Each individual has a personal tax allowance know as the 'nil rate band'. If the total value of your estate is under the nil rate band, you will not owe any inheritance tax.
For the 2016/17 tax year, the nil rate band is £325,000. If your estate is worth more than £325,000, 40% inheritance tax will be due on everything over the nil rate band.
For example, if you are single and leave behind an estate worth £500,000, you are £175,000 over the nil rate band and will owe 40% of this amount - £70,000 - in inheritance tax.
Inheritance tax for civil partners and married couples
If you're married or in a civil partnership, anything that you leave your partner is tax-free, regardless of the size of your estate. Married couples and civil partners are also able to pass on their unused tax allowance to their partner, effectively increasing the surviving partner's tax allowance.
For example, if a wife dies leaving her whole estate to her husband, no inheritance tax is due as it passed between married partners. At the same time, as none of the wife's tax allowance was used, the husband's tax allowance is increased from £325,000 to £650,000.
Inheritance tax and your home - main residence allowance
From April 2017, an additional tax allowance is being introduced by the government - on top of the nil rate band. This only applies to homeowners leaving their house or flat to children or grandchildren, and gives an additional £100,000 of tax allowance (rising to £175,000 by 2021). This allowance, like the nil rate band, is also transferable between married couples and civil partners.
For example, by 2021 a single person leaving an estate to their children, which includes their main residence, will only be subject to tax on the value of their state exceeding £500,000 (their nil rate band - £325,000 - added to their transferable main residence allowance - £175,000). If their estate was worth £600,000, 40% tax would be owed only on the £100,000 exceeding their £500,000 threshold.
Similarly, if a husband dies in 2021, leaving his estate to his wife, when his wife then passes away she will have a taxable threshold of up to £1M - the sum of her and her husband's two nil rate bands and transferable main residence allowance - £325,000 + £325,000 + £175,000 + £175,000 = £1M.