Inheritance Tax UK: Rates, Thresholds and Planning Strategies

Inheritance Tax is charged at 40% on the value of your estate above the nil-rate band. The nil-rate band is £325,000 — a figure set in 2009, when the average UK house price was £158,000 and a pint of milk cost 40p.

Between then and now, UK residential property prices have roughly doubled. The nil-rate band hasn't. And on 6 April 2026, HMRC updated its official guidance to confirm the freeze now runs to 5 April 2031 — an extra year beyond what was previously announced.

For an individual, the maths is brutal. Take a £500,000 estate: IHT applies to £175,000 (the excess over £325,000), producing a bill of £70,000. Leave at least 10% of the net estate to charity and the rate drops to 36% — a £7,000 saving on that same £500,000 estate. The reduced rate for charitable giving is one of the few explicit discounts HMRC offers, and it's worth engineering into your will if philanthropy is already part of your plan.

There is no IHT to pay if you leave everything above the threshold to a spouse, civil partner, a UK-registered charity, or a community amateur sports club. Spouses also inherit any unused nil-rate band — a provision that, combined with the residence nil-rate band, opens the door to the £1 million figure you've probably heard quoted. We'll get to that.

For a wider look at how fiscal drag is reshaping UK tax, see our 2026/27 tax year guide.

Since April 2017, an additional allowance — the residence nil-rate band (RNRB) — adds up to £175,000 to your tax-free allowance when you pass your home to direct descendants. For an individual, that means a combined threshold of £500,000. For a married couple or civil partnership, with both allowances and the spousal transfer rule, the total reaches £1 million.

But three conditions trip people up.

First, the RNRB only applies when the home goes to children, grandchildren, or stepchildren. Leave it to a sibling, a niece, or a friend and the allowance vanishes. If you don't have direct descendants, the RNRB does nothing for you — your estate gets the standard £325,000 and not a penny more.

Second, the RNRB tapers away for larger estates. For every £2 above £2 million in total estate value, the RNRB shrinks by £1. At £2.35 million, the RNRB disappears entirely. This taper is aggressive: a family home worth £500,000 inside a £2.2 million estate loses £100,000 of RNRB, adding £40,000 to the IHT bill.

Third, like the nil-rate band, the RNRB is frozen at £175,000 until at least April 2031. The value of the home you're protecting keeps rising; the allowance protecting it doesn't.

For families with estates near the £2 million taper threshold, professional advice is essential. A deed of variation within two years of a death can redirect assets to optimise RNRB availability — but only if the planning is done before the estate is distributed.

If you're weighing up gifting a home to children while you're still alive, our IHT planning strategies guide covers the pitfalls of gifts with reservation — where HMRC treats a gifted asset as still part of your estate because you continue to benefit from it.

Gifts made more than seven years before death are completely outside the estate for IHT purposes. No tax. No taper. No cap. This is the seven-year rule, and it is the single most effective IHT planning tool available to most families.

If you die within seven years of making a gift, IHT may apply on a sliding scale:

• 0–3 years before death: 40% (full rate)
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%
• 7+ years: 0%

Taper relief only kicks in once the total value of gifts exceeds the £325,000 nil-rate band. Gifts below that threshold are tax-free regardless of timing — an important detail that many summaries miss.

Alongside the seven-year rule, several annual exemptions let you give money away immediately and tax-free:

• £3,000 annual exemption: Per person, per tax year. Unused allowance can be carried forward one year only. A couple using both allowances for a decade removes £60,000 from their estate.
• £250 small gifts: Per recipient, per year, unlimited number of recipients.
• Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Normal expenditure out of income: Unlimited regular payments from income (not capital) that don't affect your standard of living. This is the big one — grandparents paying school fees or topping up a Junior ISA from income can move substantial sums outside the estate with zero IHT consequences.

Gifts between spouses and civil partners are always exempt. Gifts to charities and political parties are also exempt — which is why charitable legacies feature prominently in professional IHT planning.

For the counter-argument on whether large gifts to children during your lifetime make sense, read our pension inheritance tax guide — sometimes holding onto assets in a tax-efficient wrapper beats giving them away.

The Autumn Budget 2024 delivered the biggest IHT change in a generation: from 6 April 2027, unused defined contribution pension pots will be included in the value of your estate for Inheritance Tax purposes.

This is seismic. Under current rules, pensions sit outside the estate — they can be passed on free of IHT, and if you die before 75, free of income tax too. The 2027 change ends that. For someone with a £500,000 SIPP and a £400,000 home, the combined estate becomes £900,000 — well above the £500,000 individual threshold with RNRB — producing an IHT bill on the pension portion that simply didn't exist before.

The pension IHT reform has specific implications for different groups:

• Drawdown investors: Funds remaining in drawdown at death will be counted. The old strategy of spending ISAs first and preserving the pension for inheritance is now backwards — you may want to draw the pension and preserve the ISA instead.
• Defined benefit members: The treatment of DB pensions is more complex and still being finalised. A transfer value (CETV) may be used to value the benefit for IHT, which could push borderline estates over thresholds.
• Under-75 death benefits: Currently tax-free to beneficiaries. Post-April 2027, the IHT liability sits on top — meaning the pension gets taxed at 40% (IHT) and then possibly at the beneficiary's marginal rate.

For a detailed walkthrough of the pension IHT timeline and what to do in the 12 months before April 2027, see our pension inheritance tax planning guide.

The government's policy paper confirms that the scheme administrator will be responsible for reporting and paying any IHT due on pension death benefits — meaning the administrative burden falls on providers, not families. But the tax itself is paid from the pension fund, reducing what beneficiaries receive.

From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) were reformed. Previously, both could deliver 100% relief from IHT on qualifying assets — a farmer could pass on a £3 million farm with no IHT. That era is over.

The new rules cap 100% relief at the first £1 million of combined agricultural and business property. Above that threshold, relief drops to 50%, producing an effective IHT rate of 20% on the excess. This is still below the standard 40%, but it represents a material new liability for farming families and family business owners.

The policy rationale is that most genuine family farms fall under the £1 million threshold — but that argument doesn't hold in the South East, where 100 acres of arable land can be worth £1 million before you've counted the farmhouse, buildings, or machinery. The HMRC internal manual on Agricultural Relief confirms the detailed conditions, including occupation and ownership tests that must both be satisfied.

For business owners, the £1 million cap applies to shares in unquoted trading companies, interests in partnerships, and assets used in a business. AIM-listed shares that previously qualified for BPR may no longer provide full shelter if the total business assets exceed £1 million.

If you own farming or business assets approaching or exceeding £1 million, the planning window is now. Options include:

• Lifetime gifting of assets to the next generation (using the seven-year rule)
• Restructuring ownership to split assets between spouses, doubling the £1 million cap to £2 million
• Life insurance written in trust to cover the expected IHT liability — for which our life insurance and IHT guide provides a full walkthrough

IHT planning isn't one big decision — it's a series of smaller moves that compound over years. Here are six that work.

1. Use your gift allowances — every single year. The £3,000 annual exemption and £250 small gift allowance are use-it-or-lose-it. Miss a year and you can carry forward one year's unused annual exemption, but after that it's gone. A couple systematically using both allowances for 15 years removes £90,000 from their estate with zero paperwork.

2. Make larger gifts now, not later. Every year you wait is a year the seven-year clock hasn't started. A £50,000 house deposit gift to a child in 2026 is IHT-free if you survive to 2033. The same gift in 2030 takes until 2037 to clear.

3. Write life insurance into trust. A whole-of-life policy held in trust pays out directly to beneficiaries, outside the estate. Given the pension IHT changes, this is becoming the default mechanism for covering an expected IHT bill. The cost of premiums is often far lower than the tax saved.

4. Leave at least 10% to charity. Below 10%, the IHT rate is 40%. At 10% or above, it drops to 36%. On a £1 million estate above the threshold, that 4% difference is worth £40,000. And the charity gets £100,000. Both your beneficiaries and your chosen cause win.

5. Spend the pension, preserve the ISA. The April 2027 pension IHT change inverts the traditional drawdown order. ISAs are part of your estate regardless — they were always going to attract IHT. Pensions were not, but they will. Drawing the pension first and leaving the ISA untouched may optimise the combined IHT position.

6. Get a deed of variation in the drawer. A deed of variation allows beneficiaries to redirect their inheritance within two years of a death, rewriting the will's distribution for IHT purposes. It can't fix everything, but it can rescue a situation where assets were left to the wrong person from a tax perspective.

These strategies interact. If you're drawing your pension to preserve your ISA, you may push yourself into a higher income tax bracket. If you're making large lifetime gifts, you may trigger a capital gains tax charge on transferred assets. Professional advice — from a qualified financial adviser or STEP-qualified solicitor — is not a luxury at this level of complexity. It's the difference between a plan that works and one that HMRC unpicks.