Inheritance Tax (IHT) is charged on estates above certain thresholds when someone dies. Understanding how it works can help you plan effectively and potentially reduce the tax burden on your beneficiaries.
Inheritance Tax Thresholds 2025/26
| Threshold | Amount | Notes |
|---|---|---|
| Nil-rate band | £325,000 | Per person, frozen until 2028 |
| Residence nil-rate band (RNRB) | £175,000 | If passing home to direct descendants |
| Single person maximum | £500,000 | With RNRB |
| Married couple maximum | £1,000,000 | With transferred allowances |
Basic IHT Calculation
Example: Single Person Estate
Estate value: £600,000
Nil-rate band: £325,000
Residence nil-rate band: £175,000 (home left to children)
Total threshold: £500,000
Taxable amount: £600,000 - £500,000 = £100,000
IHT due: £100,000 × 40% = £40,000
Example: Married Couple (Second Death)
Estate value: £1,200,000
Combined nil-rate bands: 2 × £325,000 = £650,000
Combined RNRB: 2 × £175,000 = £350,000
Total threshold: £1,000,000
Taxable amount: £1,200,000 - £1,000,000 = £200,000
IHT due: £200,000 × 40% = £80,000
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Transferable Nil-Rate Band
When the first spouse dies, any unused nil-rate band can transfer to the surviving spouse:
- If everything left to spouse on first death: 100% transfers
- Transfer is proportional, not a fixed amount
- RNRB can also transfer between spouses
- Must be claimed within 2 years of second death
What's Included in Your Estate?
- Property: Your home and any other properties
- Investments: Shares, savings, ISAs
- Possessions: Cars, jewellery, art, furniture
- Business interests: May qualify for relief
- Life insurance: Unless written in trust
- Pensions: Usually exempt (death benefits may be included)
- Gifts made within 7 years: Potentially taxable
IHT Exemptions
Completely Exempt
- Spouse/civil partner: All transfers exempt (if UK-domiciled)
- Charity: Gifts to registered charities
- Political parties: Certain qualifying parties
- National purpose: Museums, National Trust, etc.
Annual Exemptions
| Exemption | Amount |
|---|---|
| Annual gift allowance | £3,000 per year |
| Small gifts | £250 per person per year |
| Wedding gift (parent) | £5,000 |
| Wedding gift (grandparent) | £2,500 |
| Wedding gift (anyone else) | £1,000 |
| Normal expenditure from income | Unlimited* |
*Must be regular, from income (not capital), and not affect your living standards
The 7-Year Rule
Gifts made during your lifetime may be taxable if you die within 7 years:
| Years Before Death | Tax Rate (% of 40%) |
|---|---|
| 0-3 years | 100% (full 40%) |
| 3-4 years | 80% (32%) |
| 4-5 years | 60% (24%) |
| 5-6 years | 40% (16%) |
| 6-7 years | 20% (8%) |
| 7+ years | 0% (exempt) |
Business Relief
Qualifying business assets can be exempt from IHT:
- 100% relief: Unquoted trading companies, sole trader businesses
- 50% relief: Quoted company shares (controlling holding), land/buildings used by partnership
- Condition: Must have owned for at least 2 years
Agricultural Relief
Agricultural property may qualify for 50% or 100% relief if actively farmed.
Residence Nil-Rate Band (RNRB)
The additional £175,000 allowance applies when:
- Estate includes your residence
- Left to direct descendants (children, grandchildren)
- Estate worth less than £2 million (tapers above this)
Strategies to Reduce IHT
- Use annual exemptions: £3,000 per year, can carry forward 1 year
- Make regular gifts from income: Unlimited if from surplus income
- Consider larger gifts: Potentially exempt after 7 years
- Life insurance in trust: Covers IHT bill without adding to estate
- Leave to charity: 36% rate if 10%+ to charity
- Business investment: EIS/SEIS can qualify for business relief after 2 years
- Pension planning: Pensions usually outside estate
Who Pays the Tax?
- Tax is paid by the estate (executors/administrators)
- Due within 6 months of death
- HMRC may charge interest on late payment
- Property tax can be paid in instalments over 10 years
How Inheritance Tax Is Calculated Step by Step
The inheritance tax calculation follows a specific sequence that determines how much tax is owed on a deceased person's estate. First, the gross value of the estate is established by adding together all assets: property, savings, investments, personal possessions, life insurance policies not held in trust, and any gifts made within seven years of death. From this gross figure, allowable deductions are subtracted, including outstanding debts, funeral expenses, and any liabilities secured against estate assets such as mortgages.
The resulting net estate value is then compared against the available nil-rate band (NRB) of £325,000. If the deceased was married or in a civil partnership and their spouse predeceased them without using their full NRB, the unused portion can be transferred to the surviving spouse's estate, potentially doubling the threshold to £650,000. The residence nil-rate band (RNRB) of £175,000 applies when a main residence is passed to direct descendants, and this too can be transferred between spouses, giving a combined threshold of up to £1 million for married couples or civil partners.
For estates that exceed these thresholds, IHT is charged at 40 percent on the excess, or 36 percent if at least 10 percent of the net estate is left to qualifying charities. It is important to note that the nil-rate band has been frozen at £325,000 since 2009, meaning that property price inflation has gradually drawn more estates into the IHT net. With average UK house prices exceeding £290,000, even a modest family home combined with savings and life insurance can push an estate above the threshold.
Gifts made more than seven years before death are entirely free of IHT. Gifts made within three to seven years are subject to taper relief, reducing the tax rate progressively:
• 3-4 years before death: 32% (instead of 40%)
• 4-5 years before death: 24%
• 5-6 years before death: 16%
• 6-7 years before death: 8%
• 7+ years before death: 0% (exempt)
UK Inheritance Tax in Context
Inheritance tax is often described as Britain's most hated tax, despite affecting only around 4 percent of estates each year. The number of estates paying IHT has risen steadily due to the frozen nil-rate band and rising property values, increasing from around 20,000 estates in 2010 to over 35,000 in recent years. HMRC collected approximately £7.5 billion in inheritance tax during the 2023/24 tax year, making it a significant but relatively small source of government revenue compared to income tax or VAT.
The UK's IHT system differs from many other countries. The United States has a much higher threshold of approximately $13 million per individual, meaning very few American estates pay federal estate tax. Many European countries use an inheritance tax model where the recipient pays tax based on their relationship to the deceased and the amount received, rather than the UK's estate tax model where tax is calculated on the total estate value before distribution. Some countries, including Australia, Canada, and Sweden, have no inheritance tax at all.
Effective IHT planning typically begins years or decades before death. Common strategies include making use of annual gift exemptions (£3,000 per year, plus £250 to any number of individuals), establishing regular gifts from surplus income which are immediately exempt, placing life insurance policies in trust so the proceeds fall outside the estate, and using business property relief (BPR) through qualifying investments held for at least two years. Each strategy has specific rules and potential pitfalls, making professional advice valuable for anyone with an estate likely to exceed the nil-rate band.
Frequently Asked Questions
Do I need to pay inheritance tax on my parents' house?
You do not pay IHT personally; it is paid from the estate before distribution. However, if your parents' estate exceeds the available thresholds, IHT will reduce the amount you inherit. If the house is passed to you as a direct descendant, the residence nil-rate band of £175,000 applies in addition to the standard £325,000 nil-rate band, giving a threshold of £500,000 per parent. For a married couple leaving their home to children, the combined threshold is up to £1 million. If the estate exceeds these thresholds, executors may need to sell assets, including the property, to pay the IHT bill.
Is there inheritance tax between husband and wife?
Transfers between married couples and civil partners are completely exempt from inheritance tax, regardless of the amount. This is known as the spouse exemption and applies to all assets including property, investments, and personal possessions. Additionally, any unused nil-rate band from the first spouse to die can be transferred to the surviving spouse's estate. This means that a married couple can effectively shield up to £1 million from IHT when passing assets to their children, provided a main residence forms part of the estate.
Can HMRC check gifts made before death?
Yes, HMRC has the power to investigate gifts made in the seven years before death. Executors are legally required to declare all gifts exceeding exempt amounts on the IHT return (Form IHT400). HMRC can access bank statements, property records, and financial accounts of the deceased to identify undeclared gifts. Deliberately failing to declare gifts constitutes tax fraud. It is advisable to keep a written record of all gifts made, including the date, recipient, value, and whether any exemption applies, to ensure accurate reporting by your executors.
What is the seven-year rule for inheritance tax gifts?
Are pension pots subject to inheritance tax?
James Mitchell, ACCA
Chartered Accountant & Former HMRC Advisor
James is a Chartered Certified Accountant (ACCA) specialising in UK personal taxation and financial planning. With over 12 years in practice and a background as a former HMRC compliance officer, he brings authoritative insight to complex tax topics.