Inheritance Tax UK 2026/27: Thresholds, Rates and How to Reduce Your Bill
Updated March 2026 | 14 min read
Inheritance tax (IHT) is charged at 40% on the value of your estate above certain thresholds when you die. In the 2024/25 tax year, HMRC collected over £7.5 billion in inheritance tax, and the number of estates paying IHT has been rising steadily as property values increase while thresholds remain frozen. The nil-rate band has been stuck at £325,000 since 2009, and the government has confirmed it will stay frozen until at least April 2028. This guide explains how IHT works, what the current thresholds are, and practical strategies to reduce the amount your family pays.
How Inheritance Tax Works
When someone dies, HMRC assesses the total value of their estate: property, savings, investments, possessions, and any gifts made in the seven years before death. Debts and funeral costs are deducted. If the net estate exceeds the nil-rate band (NRB), IHT is charged at 40% on the excess.
Simple example
Estate value: £500,000. Nil-rate band: £325,000. Taxable amount: £175,000. IHT at 40%: £70,000. The family receives £430,000 after tax.
IHT must normally be paid within 6 months of death. If it is late, HMRC charges interest. Payment can be spread over 10 years for property and certain assets, but interest still applies. The executor is responsible for calculating and paying IHT before distributing the estate.
Current IHT Thresholds (2026/27)
| Threshold | Amount | Details |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Everyone gets this. Frozen since 2009, frozen until at least April 2028. |
| Residence nil-rate band (RNRB) | £175,000 | Extra allowance if you leave your home to direct descendants (children, grandchildren). Tapers for estates over £2 million. |
| Combined individual allowance | £500,000 | NRB (£325,000) + RNRB (£175,000) if conditions are met. |
| Married couple / civil partners | Up to £1,000,000 | Unused NRB and RNRB transfer to surviving spouse. Combined maximum: £1 million. |
Source: GOV.UK: Inheritance Tax
The Spouse and Civil Partner Exemption
Everything you leave to your spouse or civil partner is completely exempt from IHT, regardless of the amount. There is no upper limit. This is the single most powerful IHT exemption.
When the first spouse dies and leaves everything to the surviving spouse, no IHT is payable. The deceased's unused nil-rate band (£325,000) and residence nil-rate band (£175,000) can be transferred to the surviving spouse's estate. When the second spouse dies, the combined allowance of up to £1 million applies.
This exemption does not apply to unmarried couples. If you are cohabiting but not married or in a civil partnership, everything you leave to your partner is subject to IHT above the nil-rate band. For some couples, this alone is a reason to get married.
The Residence Nil-Rate Band Explained
The residence nil-rate band (RNRB) adds an extra £175,000 to your IHT threshold, but only if you leave your home (or a share of it) to direct descendants: children, grandchildren, stepchildren, adopted children, or foster children. It does not apply if you leave your home to siblings, nieces/nephews, or friends.
Important RNRB conditions
- You must have owned a home at some point (you do not need to live in it at death)
- The home (or its sale proceeds) must pass to direct descendants
- Estates over £2 million: the RNRB tapers by £1 for every £2 over £2 million
- At estates of £2.35 million, the RNRB is reduced to zero
- If you downsized or sold your home after 8 July 2015, you may still qualify
Gifts and the Seven-Year Rule
You can give away unlimited amounts during your lifetime, but gifts made within seven years of death may be pulled back into your estate for IHT purposes. This is called the "seven-year rule" or "potentially exempt transfers" (PETs).
| Years Before Death | Tax Rate on Gift |
|---|---|
| 0 - 3 years | 40% |
| 3 - 4 years | 32% |
| 4 - 5 years | 24% |
| 5 - 6 years | 16% |
| 6 - 7 years | 8% |
| 7+ years | 0% (exempt) |
Certain gifts are always exempt, regardless of how soon before death they are made:
Always-exempt gifts
- Annual exemption: £3,000 per tax year (unused portion carries forward one year)
- Small gifts: £250 per person per year (unlimited recipients)
- Wedding gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else
- Gifts to charities, political parties, and national institutions
- Gifts out of surplus income (regular gifts from income you do not need to live on)
- Gifts between spouses / civil partners
Practical Strategies to Reduce Your IHT Bill
1. Leave 10% to charity for a reduced rate
If you leave at least 10% of your net estate to registered charities, the IHT rate on the rest drops from 40% to 36%. On a £500,000 estate (after exemptions), leaving £50,000 to charity could save £20,000 in tax, meaning the net cost of the donation is much less than it appears.
2. Make gifts during your lifetime
Use your annual exemption (£3,000/year), small gift exemption (£250/person), and make larger gifts that become exempt after seven years. Gifts from surplus income are immediately exempt if you can demonstrate they come from income you do not need.
3. Use your pension
Pensions are generally outside your estate for IHT purposes. Money left in a pension pot can pass to beneficiaries tax-free if you die before 75, or taxed at their income tax rate if you die after 75. Spending savings first and preserving your pension is a legitimate IHT planning strategy. Note: from April 2027, the government plans to bring unused pension funds into the scope of IHT; seek up-to-date advice on this.
4. Take out life insurance in trust
A life insurance policy written in trust does not form part of your estate. The payout goes directly to the beneficiaries and can be used to pay any IHT bill without waiting for probate. This is one of the most effective planning tools for large estates.
5. Business and agricultural relief
Business Property Relief (BPR) can reduce the IHT value of business assets by 50% or 100%. Agricultural Property Relief (APR) does the same for farmland and farm buildings. Shares in unquoted companies (including AIM-listed shares) may also qualify for 100% BPR after two years of ownership. Note: the 2024 Autumn Budget introduced changes to these reliefs from April 2026; take professional advice on the current rules.
6. Consider trusts (with professional advice)
Trusts can be useful for IHT planning, but they are complex and have their own tax rules. A discretionary trust, for example, is subject to its own IHT charges every 10 years. Trusts are best set up with a specialist solicitor or financial adviser. Do not attempt DIY trust planning.
Common IHT Myths
"I can give my house to my children and keep living in it"
This is called a "gift with reservation of benefit" and does not work. HMRC treats the house as still part of your estate for IHT. To be an effective gift, you would need to pay market rent or move out entirely.
"IHT only affects the wealthy"
With average UK house prices above £280,000 and the nil-rate band frozen at £325,000, many ordinary families with a family home and some savings now face IHT. The number of estates paying IHT has more than doubled over the past decade.
"Putting money in a joint account avoids IHT"
HMRC will look at who contributed the money. If you added £100,000 to a joint account with your child, and you die within seven years, that money is still part of your estate for IHT purposes.
How and When IHT Is Paid
IHT is due within 6 months of the end of the month of death. The executor is responsible for calculating the liability and paying it before distributing the estate. For most estates, the executor must complete form IHT400 and send it to HMRC. Smaller estates (under the threshold, or where the full value passes to a spouse/charity) may only need the shorter IHT205/IHT217 form.
A common practical problem: IHT must often be paid before the executor can access the deceased's money (which requires probate). This catch-22 can be resolved by using the Direct Payment Scheme, where banks release funds directly to HMRC, or by paying from the executor's own funds and being reimbursed from the estate.