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 when the iPhone 3GS was cutting-edge technology and the Bank of England base rate was 0.5%.

Here is the situation in one table:

Threshold / Rate	2026/27 Value
Nil-rate band (NRB)	£325,000
Residence nil-rate band (RNRB)	Up to £175,000
Combined individual threshold (with RNRB)	£500,000
Combined married couple threshold	£1,000,000
Standard IHT rate	40%
Reduced rate (10%+ to charity)	36%
NRB freeze end date	5 April 2031
IHT interest on late payments	7.75%

Between 2009 and 2026, UK residential property prices roughly doubled. The nil-rate band didn't. And on 6 April 2026, HMRC updated its official guidance to confirm the freeze 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.

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. Combined with the residence nil-rate band, this is how married couples reach the £1 million figure.

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 — and the consequences of getting any one wrong can be a £70,000 surprise.

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.

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, it disappears entirely. 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, 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 whose home has appreciated significantly in the last five years — which describes most of the South East — the effective value of the RNRB is shrinking in real terms every year.

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 remains 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 most summaries miss and many families leave money on the table over.

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.

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.

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.

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

Lifetime gifts start a seven-year clock, but they come with a trade-off: you lose control of the asset. You can't give your daughter £200,000 for a house deposit and then ask for it back if your circumstances change. Trusts solve that problem — they let you move assets outside your estate while retaining a degree of control over how and when beneficiaries receive them.

Three trust structures dominate IHT planning:

Bare trusts are the simplest. Assets are held for a named beneficiary who becomes absolutely entitled at 18. The transfer is a potentially exempt transfer (PET) for IHT — the seven-year clock starts immediately. These are commonly used for grandparent-funded Junior ISAs or investment accounts for children.

Discretionary trusts give trustees complete control over who benefits and when. Transfers into a discretionary trust are chargeable lifetime transfers (CLTs) — if the value exceeds the nil-rate band, there's an immediate 20% IHT charge (the lifetime rate). Every tenth anniversary, a periodic charge of up to 6% applies. Complex, but they offer the maximum control and can be the right tool for blended families where you want to provide for a spouse while ensuring assets ultimately pass to your children.

Interest in possession trusts give one beneficiary (e.g., a surviving spouse) the right to income or use of an asset for life, with the capital passing to another beneficiary (e.g., children) on their death. These are common in wills — the "life interest trust of the residue" — and can protect assets from a surviving spouse's remarriage or bankruptcy while still providing for them.

The trade-off is always control versus tax efficiency. A bare trust clears the estate fastest (seven-year PET clock) but gives the beneficiary unrestricted access at 18. A discretionary trust preserves control but triggers immediate charges and ongoing compliance costs. There is no universally right answer — only the right answer for your family.

Trusts interact with other taxes too. Assets transferred into trust may trigger a Capital Gains Tax charge if they've appreciated. Trust income above £500 is taxed at the trust rate. And trustees must register most trusts with HMRC's Trust Registration Service. Professional advice from a STEP-qualified solicitor is not optional here — a badly drafted trust can create more tax problems than it solves.

Most IHT mistakes aren't exotic. They're ordinary oversights that compound into five- and six-figure tax bills. Here are the ones HMRC sees most often — and how to avoid them.

Mistake 1: Assuming the nil-rate band covers your home. It doesn't. The £325,000 applies to your entire estate — house, savings, investments, car, jewellery, everything. A £400,000 house and £50,000 in savings creates a £125,000 IHT liability if you're single without the RNRB. The RNRB is not automatic — you have to leave your home to direct descendants to claim it.

Mistake 2: Not using the annual gift exemption. £3,000 per person per year sounds trivial. Over 20 years, a couple using both exemptions moves £120,000 outside the estate — avoiding £48,000 in IHT. And it requires zero paperwork. The carry-forward rule (one year only) means you can give £6,000 in a single year if you didn't use last year's allowance. Most people don't.

Mistake 3: Owning assets as tenants in common without a will that optimises the nil-rate band. If you own your home as joint tenants, it passes automatically to the surviving spouse — which sounds fine, but uses none of the deceased's nil-rate band. Severing the tenancy and writing wills that create a nil-rate band discretionary trust can preserve both spouses' allowances. The difference: up to £140,000 in saved IHT.

Mistake 4: Dying without a will. Intestacy rules distribute your estate according to a rigid formula. The RNRB may not apply. Trust structures that would have saved tax don't exist. Your estate pays maximum IHT because you left the planning to a statutory formula designed for the average case.

Mistake 5: Forgetting that joint accounts aren't always split 50/50. HMRC looks at who contributed what, not whose name is on the account. If one spouse funded the entire joint savings account, the whole balance is in their estate for IHT — regardless of the joint name.

Mistake 6: Giving away assets but continuing to use them. This is the gift with reservation trap. Transfer the house to your children but keep living there rent-free? HMRC treats it as still part of your estate. The only way to avoid this is to pay market rent — and document it properly.

Mistake 7: Not reviewing your will after the April 2027 pension changes. If your will leaves your pension outside the estate (as was correct pre-2027) and doesn't account for the new IHT liability, your beneficiaries could face a tax bill that the estate wasn't structured to pay. Every will written before the Autumn Budget 2024 needs a review before April 2027.

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. But beware the income tax interaction — drawing large pension sums can push you into a higher bracket. Our National Insurance guide covers the interaction between pension drawdown, NI, and marginal tax rates.

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.