Inheritance tax occupies a strange place in the national conversation. It is talked about constantly, resented widely, and paid by a small minority of estates.

Part of the confusion is that the rules are described in terms of thresholds and allowances that stack on top of each other. Once the layers are separated out, the question of who actually pays becomes much clearer.

The £325,000 threshold

The starting point is the nil-rate band.

According to the government's guidance on how inheritance tax works, there is normally no inheritance tax to pay if the value of the estate is below the £325,000 threshold, or if everything above that threshold is left to a spouse, a civil partner, a charity or a community amateur sports club. Even where no tax is due, the value of the estate may still have to be reported.

The standard rate is 40%, and it is charged only on the part of the estate above the threshold. The government's own worked example is worth holding on to: an estate of £500,000 with a threshold of £325,000 pays 40% on £175,000, not on the whole £500,000.

There is a reduced rate of 36% where 10% or more of the net value of the estate is left to charity in the will.

Spouses and civil partners change everything

The single most important feature of the tax is what happens between married couples and civil partners.

Anything left to a spouse or civil partner passes free of inheritance tax. On top of that, any part of the threshold that was not used on the first death can be added to the survivor's threshold, so a couple who leave everything to each other effectively pass on a combined allowance.

This is also why unmarried couples are treated markedly less favourably. There is no transfer of unused threshold between cohabiting partners, however long they have lived together, and no exemption for what one leaves to the other.

Passing on a home

The second layer of allowance is the one that lifts many family estates out of the tax altogether.

Government guidance on passing on a home explains that where you own your home, or a share in it, the tax-free threshold can increase to £500,000 if you leave it to your children, including adopted, foster or stepchildren, or to your grandchildren, and the estate is worth less than £2 million. The additional allowance is known formally as the residence nil-rate band.

Because the unused allowances of a spouse or civil partner can be transferred, a married couple leaving their home to their children can reach a combined threshold of £1 million. That figure, rather than £325,000, is the one that decides the outcome for a large number of ordinary estates.

Giving a home away during your lifetime is not the simple solution it appears to be. There is normally no inheritance tax if you move out and live for another seven years, but if you carry on living there without paying market rent and your share of the bills, it counts as a gift with reservation and is added back into the value of your estate.

Gifts and the seven-year rule

Lifetime giving is where the rules become genuinely technical, and where the received wisdom is least reliable.

Government guidance on gifts explains that gifts made less than seven years before death may be taxed, depending on who received them, the value of the gift and when it was given. Gifts include money, household and personal goods, houses and land, and shares. Selling something to a family member for less than it is worth counts as a gift of the difference.

Several categories are outside the tax altogether. There is no inheritance tax on gifts between spouses or civil partners who live permanently in the UK, and none on gifts to charities or political parties. Each tax year there is also an annual exemption of £3,000, which can go to one person or be split between several.

Where a gift does fall within the seven years, taper relief can reduce the tax charged on it below 40% depending on how long the donor survived. Taper relief reduces the tax on the gift, not the value of the gift itself — a distinction that leads to a good deal of disappointment.

Who pays, and when

The bill does not usually land on the beneficiaries personally.

Inheritance tax on the estate is paid to HMRC out of the estate's own funds by the person dealing with it, normally the executor or administrator. The deadline is firm: guidance on paying inheritance tax requires payment by the end of the sixth month after the person died, and HMRC charges interest on anything paid late.

That deadline sits awkwardly with the practical reality of estate administration, because money often cannot be released until the grant of probate has been obtained, and a payment towards the tax is usually needed before the grant is issued. Instalment options exist for assets such as property that cannot be sold quickly.

Other reliefs, including business relief and agricultural relief, can allow particular assets to pass with reduced tax or none at all. These are areas where professional advice earns its cost.

Different rules elsewhere in the UK

Inheritance tax itself is a UK-wide tax administered by HMRC, so the £325,000 threshold, the 40% rate and the rules on gifts apply in the same way in England, Wales, Scotland and Northern Ireland.

What differs is everything around it. Scotland has its own inheritance law, including legal rights for a surviving spouse, civil partner and children, and uses confirmation rather than probate; official information is available from mygov.scot. Northern Ireland has its own rules on wills and probate, explained by nidirect.

Because tax planning and inheritance law interact, advice taken in one part of the UK does not automatically translate to another.