Inheritance Tax (IHT) is charged at 40% on the value of a deceased person's estate above the available nil-rate band. With nil-rate bands frozen and property values rising, more families are affected by IHT each year. Understanding the thresholds, exemptions, and reliefs — and acting while there is time to plan — is the key to reducing or eliminating an IHT liability.
What is Inheritance Tax?
IHT is charged on the net value of a person's estate at death — their assets (property, cash, investments, business interests, personal possessions) minus any debts and liabilities. The tax is paid from the estate before it is distributed to beneficiaries, or (in some cases) by the recipient of a gift made before death.
The estate is valued as at the date of death. For assets like listed shares, the probate value is well-established. For property, a professional valuation is typically required, and HMRC may challenge under-valuations.
Who pays Inheritance Tax?
In most cases, IHT is paid by the executors of the estate using the estate's own assets before distribution. If the estate does not have sufficient cash, assets may need to be sold to fund the tax. IHT on assets passing to a surviving spouse or civil partner is generally deferred until the second death.
Gifts made within the seven years before death may also attract IHT. In these cases, the recipient of the gift (the donee) may be liable for the tax if the estate cannot pay.
The nil-rate band
The nil-rate band (NRB) is the amount that can pass on death free of IHT. For 2026/27, the NRB is £325,000. It has been frozen at this level since 2009 and is set to remain frozen until at least April 2030. Because property values and financial assets have risen significantly over this period, a much larger proportion of estates now exceed the threshold.
Any NRB unused on the death of the first spouse or civil partner can be transferred to the survivor, potentially doubling the allowance to £650,000.
Residence nil-rate band
The Residence Nil-Rate Band (RNRB) provides an additional allowance of up to £175,000 when a main residence (or share of one) is left to direct descendants. Direct descendants include children, stepchildren, adopted children, foster children, and their lineal descendants.
Combined with the standard NRB, a single person can leave up to £500,000 free of IHT (£325,000 NRB + £175,000 RNRB). A married couple or civil partners who are passing everything to children or grandchildren can potentially shelter up to £1,000,000 from IHT through the combined transferable allowances.
Spouse and civil partner exemption
Assets that pass between spouses or civil partners — at death or as lifetime gifts — are completely exempt from IHT, regardless of value. There is no limit on the amount that can be transferred. This exemption is only available between UK-domiciled spouses. If the recipient is non-domiciled, the exemption is capped (though a non-domiciled surviving spouse can elect to be treated as UK-domiciled for IHT purposes).
The practical consequence is that most couples defer any IHT liability until the death of the surviving spouse. At that point, the combined estate (including transferred allowances) is assessed for IHT.
Gifts and the seven-year rule
Gifts made from your estate while you are alive are known as Potentially Exempt Transfers (PETs). A PET becomes fully exempt from IHT if you survive for seven years after making the gift. If you die within seven years, the gift is brought back into the estate for IHT purposes.
The amount of IHT due on a gift made within seven years is tapered, based on how long before death the gift was made:
| Years before death | IHT rate on gift (if no NRB remaining) |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| Over 7 years | 0% |
Note that taper relief only reduces the tax on the gift itself — it does not reduce the total value of the estate for NRB purposes. Gifts are set against the NRB before the death estate, which means large gifts made shortly before death can erode the NRB available for the remaining estate.
Annual gift exemptions
Several categories of gifts are immediately exempt from IHT regardless of the seven-year rule:
- Annual exemption: £3,000 per donor per tax year (any unused allowance can be carried forward one year, allowing up to £6,000 in the first year).
- Small gifts exemption: Up to £250 per recipient per tax year, to any number of people, provided no other exemption is used for the same recipient.
- Wedding gifts: Up to £5,000 per child, £2,500 per grandchild, or £1,000 to anyone else — provided the gift is conditional on the marriage taking place.
- Normal expenditure out of income: Regular gifts made from surplus income (not capital) that do not reduce your standard of living can be exempt without limit — but must be documented carefully.
- Gifts to charities: All gifts to registered UK charities are exempt from IHT.
Business Property Relief and Agricultural Property Relief — 2026 changes
Business Property Relief (BPR) and Agricultural Property Relief (APR) allow qualifying business and farm assets to be passed on free of IHT. Historically, 100% relief could apply to the full value of eligible assets. From 6 April 2026, significant restrictions apply:
- The first £2.5 million of combined agricultural and business property value qualifies for 100% relief.
- Assets above £2.5 million qualify for only 50% relief, with the remaining 50% taxed at 40% IHT.
- A married couple together can pass on up to £5 million of qualifying business or agricultural assets at 100% relief.
HMRC estimates that 85% of estates claiming APR or BPR will not pay additional IHT as a result of the change. However, owners of larger farms, family businesses, and AIM-listed share portfolios used for IHT planning should review their exposure urgently.
Charitable giving and IHT
If you leave at least 10% of your net estate to charity, your IHT rate on the remainder is reduced from 40% to 36%. For larger estates, this can result in a significant saving, making strategic charitable bequests an efficient part of estate planning.
IHT planning strategies
Effective IHT planning requires acting in advance. Common strategies include:
- Making use of annual exemptions. Consistently using the £3,000 annual exemption (and carrying forward unused amounts) gradually reduces the estate's value.
- Regular gifts from income. Establishing a pattern of gifting from surplus income — documented with records of income, expenditure, and gifts — can shelter large amounts over time without the seven-year clock.
- Pension planning. Pension funds are generally outside the estate for IHT purposes and can be nominated to pass to beneficiaries free of IHT. Maximising pension contributions (within Annual Allowance limits) can significantly reduce an IHT-liable estate.
- Life insurance in trust. A whole-of-life or term assurance policy written in trust pays out directly to beneficiaries without forming part of the estate, covering the expected IHT liability.
- Gifting property while retaining use. Gifting a home to children while continuing to live there is generally not effective — HMRC treats it as a Gift with Reservation of Benefit (GROB), and the property remains in the estate.
- Trusts. Various trust structures can remove assets from the estate, though trust taxation is complex and professional advice is essential.
Key takeaways
- IHT is charged at 40% on estate value above the nil-rate band (£325,000), frozen until 2030. A residence nil-rate band of £175,000 is available when a home passes to direct descendants.
- Married couples and civil partners can combine their nil-rate bands and residence nil-rate bands, potentially sheltering up to £1 million from IHT.
- Gifts become fully IHT-exempt after seven years; taper relief reduces IHT on gifts made three to seven years before death.
- From April 2026, Business Property Relief and Agricultural Property Relief are capped at 100% relief on the first £2.5 million, with 50% relief thereafter.
- Leaving at least 10% of your estate to charity reduces the IHT rate on the remainder from 40% to 36%.
Frequently asked questions
How much can I inherit before paying Inheritance Tax?
In England, Wales, and Northern Ireland, an estate up to £325,000 (the nil-rate band) is free of IHT. If you are inheriting a main residence from a parent or grandparent, the threshold may be £500,000 when the residence nil-rate band is added. Married couples can potentially leave £1 million to children free of IHT by combining their allowances. Above these thresholds, IHT is charged at 40%.
Does my pension count towards my estate for Inheritance Tax?
Generally no. Defined contribution pension funds are not part of your legal estate and do not usually attract IHT — they are passed to nominated beneficiaries outside the probate process. However, the government announced in Autumn Budget 2024 that unused pension funds will be included within estates for IHT from April 2027. This is a significant change and pension planning strategies may need to be revisited.
Are gifts to children exempt from Inheritance Tax?
Gifts to children are Potentially Exempt Transfers (PETs). They become fully exempt from IHT if you survive for seven years after making the gift. If you die within seven years, the gift is brought back into your estate and IHT may be due — though taper relief reduces the tax on gifts made three to seven years before death. The annual £3,000 gift exemption and small gifts exemption (£250 per person) are immediately exempt without the seven-year requirement.
When does Inheritance Tax have to be paid?
IHT is due six months after the end of the month in which death occurs. For a person who died in January 2026, IHT would be due by 31 July 2026. Probate cannot normally be obtained until IHT has been paid, creating a cash flow challenge for estates where assets are illiquid. HMRC offers instalment options for IHT on certain assets, including property, business interests, and agricultural land.
What is the difference between Business Property Relief and Agricultural Property Relief?
Business Property Relief (BPR) applies to qualifying business assets — shares in unlisted companies, interests in business partnerships, and business property used in a trade. Agricultural Property Relief (APR) applies to agricultural land, farm buildings, and farmhouses used in a farming business. Both can provide relief at 100% or 50% depending on the asset type and how it is owned. From April 2026, combined BPR and APR is restricted to 100% relief on the first £2.5 million, with 50% thereafter.