Advertisement
Advertisement

Inheritance Tax Guide UK 2026

Everything you need to know about UK inheritance tax — thresholds, exemptions, gifting rules, and proven strategies to legally reduce your estate's IHT bill.

£325,000Nil-Rate Band
40%IHT Rate
£175,000Residence NRB
£500,000Max Single Threshold

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax levied on the estate — the property, money, and possessions — of someone who has died. In the UK, HMRC collects IHT on estates whose total value exceeds the applicable threshold. The executor of the estate is responsible for paying any IHT owed, typically before assets are distributed to beneficiaries.

Although IHT is often described as a "death tax", it is more precisely a transfer tax on wealth passed at death. The UK IHT regime has been in place in various forms since 1986, replacing the earlier Capital Transfer Tax. It affects a growing number of estates each year, particularly as property values continue to rise.

According to HMRC data, IHT receipts exceeded £7 billion in 2023/24, with the number of estates paying the tax increasing steadily. Understanding how IHT works is essential for anyone with an estate that may exceed the nil-rate band, or who wants to pass on wealth efficiently to the next generation.

Key Point
IHT is paid by the estate, not the beneficiaries. The estate's personal representative (executor) must file an IHT return with HMRC and pay any tax due within 6 months of the death.

Nil-Rate Band and Thresholds

The nil-rate band (NRB) is the threshold below which no inheritance tax is payable. For 2025/26 and 2026, the nil-rate band is £325,000. This figure has been frozen by the government since 2009 and is currently frozen until at least April 2030, meaning more estates are being drawn into the IHT net each year as asset values rise.

Threshold TypeAmount (2026)Who Qualifies
Standard Nil-Rate Band£325,000All estates
Residence Nil-Rate Band£175,000Homeowners passing to direct descendants
Combined (single person)£500,000Homeowners with direct descendants
Combined (married couple / civil partners)Up to £1,000,000Couples passing home to children/grandchildren

On the portion of the estate above the nil-rate band, IHT is charged at 40%. So, if an unmarried person dies with an estate worth £600,000 (no qualifying residence), IHT is charged at 40% on £275,000 (£600,000 minus £325,000), resulting in a tax bill of £110,000.

Residence Nil-Rate Band (RNRB)

The Residence Nil-Rate Band was introduced in April 2017 to help families pass on a family home without excessive tax. It adds up to £175,000 to the standard NRB for eligible estates.

Who Qualifies for the RNRB?

  • The deceased must have owned a home (or share of a home) in the UK.
  • The home must be left to direct descendants: children, stepchildren, adopted children, foster children, or their lineal descendants (grandchildren, great-grandchildren).
  • The total estate must not exceed £2 million before tapering begins. For every £2 the estate exceeds £2 million, the RNRB is reduced by £1.
Taper Warning
If your estate exceeds £2,000,000, the Residence Nil-Rate Band is tapered. At £2,350,000 the RNRB is entirely lost for a single person. Married couples see tapering at £2,700,000 combined.

Transferring the RNRB Between Spouses

Like the standard NRB, any unused RNRB from a deceased spouse can be transferred to the surviving spouse's estate. This means a widowed person can claim up to £350,000 of RNRB (their own £175,000 plus the transferred £175,000), in addition to £650,000 of combined standard NRB — giving a total potential threshold of £1,000,000.

Spouse and Civil Partner Exemption

One of the most valuable IHT reliefs is the spouse exemption. Transfers of assets between married couples and civil partners who are both UK domiciled are completely exempt from inheritance tax, regardless of the amount transferred. This applies to both lifetime gifts and gifts made on death.

However, the exemption is not unlimited in all cases. If the receiving spouse is not UK domiciled, the exemption is capped at £325,000. Non-domicile issues can create complex IHT planning challenges and specialist advice is advisable.

Planning Tip
Leaving everything to a spouse defers, but does not eliminate, the IHT liability. On the surviving spouse's death, the combined estate may be subject to IHT. Proper planning — including using trusts and lifetime gifting — is essential for larger estates.

Gifting Rules and the 7-Year Rule

Gifting assets during your lifetime is one of the most effective and widely used methods of reducing IHT. The key rule is the 7-year rule: gifts made more than 7 full years before death are completely outside the estate for IHT purposes.

Potentially Exempt Transfers (PETs)

Most outright gifts between individuals are classified as Potentially Exempt Transfers. At the time of the gift, no IHT is charged. However, if the donor dies within 7 years, the gift may be subject to IHT, with the rate tapering based on how long ago the gift was made.

Years Between Gift and DeathTaper ReliefEffective IHT Rate
Less than 3 years0%40%
3 to 4 years20%32%
4 to 5 years40%24%
5 to 6 years60%16%
6 to 7 years80%8%
More than 7 years100%0%
Important Note on Taper Relief
Taper relief only applies to the value of a gift above the nil-rate band. If cumulative gifts in the 7 years before death are less than £325,000, no IHT is payable on those gifts regardless of when they were made (provided they used the NRB).

Gifts with Reservation of Benefit

If you give away an asset but continue to benefit from it — for example, giving your home to your children but continuing to live in it rent-free — HMRC treats this as a "gift with reservation of benefit" and the asset remains in your estate for IHT purposes. To avoid this, you must pay a full market rent to the new owner.

Annual Gift Exemptions

HMRC provides several annual exemptions that allow you to give away money and assets each year without any IHT implications, even if you die within 7 years.

ExemptionAnnual LimitDetails
Annual exemption£3,000 per donorCan be carried forward one year if unused (max £6,000)
Small gift exemption£250 per recipientCannot combine with annual exemption for same person
Wedding/civil partnership gift – child£5,000Per child
Wedding/civil partnership gift – grandchild£2,500Per grandchild or great-grandchild
Wedding/civil partnership gift – other£1,000Per person
Normal expenditure out of incomeUnlimitedMust be regular, from income, and leave standard of living unchanged

Normal Expenditure Out of Income

This is a particularly powerful but underused exemption. If you can demonstrate that you regularly give money from your income (not capital) — for example, paying premiums on a life insurance policy for your children, or making regular monthly transfers — and that these gifts do not affect your normal standard of living, they are entirely exempt from IHT with no limit on the amount.

Business Property Relief and Agricultural Property Relief

Business Property Relief (BPR)

Business Property Relief can reduce the taxable value of qualifying business assets by either 50% or 100%, making it an invaluable tool for business owners. Assets must generally have been owned for at least 2 years to qualify.

BPR Restrictions
BPR does not apply to investment businesses, businesses that deal mainly in shares or land, or businesses not wholly or mainly carrying on a trading activity. HMRC scrutinises BPR claims carefully.

Agricultural Property Relief (APR)

Agricultural Property Relief works similarly to BPR, giving 100% or 50% relief on the agricultural value of qualifying farmland and farm buildings. From April 2026, the government has announced changes limiting APR and BPR combined to £1 million at 100% relief, with a 50% rate applying above that threshold — a significant change that farming and business families should plan for.

Trusts and IHT Planning

Trusts can be powerful IHT planning tools, but they come with their own tax rules and must be set up correctly. The main types of trusts used in IHT planning are:

Discretionary Trusts

Assets placed in a discretionary trust are removed from the settlor's estate (subject to the 7-year rule for chargeable lifetime transfers). However, discretionary trusts face their own IHT charges: an entry charge of up to 20% on transfers above the NRB, 10-yearly periodic charges of up to 6%, and exit charges when assets leave the trust.

Bare Trusts

Bare trusts (absolute trusts) hold assets for a named beneficiary who has an immediate right to the assets at age 18. Gifts into bare trusts are treated as PETs, so if the donor survives 7 years, no IHT is payable. Bare trusts are commonly used to pass wealth to grandchildren.

Loan Trusts and Discounted Gift Trusts

These are insurance-based trust arrangements that allow you to reduce the value of your estate while retaining some access to funds. A Discounted Gift Trust (DGT) allows you to receive a regular income stream from the trust while the capital (minus the "discount") immediately falls outside your estate. The discount reflects the capitalised value of your retained right to income.

Charitable Giving and the 36% Rate

Leaving at least 10% of your net estate to charity not only supports good causes but also reduces the IHT rate on the remainder of the estate from 40% to 36%. This can sometimes result in more money going to both charity and family than if no charitable gift were made.

Example: Charitable Giving Benefit

Estate: £900,000. NRB: £325,000. Taxable estate: £575,000.

Without charity: IHT = 40% × £575,000 = £230,000. Net to family = £670,000.

With 10% to charity: Charitable gift = £57,500. Taxable estate = £517,500. IHT = 36% × £517,500 = £186,300. Net to family = £656,200. Net to charity = £57,500.

The family receives £13,800 less, but the charitable gift is fully funded partly from the IHT saving (£43,700 tax saved).

10 Proven Ways to Reduce Your IHT Bill

  1. Use annual gift exemptions: Give away up to £3,000 per year (or £6,000 if carrying forward the previous year's unused allowance). This immediately removes assets from your estate.
  2. Make regular gifts from income: Use the normal expenditure out of income exemption to make unlimited regular gifts from your surplus income.
  3. Give early with the 7-year rule: Larger gifts made as PETs become completely exempt after 7 years. The sooner you start, the better.
  4. Take out life insurance: A whole-of-life policy written in trust (so it does not form part of your estate) can pay the IHT bill on death, preventing your beneficiaries from having to sell assets.
  5. Donate to charity: Leave 10%+ to charity to benefit from the 36% reduced IHT rate and help causes you care about.
  6. Set up a trust: Discretionary or bare trusts can move assets outside your estate while still benefiting your family over time.
  7. Spend your estate: Legitimately spending your estate on experiences, home improvements, or care costs reduces the taxable amount.
  8. Invest in AIM shares: Shares in qualifying AIM-listed companies can qualify for 100% BPR after 2 years of ownership.
  9. Make pension contributions: Pension funds are generally outside the estate for IHT purposes (though rules are changing from April 2027).
  10. Equalise estates: Married couples should ensure both nil-rate bands are utilised by holding assets in individual names or using suitable will structures.

Worked Examples

Example 1: Single Person, No Qualifying Residence

Estate value: £700,000. No property to pass to descendants.

Nil-rate band: £325,000. Taxable amount: £375,000.

IHT payable: 40% × £375,000 = £150,000

Example 2: Homeowner Passing Property to Children

Estate value: £800,000 (includes £400,000 property). Passed to children.

NRB: £325,000 + RNRB: £175,000 = £500,000 combined threshold.

Taxable amount: £300,000. IHT payable: 40% × £300,000 = £120,000

Example 3: Married Couple — Surviving Spouse

First spouse dies, leaving everything to surviving spouse (no IHT). Combined estate on second death: £1,200,000.

Transferred NRB: £325,000 + own NRB: £325,000 + transferred RNRB: £175,000 + own RNRB: £175,000 = £1,000,000 total threshold.

Taxable amount: £200,000. IHT payable: 40% × £200,000 = £80,000

Useful Calculators

IHT Calculator Gift Calculator Estate Value Calculator

Frequently Asked Questions

What is the inheritance tax threshold in the UK for 2026?

The standard nil-rate band is £325,000. If you own a home and pass it to direct descendants, you can add the residence nil-rate band of £175,000, giving a combined threshold of £500,000. Married couples and civil partners can combine their allowances — potentially sheltering up to £1,000,000 from IHT when both nil-rate bands and both residence nil-rate bands are combined.

What is the UK inheritance tax rate?

Inheritance tax in the UK is charged at 40% on the portion of the estate that exceeds the available nil-rate band. A reduced rate of 36% applies if you leave at least 10% of your net estate to charity. These rates apply to estates of people who were UK domiciled at the time of death.

Do spouses pay inheritance tax on each other's estates?

No. Transfers between married couples and civil partners who are both UK domiciled are fully exempt from inheritance tax, regardless of the amount. The unused nil-rate band and residence nil-rate band can also be transferred to the surviving spouse's estate, reducing the eventual tax bill on their death.

How does the 7-year gifting rule work?

Gifts made more than 7 years before death are completely exempt from IHT. Gifts made within 7 years are potentially exempt transfers (PETs). If the donor dies within 7 years, the gift may be subject to IHT on a tapered basis: full 40% if within 3 years, reducing to 8% if the gift was made 6-7 years before death. The taper applies to gifts above the nil-rate band only.

What gifts are exempt from inheritance tax each year?

Each person can give away £3,000 per tax year free of IHT (the annual exemption), carrying forward up to one year's unused allowance. Small gifts of up to £250 per recipient per year are also exempt. Wedding gifts are exempt up to £5,000 per child, £2,500 per grandchild, or £1,000 to any other person. Regular gifts from surplus income can also be exempt with no limit under the "normal expenditure out of income" exemption.

What is Business Property Relief and who qualifies?

Business Property Relief (BPR) provides either 100% or 50% relief from IHT on qualifying business assets owned for at least 2 years. Unlisted trading company shares (including AIM-listed), sole trader businesses, and partnership interests typically qualify for 100% relief. Quoted controlling shareholdings and certain business assets may qualify for 50% relief. Investment businesses and property investment companies generally do not qualify.

How can I reduce inheritance tax on my estate?

Key strategies include: making regular gifts using annual exemptions (£3,000/year), using the 7-year rule for larger gifts, setting up trusts, taking out a whole-of-life insurance policy written in trust, donating at least 10% of the estate to charity (reduces IHT rate to 36%), investing in qualifying AIM shares for BPR, and using pension contributions (pensions are generally outside the estate). Professional advice from a qualified financial adviser or solicitor is strongly recommended for estates above the threshold.

When must inheritance tax be paid to HMRC?

IHT must generally be paid within 6 months of the end of the month in which death occurred. Late payment incurs interest charges. However, for certain assets such as land, buildings, and unlisted shares, IHT can be paid in annual instalments over 10 years. The estate cannot be fully administered until the IHT liability is settled and probate is granted.

MB
Mustafa Bilgic
Financial Content Writer | UK Calculator

Mustafa specialises in making UK tax and personal finance topics accessible to everyday readers. He covers inheritance tax, ISAs, pensions, and property taxes across the UK Calculator network.