Inheritance Tax estimator 2026/27

Inheritance Tax is charged at 40% on the value of an estate above the nil-rate band of £325,000. A residence nil-rate band of £175,000 stacks on top when a main home passes to direct descendants, taking the threshold to £500,000 for an individual and up to £1 million for a married couple. Both bands are now confirmed frozen until April 2031. The rate drops to 36% if at least 10% of the net estate is left to charity. This calculator estimates IHT on a given estate, applies the residence nil-rate band including the £2 million taper, factors in unused spousal allowances, and shows lifetime gift exposure under the 7-year rule.

How the nil-rate band works in 2026/27

The nil-rate band (NRB) is £325,000 per person. It’s been at this level since April 2009 — a 16-year freeze in nominal terms that has eroded sharply in real terms. The 2025 Budget confirmed the freeze runs until April 2031.

The residence nil-rate band (RNRB) is £175,000 per person, available where a main residence passes to a “direct descendant” — children, grandchildren, step-children, foster children. It’s available even if the home is sold during the deceased’s lifetime, provided they “downsized” and the unused RNRB transfers via the downsizing addition rules.

For a couple, both nil-rate bands transfer to the surviving spouse to the extent unused. So a widow whose late husband left everything to her uses none of his NRB or RNRB; on her later death, her own £325,000 + £175,000 plus her late husband’s £325,000 + £175,000 totals £1 million of allowance. The full £1 million only applies if the home is being passed to direct descendants.

The £2 million taper

The RNRB tapers away above estates of £2 million, at £1 lost for every £2 of estate value above the threshold. So an estate of £2.35 million loses £175,000 of RNRB entirely (£175,000 Ã, 2 = £350,000 above the £2 million threshold). The £2 million threshold is also frozen until 2031.

For estates near the taper, planning becomes about reducing the gross estate below £2 million to preserve the RNRB. Lifetime gifts more than 7 years before death drop out of the estate. Pension funds (with some exceptions for the 2027 changes — see below) sit outside the estate. Business Property Relief and Agricultural Property Relief can take qualifying assets out of the IHT calculation entirely.

The 7-year rule on lifetime gifts

Lifetime gifts are “Potentially Exempt Transfers” (PETs). If the donor survives 7 years, the gift falls out of the estate. If they die within 7 years, the gift is added back. Taper relief reduces the IHT (not the gift value) on a sliding scale:

Note the relief is on the IHT, not the gift. A £100,000 gift made 4 years before death has IHT of (£100,000 Ã, 40%) Ã, 60% = £24,000 if the NRB is exhausted by other gifts and assets. Gifts use up the nil-rate band first, in date order, so the earliest gift gets the most NRB protection.

Smaller exemptions and the regular gifts rule

Several gifts and exemptions sit outside the 7-year rule:

• £3,000 annual exemption per donor (can carry forward one year if unused).
• £250 small gifts to as many people as you like.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone.
• Gifts between spouses and civil partners: unlimited.
• Charitable gifts: unlimited.
• “Normal expenditure out of income”: a regular pattern of giving from surplus income that doesn’t reduce the donor’s standard of living. This is one of the most powerful tools for IHT planning over time, but requires careful documentation.

Used systematically, a couple can give away £6,000 a year (annual exemptions) plus arbitrary amounts of “normal expenditure out of income” without any 7-year clock starting.

Pensions and IHT from April 2027

Currently (2026/27), most defined contribution pension funds sit outside the IHT estate. From 6 April 2027, the government has legislated to bring most unspent pension funds into the IHT net. This is a significant change. Anyone with a substantial pension pot expecting to leave residual pension to children needs to revisit their estate plan ahead of the April 2027 change.

The detail of the April 2027 reform is still being finalised, but the headline is that pensions will largely lose their IHT-exempt status. The annuity vs drawdown decision and the death-in-service insurance arrangements both need re-examining.

Worked example: £900,000 estate, leaving home to children

A widow dies in 2026/27 with an estate of £900,000, including a £400,000 main residence left to her two children. Her late husband had left her his entire estate, so she can use his unused nil-rate bands too.

• Combined NRB: £325,000 Ã, 2 = £650,000
• Combined RNRB (home goes to children): £175,000 Ã, 2 = £350,000
• Total threshold: £1,000,000
• Estate value: £900,000
• Estate within threshold: nil IHT due

Now make the estate £1,200,000:

• Total threshold: £1,000,000 (same, no taper because below £2m)
• Estate above threshold: £200,000
• IHT at 40%: £80,000

Key takeaways

• Nil-rate band: £325,000 per person, frozen until April 2031.
• Residence nil-rate band: £175,000 per person where a main home passes to direct descendants, frozen at £2 million taper.
• Combined couple’s threshold: up to £1 million if home goes to children.
• Lifetime gifts more than 7 years before death drop out of the estate; gifts within 3 years pay full IHT.
• Pension funds become IHT-exposed from April 2027; estate planning needs to revisit the pension assumption.

Frequently asked questions

Do I pay IHT on a gift I receive? No. The donor (or the donor’s estate) is liable for IHT, not the recipient. The exception is if the donor’s estate doesn’t have enough to pay the IHT on PETs that fall back into the estate within 7 years — HMRC can pursue the recipient as a fallback.

What’s the difference between NRB and RNRB? The nil-rate band (£325,000) applies to any estate. The residence nil-rate band (£175,000) is an extra allowance specifically for estates that include a main residence passing to direct descendants. NRB has been around since 1986. RNRB was introduced in April 2017 specifically to take family homes out of the IHT net for moderate estates.

Can my unused nil-rate band pass to my spouse? Yes. Both NRB and RNRB transfer to a surviving spouse or civil partner to the extent unused on the first death. The transfer is claimed on the second death by completing form IHT402 (NRB) and IHT436 (RNRB). It’s the value of the unused percentage at the time of the second death, not the cash amount, that transfers.

Does life insurance count in my estate for IHT? Most life insurance pays out into the estate by default, where it’s subject to IHT. Writing the policy in trust takes the proceeds outside the estate, so they go directly to beneficiaries IHT-free. Almost all financial planners recommend writing life policies in trust for this reason; the cost is essentially zero and the IHT saving can be 40% of the sum assured.