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From 1796, small inheritance taxes, then called legacy, succession and estate duties were collected, in England and Wales on estates over a certain value by stamping deeds and by stamping wills admitted to probate, similarly to stamp duty. The value varied and the scope of estate duty became gradually extended as the socio-economic parish level land taxation system obsolesced as a result of the Industrial Revolution, see the poor rate and Old Poor Law. From 1857, estates worth over £20 were taxable but duty was rarely collected on estates valued under £1,500. Death duties were introduced in 1894 and the rates have been increased which led in many cases for the first time to the breaking up of large estates. Estate Duty began, at a more typical rate of tax, starting in 1914 under the First Asquith ministry that was a breakthrough in constitutional terms and social terms by introducing the People's Budget and the first written right of the House of Commons to ascendancy in the Parliament of the United Kingdom under the Parliament Act 1911.
Estate duty was replaced in 1975 by Capital Transfer Tax, which was renamed Inheritance Tax (IHT) in 1986. There are a few simple and widely used methods available to avoid it, often resulting in additional income and capital gains taxes on trusts; however, Inheritance Tax accounts for about 0.8% of government income, raising around £2 billion in 2001 and around £2.7 billion in 2011.
A spouse exemption has long existed in respect of Inheritance Tax as a matter of public policy. From 9 October 2007, a transferable nil rate band policy was introduced that allows a surviving spouse (who has lost a husband/wife/civil partner) to benefit from an additional percentage of nil rate band (that unused) therefore providing up to a 200% nil rate band for that person; however that person may have already used their nil rate band, for instance to provide for relatives less likely to face care charges under the (National Health Service and) Community Care Act 1990. For the 2010/2011 tax year, the IHT rate was 0% on the first £325,000 (the "nil-rate band"), and 40% on the rest of the value, at death, of an individual's taxable estate (loosely speaking net assets at death as the tax provides for a degree of retro-activity as at date of death).
The tax is payable on only the value of an estate above the nil rate band.
In the 2007 budget report the Chancellor of the Exchequer announced that the nil rate band was to rise to £350,000 by 2010. This plan was said to take into account the sharp rise in house prices in the United Kingdom over the previous few years. This increase was cancelled by the Chancellor in December 2009 and while in the 2008–2012 global recession has been maintained at £325,000 until at least the end of the tax year ending 5 April 2015.
The tax estate includes:
There is also a charge on "lifetime chargeable transfers" into certain trusts (and a recalculation of those charges if the giver dies within seven years), and trusts themselves have an inheritance tax regime. See Taxation of trusts (United Kingdom).
There are deductions for:
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The Chancellor of the Exchequer's Autumn Statement on 9 October 2007  announced that with immediate effect inheritance tax allowances (often referred to as the nil-rate band) were to be transferrable between married couples and between civil partners. Thus, for the 2007/8 tax year, a married couple will in effect have an allowance of £600,000 against inheritance tax, whilst a single person's allowance remains at £300,000. The mechanism for this enhanced allowance is that on the death of the second spouse to die, the nil rate band for the second spouse is increased by the percentage of the nil-rate band which was not used on the death of the first spouse to die.
For example, if in 2007/08 the first married spouse (or civil partner) to die were to leave £120,000 to their children and the rest of their estate to their spouse, there would be no inheritance tax due at that time and £180,000 or 60% of the nil-rate band would be unused. Later, upon the second death the nil-rate band would be 160% of the allowance for a single person, so that if the surviving spouse also died in 2007/08 the first £480,000 (160% of £300,000) of the surviving spouse's estate would be exempt from inheritance tax. If the surviving spouse died in a later year when the nil-rate band had reached £350,000, the first £560,000 (160% of £350,000) of the estate would be tax exempt.
This measure was also extended to existing widows, widowers and bereaved civil partners on 9 October 2007. If their late spouse or partner had not used all of their inheritance tax allowance at the time of the spouse's death, then the unused percentage of that allowance can now be added to the single person's allowance when the surviving spouse or partner dies. This applies irrespective of the date on which the first spouse died, but special rules apply if the surviving spouse remarries.
In a judgement following an unsuccessful appeal to a 2006 decision by the European Court of Human Rights, it was held that the above does not apply to siblings living together. The crucial factor in such cases was determined to be the existence of a public undertaking, carrying with it a body of rights and obligations of a contractual nature, rather than the length or supportive nature of the relationship.
Prior to this legislative change, the most common means of ensuring that both nil-rate bands were used was called a nil band discretionary trust (now more properly known as NRB Relevant Property Trust*). This is an arrangement in both wills which says that whoever is the first to die leaves their nil band to a discretionary trust for the family, and not to the survivor. The survivor can still benefit from those assets if needed, but they are not part of that survivor's estate.
Inheritance Tax is an emotive tax which seems to be widely disliked by the general public as it comes at the time of loss and mourning. Inheritance tax for most people is a tax-on-tax, in that wealth such as personal savings and property would have been built up from personal income already subject to income tax.
In 2002 Queen Elizabeth The Queen Mother is understood to have left her entire estate estimated at £50 million to her daughter Elizabeth II, including works of art, jewels, antiques and her thoroughbred racehorses. A deal made back in 1993  ensures that The Queen is spared inheritance tax of an estimated £20 million on her mother's estate.
Inheritance Tax has been something of a political football with the government of the time introducing the concept of a transferable nil-rate band (NRB) on 9 October 2007 and the opposition promising to significantly increase the NRB threshold to £1 million to excuse most of middle England's houses from this tax. However, the Coalition government has agreed to keep the threshold for the time being.