status advice early if you’re approaching the 10-year mark as a UK resident, since this is the single biggest shift for migrants under the new rules.

Because pensions are also due to be brought within the scope of Inheritance Tax from April 2027, it’s worth reviewing retirement savings alongside a wider estate plan rather than treating them as automatically outside the tax net. Anyone building a long-term financial base in the UK — including a workplace or private pension — should factor this into future planning.

Frequently Asked Questions

Summary

• Inheritance Tax applies to estates above £325,000 (or up to £500,000 with the residence nil-rate band), at a rate of 40% on the excess.
• Since April 2025, IHT depends on UK tax residence, not domicile or nationality — 10 of the last 20 years makes you a long-term resident with worldwide exposure.
• Spousal transfers are usually unlimited and tax-free, but capped at £325,000 where one partner isn’t a long-term resident.
• Gifts become fully tax-free after seven years; taper relief softens the tax if death occurs between three and seven years after a gift.
• The estate pays the tax before distribution — beneficiaries aren’t billed directly.

Inheritance Tax planning is rarely urgent until, suddenly, it is. For migrants building assets across two countries, understanding exactly when UK rules start to apply — and to how much of what you own — is the difference between a manageable estate and an unpleasant surprise for the people left behind.