What gets taxed and at what rate
UK Inheritance Tax (IHT) is charged on the value of someone's estate at death — broadly, everything they owned (property, savings, investments, life insurance not in trust, valuables) minus what they owed (mortgage, debts, funeral expenses). Above the relevant tax-free thresholds, the rate is 40%.
If at least 10% of the net estate is left to qualifying UK charities, the rate on the remaining estate drops to 36%. This is one of the more powerful "leave-something-to-charity" incentives anywhere in personal finance: the marginal effect of giving the last 10% to charity can be cheaper than not giving it at all.
2026/27 thresholds
| Threshold / element | 2026/27 amount | Notes |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Frozen since 2009; freeze extended to 2030 |
| Residence Nil-Rate Band (RNRB) | £175,000 | Only when the home passes to direct descendants |
| RNRB taper threshold | £2,000,000 | RNRB tapers £1 for every £2 of estate above this |
| Standard rate | 40% | On excess above thresholds |
| Reduced rate (10%+ to charity) | 36% | If 10%+ of net estate left to charity |
| Annual gift exemption | £3,000 | Per donor per year, can roll over one year |
| Small gifts exemption | £250 | Per recipient per year, unlimited recipients |
Combined band — the £1,000,000 number
Married couples and civil partners can transfer any unused NRB and RNRB to the surviving spouse, who can then use a combined band on their own death. The maximum combined exemption is £1,000,000: 2 × £325,000 NRB + 2 × £175,000 RNRB = £1,000,000. This is the figure quoted as the "couples' threshold" in financial press, but it requires three conditions:
- The first spouse died and left their assets to the survivor (or to direct descendants in a way that didn't use up the bands).
- The survivor's estate at death includes a residence (or the proceeds of one sold downsizing).
- That residence is left to direct descendants — children, grandchildren, step-children, adopted children, or their spouses.
Without children or a property, the couple's joint exemption is just the 2 × £325,000 = £650,000 of NRB.
The £2 million RNRB taper
For very large estates, the RNRB tapers away at £1 of band lost for every £2 of estate above £2 million. So:
- £2,000,000 estate: full £175,000 RNRB available
- £2,200,000 estate: RNRB reduced by £100,000 → £75,000 available
- £2,350,000 estate: RNRB fully tapered to £0
For couples with combined estates above £2 million, a small downsize or charitable gift to bring the surviving estate below the taper threshold can preserve the full £175,000 RNRB on second death.
The 7-year rule for lifetime gifts
Most lifetime gifts to individuals are Potentially Exempt Transfers (PETs). They drop out of your estate entirely if you survive seven years from the date of the gift. If you die within seven years, the gift is brought back into your estate for IHT calculation and may be taxable.
Taper relief on PETs
If a PET becomes chargeable because the donor died within seven years, the rate of IHT on the gift is tapered based on how long the donor survived after making it:
| Years between gift and death | Rate on the gift |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7+ | 0% (exempt) |
Critical caveat: taper relief only applies to gifts that exceed the NRB. The first £325,000 of cumulative gifts in the seven years before death uses up the NRB and is taxed at the relevant rate without taper. Taper kicks in only on the slice above the NRB — which is why for moderate estates, taper relief actually does very little.
Annual gift exemptions
These are exemptions that apply regardless of whether you survive 7 years — they don't count against the NRB:
- £3,000 annual exemption per donor. Unused annual exemption can be carried forward one year (so a donor with no prior gifts could give up to £6,000 in a single year).
- £250 small gifts per recipient per year, to as many recipients as you like (but cannot be combined with the £3,000 to the same person).
- Wedding gifts: £5,000 to your child, £2,500 to a grandchild, £1,000 to anyone else, in contemplation of their wedding.
- Regular gifts out of income — possibly the most under-used exemption — are immediately exempt from IHT if they're regular, made out of income (not capital), and don't reduce your standard of living. No specified upper limit.
- Spousal exemption: all gifts and bequests between UK-domiciled spouses or civil partners are entirely exempt, no limit.
- Charity exemption: all gifts to UK-registered charities are exempt.
Business Relief and Agricultural Relief
Two valuable IHT reliefs reduce or eliminate IHT on certain business and farm assets:
- Business Relief (BR) — 100% relief on shares in unlisted trading companies, AIM-listed shares (subject to upcoming changes — see below), interests in partnerships, sole-trader business assets. 50% relief on shares in listed companies you control more than 50% of, or land/buildings used by a business you control.
- Agricultural Relief (AR) — 100% relief on farm land used for agricultural purposes, owned for at least 7 years (or 2 years if the deceased farmed it themselves).
April 2026 changes — important
From 6 April 2026, Business Relief and Agricultural Relief have a combined £1 million 100% allowance per individual — anything above is relieved at 50% (effective 20% IHT, half the standard 40% rate). This is a major change from the previous unlimited 100% relief and primarily affects estates with substantial AIM share holdings, working farms, or unlisted trading company shares.
For investors who used AIM shares specifically as an IHT planning tool (a common pattern in the past decade), the change is material. Most retail-investor AIM portfolios above £1 million now face partial IHT. The grandfathering rules and trust-related transitional arrangements are still being clarified — get specific advice before relying on AIM relief in a current plan.
Pensions — the 2027 change
The single biggest current IHT planning issue: from April 2027, defined-contribution pensions will be brought into the IHT estate. Currently, DC pensions pass outside the estate entirely if death is before age 75 (and at marginal rate to beneficiaries after 75) — making them one of the most tax-efficient inheritance vehicles available.
From April 2027, the unused pension pot at death will be added to the estate and potentially subject to 40% IHT, plus income tax for the beneficiary on subsequent withdrawal. The combination can produce effective tax rates near 67% on inherited pension wealth. The planning implications are substantial:
- Order of withdrawal in retirement — for couples with both pensions and ISAs, draw from ISAs first if intending to leave pension to descendants (under current rules), but flip the order from April 2027 onward.
- Lifetime gifting from current pension pots becomes more attractive (subject to the 7-year rule).
- Whole-of-life insurance written in trust as a way to fund the future IHT bill becomes a more compelling product.
This is one of the areas where personalised advice from a regulated financial planner is genuinely worth the fee — the rules are still being finalised, but the direction of travel is clear.
Worked example — a typical couple's estate
Married couple, both UK-domiciled. Husband dies in 2026 leaving everything to his wife. Wife dies in 2030 with an estate worth £1,200,000, including a £550,000 home left to two children:
- Wife's own NRB: £325,000
- Husband's transferred NRB: £325,000 (he used none — left everything to wife)
- Wife's RNRB: £175,000 (because home passes to direct descendants)
- Husband's transferred RNRB: £175,000
- Total tax-free: £1,000,000
- Taxable estate: £1,200,000 − £1,000,000 = £200,000
- IHT: £200,000 × 40% = £80,000
Now consider the same couple gifting £100,000 each (£200,000 total) to children seven-plus years before second death, using regular-gifts-out-of-income or PETs that survive their 7-year clock. The taxable estate becomes £1,000,000 — exactly at the threshold — and the IHT bill drops to £0. The £200,000 of gifts saved £80,000 of tax (a 40% effective return on the capital that would otherwise have been lost to HMRC).
The most powerful planning levers
- Use both NRBs. Make sure first-death wills don't waste the first NRB; use a "nil-rate band discretionary trust" or simply leave assets to the surviving spouse.
- Make the most of regular gifts out of income. If you have surplus pension or salary income, regular gifts straight from income are immediately exempt with no upper cap.
- Use the £3,000 annual exemption every year. Cumulatively, decades of small-but-regular gifts build into substantial tax-free transfers.
- Charitable bequests above 10% to drop the rate. If you'd give to charity anyway, do it in your will — the 36% rate can leave non-charity beneficiaries better off than the 40% rate would have.
- Whole-of-life insurance in trust. A pure protection policy held in trust pays out outside the estate and can fund the IHT bill without further taxation. Suits couples whose IHT exposure is large and known.
- Spend it. The most under-used "planning" tool is to enjoy the money in life. Many people accumulate IHT exposure they never intended to leave.
FAQs
Do I have to pay IHT before the executors can release the estate?
Yes — IHT must usually be paid before HMRC releases the grant of probate, which is required to access most estate assets. This creates the classic "frozen estate" problem. Banks may release some funds for funeral costs and IHT itself; otherwise executors often borrow against the estate or sell liquid assets first.
Are gifts to grandchildren tax-free?
They use the same rules as gifts to anyone else: the £3,000 annual exemption, £250 small gifts exemption, regular gifts out of income, or PETs that need 7 years to fall out of the estate. Gifts into a trust for grandchildren may have their own treatment depending on trust type.
What about overseas assets?
UK-domiciled individuals are subject to IHT on worldwide assets. Non-UK domiciled individuals are subject only on UK assets. UK domicile is sticky — you can be deemed UK-domiciled even after long periods abroad. The rules are nuanced and changing (the "non-dom" regime was reformed in 2024-25). Get specific advice if you have significant overseas assets or a non-UK background.
Does life insurance count for IHT?
If the policy isn't written in trust, the proceeds form part of your estate and may be taxable. If it's written in trust (which costs nothing extra at policy inception), the proceeds bypass the estate and pay directly to beneficiaries. Always write life cover in trust unless there's a specific reason not to.
Can I avoid IHT by giving everything away on my deathbed?
No. "Deathbed gifts" (donatio mortis causa) and the 7-year rule mean any gift made within 7 years of death is brought back into the estate. There's no way to make a recent gift escape IHT through timing alone.
Related calculators
Inheritance Tax calculator · UK tax rates 2026/27 · CGT hub · CGT spouse tip · EIS / SEIS relief