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 | Unchanged since April 2009; fixed until 5 April 2031 |
| Residence Nil-Rate Band (RNRB) | £175,000 | Only when the home passes to direct descendants; fixed until 5 April 2031 |
| RNRB taper threshold | £2,000,000 | RNRB tapers £1 for every £2 of estate above this; fixed until 5 April 2031 |
| 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For larger estates, the RNRB is withdrawn at £1 for every £2 the estate is worth above £2 million. For one person's £175,000 band:
- £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
Where a surviving spouse also has a transferred band (£350,000 of RNRB in total), it is fully withdrawn once the estate reaches £2,700,000.
Three details catch people out:
- The £2 million test ignores reliefs and exemptions. The estate is valued as its assets minus debts and liabilities, before Business Relief, Agricultural Relief or the charity and spouse exemptions are deducted. An estate holding a valuable trading company alongside the family home can lose the RNRB even though the business itself is relieved, and a legacy to charity in the will does not bring the estate under the threshold.
- Only direct descendants qualify. That means children, grandchildren and other lineal descendants (including step, adopted and fostered children) and their spouses or civil partners. A home left to a nephew, niece or sibling does not attract the RNRB.
- Downsizing need not lose the band. If someone sold, gave away or downsized to a less valuable home on or after 8 July 2015, a "downsizing addition" can preserve the RNRB, provided the former home would have qualified and direct descendants inherit at least some of the estate.
Inside the taper the marginal rate is steep. Each extra £2 of estate is taxed at 40% (80p) and also removes £1 of RNRB, which costs another 40p. For an estate already above its nil-rate bands, that is an effective 60% on value between £2 million and the point where the RNRB runs out.
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 if the total value of gifts made in the seven years before death is over the £325,000 nil-rate band. Gifts within the band are not taxed themselves, but they use it up first, leaving less nil-rate band for the rest of the estate. Taper then reduces the tax only on the slice of gifts above the band — 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, with no seven-year clock and no upper limit. Under section 21 of the Inheritance Tax Act 1984 all three tests must be met: the gifts are part of your normal expenditure (a regular pattern), they are made out of income rather than capital, and after making them you still have enough income to maintain your usual standard of living. Executors have to show this after your death, so keep a yearly record of your income, your spending and the gifts made.
- Spousal exemption: gifts and bequests between spouses or civil partners are exempt with no limit where the receiving spouse is a long-term UK resident. If they are not, the exemption is limited to the nil-rate band (£325,000), unless they elect to be treated as a long-term UK resident.
- 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 (within the allowance below) on shares in unlisted trading companies, interests in partnerships and sole-trader business assets. Shares traded on AIM and other markets designated as "not listed" get 50% relief. 50% relief also applies to 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, 100% Business Relief and Agricultural Relief are limited to a combined £2.5 million allowance per person. Qualifying assets above that get 50% relief, which works out as an effective 20% IHT rate on the excess (half the standard 40%). The allowance was first announced at £1 million and was raised to £2.5 million in December 2025, before the change took effect. This is a major change from the previous unlimited 100% relief and mainly affects working farms and larger unlisted trading businesses.
Any unused allowance can be transferred to a surviving spouse or civil partner, so a couple can pass on up to £5 million of qualifying business and agricultural assets with 100% relief, on top of their nil-rate bands. AIM shares are treated differently: they get 50% relief in all circumstances, whatever their value, so investors who held AIM portfolios specifically for IHT planning now face partial IHT on them. The rules for lifetime gifts and trusts are detailed — get specific advice before relying on these reliefs in a plan.
Pensions — the 2027 change
The single biggest current IHT planning issue: for deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be brought into the IHT estate. Until then, most defined-contribution pensions (SIPPs, personal pensions, drawdown pots) sit outside the estate for IHT, which has made them one of the most tax-efficient ways to pass on wealth.
What changes and what doesn't:
- Unused pension funds will be added to the estate and tested against the same nil-rate bands and 40% rate as everything else. Personal representatives will be responsible for reporting and paying the IHT due on them.
- Death-in-service benefits from registered pension schemes are excluded, as are dependants' scheme pensions from defined benefit arrangements.
- Pension death benefits left to a surviving spouse or civil partner, or to a registered charity, stay exempt.
- Income tax on inherited pensions is a separate question. If the holder dies before 75, beneficiaries can usually draw an inherited drawdown fund free of income tax; if the holder dies at or after 75, withdrawals are taxed at the beneficiary's marginal rate. After April 2027 a large pot could therefore face both IHT in the estate and income tax in the beneficiary's hands.
The planning implications are substantial. The common approach of spending ISAs and other savings first while leaving the pension untouched for the next generation is less attractive from April 2027, and lifetime gifting (subject to the 7-year rule) and whole-of-life insurance written in trust are among the approaches families look at instead. This is one of the areas where personalised advice from a regulated financial planner is genuinely worth the fee. More detail is on our 2027 pensions-into-IHT reform page.
Worked example — a typical couple's estate
Married couple, both long-term UK residents. 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 (the nil-rate bands are fixed until April 2031, so today's figures apply):
- 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).
Or change one fact instead: the home is left to a nephew rather than the children. A nephew is not a direct descendant, so neither residence nil-rate band applies and only the £650,000 of combined nil-rate band is available. The taxable estate becomes £1,200,000 − £650,000 = £550,000 and the IHT £220,000 — £140,000 more, purely because of who inherits the home.
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.
- A deed of variation after death. Within two years of a death, beneficiaries can redirect what they inherit, for example to grandchildren or to charity. If the deed contains the statement the law requires, IHT treats the change as if the person who died had made it. See deeds of variation explained.
- 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.
Paying the bill and the reporting deadlines
Knowing the reliefs is only half the job: the executors then have to report and pay, often before they can reach the money.
- IHT is due by the end of the sixth month after the person died. HMRC charges interest on tax paid after that.
- Payment usually comes before probate. You usually need to pay at least some of the IHT before you can get the grant of representation, which executors need to access most of the estate. The tax can be paid from the deceased's own bank, savings or investment accounts to help with this.
- Some tax can be paid in instalments. IHT on assets that may take time to sell, such as land and buildings, certain shares and business interests, can be paid in equal yearly instalments over 10 years. Interest is usually charged on the unpaid balance.
- Not every estate needs a full IHT account. Where no tax is due and the estate qualifies as an "excepted estate", a full account is not required; otherwise executors complete form IHT400.
For the step-by-step administration route, see our probate and Inheritance Tax guide.
FAQs
Do I have to pay IHT before the executors can release the estate?
Usually, yes — you normally need to pay at least some of the IHT before you can get the grant of representation (probate), which is needed to access most estate assets. This creates the classic "frozen estate" problem. The tax can be paid from the deceased's bank, savings or investment accounts; otherwise executors may need to borrow or use their own money, which they can claim back from the estate once they have probate.
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?
Since 6 April 2025, the reach of IHT depends on residence rather than domicile. If you are a long-term UK resident — UK resident in at least 10 of the 20 tax years before the year of death — IHT applies to your worldwide assets. If you are not, it applies only to your UK assets. Long-term resident status can continue for a period after you leave the UK. Get specific advice if you have significant overseas assets or have lived abroad.
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. Under the 7-year rule, a gift made within 7 years of death is brought back into the IHT calculation, so a gift made shortly before death gains nothing from timing. Only the specific exemptions — the £3,000 annual exemption, small gifts, wedding gifts, regular gifts out of income, and gifts to a spouse or charity — take a gift outside IHT straight away.
Related calculators
Inheritance Tax calculator · 7-year gift rule · Transferable nil-rate band · Business Property Relief · Deeds of variation · UK tax rates 2026/27 · CGT hub · CGT spouse tip · EIS / SEIS relief
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