1. There are two things you need to know here. Firstly inheritance tax is a tax on the estate. So the inheritance tax comes out of the money and property the estate of the deceased has available for distribution. Secondly, there is an exemption from tax up to a limit of 325,000 pounds. Above this limit, Inheritance tax is payable. Additionally, you should be aware that where there are joint accounts and savings the half which belongs to the deceased (husband), will pass under the right of survivorship to the other joint account holder, namely you.
2. Accordingly, there will be inheritance tax payable on all assets above the value of 325,000. So, as the total assets in the estate will be 700k, this means that Inheritance tax will be paid on 375k of the assets. This will mean that part of the house you inherit will be subject to tax. So not only will the flat passing to the children be subject to inheritance tax, so also will the house and possessions be subject in part to inheritance tax.
3. The way to deal with this situation is for your husband to make a Potentially Exempt Transfer (PET) during his lifetime whereby he gifts the flat to his children whilst he is still alive. At the outset, there is no gift tax on the transfer. If he survives the date of gift by seven years, then there is no Inheritance Tax on the transfer and the flat does not form part of his estate. This is one way to avoid Inheritance Tax on the flat.