Inheritance tax is applicable on the money and/or possessions you when you die as well as on some gifts made during your life. A certain amount can be passed on tax-free which is called the ‘tax-free allowance’ or the ‘nil rate band’.
The inheritance tax has to be paid only if the combined value of the inherited property, money, car, art or other valuable items surmounts the tax threshold £325,000 (2013 – 2014, said stay frozen until 2017). 40% tax will applied on anything above £325,000.
Inheritance tax may also be due on gifts you make during your lifetime, especially if you die within seven years of making the gift. However, you cannot give away something and still continue to benefit from it and save IHT.
In case the tax is payable on the gifts you made within the last seven years before your death, the people who received the gifts must pay inheritance tax. If they cannot or will not pay, the amount will be taken of your possessions.
HMRC gives a more thorough view on the Inheritance Tax