UK inheritance tax (IHT) is charged at 40% on the value of an estate above £325,000 (nil-rate band), reduced to 36% where at least 10% of the net estate is left to charity. Each individual also has a £175,000 residence nil-rate band (RNRB) for property left to direct descendants, giving up to £500,000 per person or £1,000,000 per married couple. Lifetime gifts are exempt if you survive 7 years; taper relief applies between years 3 and 7. Both NRB and RNRB are frozen until April 2030 per Autumn Budget 2024.
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Estimate IHT liability and the savings from planning strategies.
1. Current UK Inheritance Tax Rates and Allowances
For the 2025/26 tax year and continuing through 2029/30 per the Autumn Budget 2024 freeze, the UK inheritance tax framework consists of two main allowances and one headline rate. The nil-rate band (NRB) remains at £325,000 per individual, unchanged since April 2009 — making this the longest freeze in modern UK tax history. The residence nil-rate band (RNRB), introduced in April 2017 and now fully phased in at £175,000, provides an additional allowance when a qualifying interest in a residence is passed to direct descendants on death.
Combined, a single individual can pass on £500,000 free of inheritance tax. Through the transferable nil-rate band introduced by Finance Act 2008 and the transferable RNRB, a married couple or civil partnership can effectively pool both allowances, allowing up to £1,000,000 to pass tax-free on the second death. Estates above this level pay 40% on the excess, reduced to 36% where at least 10% of the net estate is left to a qualifying charity (the "reduced rate" under Schedule 1A IHTA 1984).
2025/26 Rates Table
| Allowance / Rate | Amount | Conditions |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Per individual; transferable to spouse |
| Residence nil-rate band (RNRB) | £175,000 | Qualifying residence to direct descendants |
| Maximum allowance per person | £500,000 | NRB + RNRB combined |
| Maximum allowance per married couple | £1,000,000 | Transferable NRB + RNRB |
| Standard IHT rate | 40% | On estate value above allowances |
| Reduced IHT rate (charity 10%+) | 36% | 10% of net estate to charity |
| Lifetime rate (CLT to trust) | 20% | On value above NRB at time of gift |
| RNRB taper threshold | £2,000,000 | £1 RNRB lost per £2 over threshold |
2. The Seven-Year Gift Rule Explained
Lifetime gifts to individuals are treated as Potentially Exempt Transfers (PETs). The gift is provisionally exempt from IHT, becoming fully exempt if the donor survives seven years from the date of the gift. If death occurs within seven years, the PET fails and becomes a Chargeable Transfer aggregated with the death estate. The HMRC IHT Manual at IHTM14000 provides full guidance on lifetime transfers.
Where the cumulative value of failed PETs exceeds the available nil-rate band at death, IHT becomes payable on the excess. Crucially, taper relief reduces the tax due — but only the tax, not the value of the gift itself. The relief is structured to incentivise long-term planning, with the full IHT due if death occurs within three years of the gift, and the relief increasing each subsequent year:
Taper Relief Table (s.7(4) IHTA 1984)
| Years between gift and death | Taper relief | IHT % payable on tax due |
|---|---|---|
| 0–3 years | 0% | 100% of tax due (full 40%) |
| 3–4 years | 20% | 80% (effective 32%) |
| 4–5 years | 40% | 60% (effective 24%) |
| 5–6 years | 60% | 40% (effective 16%) |
| 6–7 years | 80% | 20% (effective 8%) |
| 7+ years | 100% | 0% — fully exempt |
3. Annual Gifting Exemptions
Beyond the 7-year rule, several exemptions allow tax-efficient transfer of wealth during your lifetime with no need to survive any period:
- Annual exemption £3,000 per tax year — can be carried forward one year (max £6,000 in one year).
- Small gifts exemption up to £250 per recipient per tax year, unlimited recipients, but cannot stack with annual exemption to the same person.
- Wedding/civil partnership gifts: £5,000 to a child, £2,500 to grandchild or great-grandchild, £1,000 to anyone else.
- Spouse/civil partner exemption — unlimited gifts between UK-domiciled spouses; £325,000 lifetime limit applies where the recipient is non-UK domiciled (raised from £55,000 in 2013).
- Charity exemption — unlimited gifts to UK or EEA registered charities are fully exempt.
- Political party gifts — exempt where the party qualifies (had at least 2 MPs elected or 1 MP + 150,000 votes).
- Normal expenditure out of income — fully exempt with no monetary cap if part of normal expenditure pattern, made from income (not capital), and leaving the donor with sufficient income to maintain their usual standard of living.
4. The Residence Nil-Rate Band in Detail
The RNRB applies only where (a) the deceased held a qualifying residential interest (QRI) — a home in which they have, at some point, lived as a residence — and (b) that property passes on death to "direct descendants" defined in s.8K IHTA 1984 as children, grandchildren and their spouses or civil partners, including stepchildren, adopted, fostered children. The full HMRC guidance is at the IHT Manual section IHTM46000.
Two important features of the RNRB merit careful planning:
- Downsizing addition (s.8FA IHTA 1984): if you sold or "downsized" your home after 8 July 2015 and left other assets to direct descendants, you may still claim some RNRB. This protects estates where the deceased sold the family home before death.
- Taper for large estates: RNRB reduces by £1 for every £2 the net estate (before reliefs but after exemptions) exceeds £2,000,000. The full RNRB is lost at £2,350,000 (single) or £2,700,000 (married couple with full transferable RNRB).
5. Business Property Relief and Agricultural Property Relief — 2026 Changes
BPR (IHTA 1984 ss.103-114) and APR (ss.115-124B) are the most powerful planning tools for business owners and landowners. Currently both can provide 100% relief on qualifying assets held for 2 years (or 7 years for APR where land is let). However, the Autumn Budget 2024 announced significant changes from 6 April 2026:
- Combined £1,000,000 cap on 100% relief across both BPR and APR — above this, relief reduces to 50%.
- AIM shares relief reduces from 100% to 50% from April 2026 — current holders should review holdings before this date.
- Family-owned trading businesses with values above £1m may need succession restructuring (e.g., partial gifts ahead of 2026, or use of family investment companies).
What Qualifies for 100% BPR?
| Asset type | Relief | Conditions |
|---|---|---|
| Unquoted trading company shares | 100% | Held 2+ years; trading not investment |
| Sole trader business / partnership interest | 100% | Held 2+ years |
| AIM-listed shares | 100% (50% from Apr 2026) | AIM is treated as unquoted for BPR |
| Controlling holding in listed company (>50%) | 50% | Held 2+ years |
| Land/buildings/machinery used by partnership/company | 50% | Used in business; deceased had control |
6. Trust Structures for IHT Planning
Trusts remain a core element of UK estate planning. Each trust type has different IHT consequences, set out in HMRC's IHT Manual at IHTM42000.
Discretionary Trust
Trustees decide which beneficiaries receive what and when. Assets are outside the settlor's estate after 7 years. Entry charge of 20% applies on amounts above the available NRB at outset (£325k as of 2025/26). Subject to 10-yearly principal charge (maximum 6%) and exit charges. Suitable for: family wealth protection, vulnerable beneficiaries, asset protection from divorce/bankruptcy.
Interest in Possession (IIP) Trust
Life tenant receives income from the trust during their lifetime; capital passes to remaindermen on their death. Lifetime IIPs created since 22 March 2006 are taxed as discretionary trusts (relevant property regime). Will-trust IIPs are aggregated with the life tenant's estate for IHT.
Bare Trust
Simple legal arrangement — beneficiary has absolute entitlement, treated for tax as if they own the assets directly. The gift into a bare trust is a PET. No ongoing trust tax compliance. Commonly used for grandparents gifting to grandchildren under 18.
Pilot Trusts
Multiple small discretionary trusts settled with £10 each, then topped up by Will. After Finance (No 2) Act 2015, "related settlements" must share a single NRB across all trusts created the same day — so pilot trusts must be created on different days for full benefit. Provides flexibility and protection compared to a single large will-trust.
Loan Trust and Discounted Gift Trust (DGT)
Insurance-bond based structures that allow the settlor to retain access to capital (loan trust) or income (DGT) while reducing estate value. The "discount" in a DGT reflects the value of the retained right to fixed regular payments, reducing the IHT-chargeable gift.
7. Life Insurance Written in Trust
Life insurance is one of the simplest and most cost-effective IHT planning tools. A whole-of-life policy sized to cover the expected IHT bill, with premiums paid from disposable income, can be written into a discretionary trust at outset using the insurer's standard trust deed (no separate solicitor fee required).
Benefits: (1) policy proceeds fall outside the estate, (2) trustees pay out within 2-4 weeks bypassing probate delays of 6-12 months, (3) beneficiaries do not have to sell the family home to fund IHT, (4) regular premiums are usually within the "normal expenditure out of income" exemption, so no impact on lifetime gifts.
8. Charity Bequests — Triggering the 36% Rate
Where you leave at least 10% of your "net" estate (after NRB, RNRB and other reliefs/exemptions) to a UK or EEA registered charity, the IHT rate on the remainder reduces from 40% to 36%. The "10% test" is mechanical but the precise calculation can be complex where multiple components exist (free estate, survivorship property, settled property).
Worked Example: £1.5m Estate
Single person, estate £1.5m (£600k home left to children, £900k investments). NRB £325k + RNRB £175k = £500k exemption. Taxable estate = £1m at 40% = £400k IHT.
| Scenario | To beneficiaries | To charity | IHT | Net to non-charity |
|---|---|---|---|---|
| No charity | £1,100,000 | £0 | £400,000 | £1,100,000 |
| 5% charity (£50k) | £1,070,000 | £50,000 | £380,000 | £1,070,000 |
| 10% charity (£100k) → 36% rate | £1,076,000 | £100,000 | £324,000 | £1,076,000 |
Note the cross-over: at 10% charity bequest the beneficiaries receive £1,076,000 vs £1,070,000 with 5% — leaving more to charity actually increases the beneficiaries' inheritance through the rate reduction.
9. Pension Wealth and IHT — April 2027 Changes
Per the Autumn Budget 2024, from 6 April 2027 most unused defined contribution pension pots and pension death benefits will fall within the deceased's estate for IHT. This represents the most significant IHT change in two decades and affects an estimated 8% of estates per HMT impact assessment.
Combined with the existing income tax on inherited pensions where the deceased died after age 75, this creates an effective tax rate that can exceed 67%. Planning to consider before 2027:
- Accelerated pension drawdown to gift surplus income or reduce pension wealth.
- Purchase of joint-life annuities or value-protected annuities outside the IHT scope.
- Use of inherited ISA allowances for spousal succession.
- Bypass trusts for life-time legacies.
- Whole-of-life insurance to cover the projected IHT shortfall.
10. Deed of Variation — Post-Death Planning
A deed of variation (DoV) under s.142 IHTA 1984 allows beneficiaries to redirect inheritance within 2 years of death, treated for IHT and CGT as if the redirection was made by the deceased. Common applications:
- Skipping a generation to grandchildren, accelerating wealth transfer and using more NRBs.
- Topping up charity bequests to reach the 10% threshold for 36% rate.
- Establishing a discretionary trust where the will did not, providing protection for vulnerable beneficiaries.
- Equalising estates between spouses for future RNRB taper management.
11. Gifts With Reservation of Benefit (GWROB)
The GWROB rules (FA 1986 s.102, schedules 20) catch gifts where the donor continues to enjoy or benefit from the asset. The asset remains in the donor's estate for IHT however many years they survive. Most commonly fails for "give the house to the kids and keep living there" plans.
To escape GWROB the donor must either (1) move out completely, or (2) pay full market rent to the new owner. The pre-owned asset tax (POAT, FA 2004) creates an annual income tax charge as a backstop where GWROB escapes IHT — making most home-gifting schemes ineffective.
12. Domicile and IHT — 2025 Reforms
From 6 April 2025, the long-standing "domicile" basis for IHT was replaced with a "long-term residence" test. Individuals UK-resident for 10 of the previous 20 tax years (the "10/20 test") are within the scope of UK IHT on worldwide assets. This affects expats, internationally mobile families and recent UK arrivals — requires bespoke advice from a specialist STEP member.
13. Insurance Bonds and Investment Wrappers
Onshore and offshore investment bonds allow tax-deferred growth within a wrapper and can be assigned into trust. Combined with trust planning they offer: (1) ongoing access via 5% annual withdrawal allowance, (2) gross roll-up offshore, (3) chargeable event simplicity on encashment. Often used as the asset class within DGTs and loan trusts.
14. Family Investment Companies (FICs)
An FIC is a private company funded by shareholders (typically parents) holding investment assets. Used as an alternative to trusts post-2006 due to favourable corporation tax (currently 25% but with marginal relief), ability to issue different share classes for income/control split, and flexibility on dividend distribution. Particularly attractive where BPR is no longer the dominant relief due to the 2026 £1m cap.
15. Equity Release and IHT
Lifetime mortgages reduce estate value by the loan plus rolled-up interest, effectively transferring wealth to the mortgagee. Useful where surplus income is limited and the home is the main asset. Care needed: equity release does not avoid GWROB (the homeowner remains in occupation), and intergenerational gifts of released cash are PETs subject to the 7-year rule.
16. The 14-Year Rule and CLT Cumulation
While the standard rule is 7 years, Chargeable Lifetime Transfers (CLTs — typically gifts into discretionary trusts above NRB) trigger a "14-year shadow" for cumulation purposes. The HMRC IHT Manual at IHTM14513 confirms that earlier CLTs can still affect failed PET calculations made within 14 years. This complicates lifetime gifting strategies that mix trust and personal gifts.
17. Domicile of Choice and Long-Term Planning
For UK-resident non-domiciled individuals, the April 2025 reforms abolished the "remittance basis" and replaced "deemed domicile" with the 10-year long-term residence test. A 4-year Foreign Income and Gains (FIG) regime is available for new arrivals. IHT consequences should be modelled against any return to the home jurisdiction.
18. IHT Reporting and Payment
For deaths from 1 January 2022, the IHT (Excepted Estates) Regulations 2004 (as amended) widen the categories of excepted estates that bypass the IHT400. Where IHT400 is required:
- Filing deadline: 12 months from end of month of death.
- Payment deadline: 6 months from end of month of death (interest from then on the unpaid amount).
- Direct Payment Scheme: banks can pay HMRC directly from the deceased's accounts pre-probate.
- Instalment option (s.227 IHTA 1984): IHT on land, controlling shares and certain businesses can be paid over 10 annual instalments.
19. Cross-Border Considerations
UK assets owned by non-UK domiciliaries are within UK IHT scope. The UK has bilateral double taxation treaties on IHT with: France, India, Italy, Republic of Ireland, Netherlands, Pakistan, South Africa, Sweden, Switzerland and the United States. Unilateral credit applies elsewhere under s.159 IHTA 1984.
20. Common IHT Planning Mistakes
- Gifting the house while continuing to live there (GWROB trap).
- Joint accounts with adult children — may be treated as PETs at the time the account is opened, and the contributions remain visible to creditors.
- Life policy not in trust — adds payout to taxable estate.
- Direct gifts to grandchildren via parents — risks triggering associated operation/conduit anti-avoidance.
- Equalising estates too late — to use both spouses' RNRB the deceased must have owned a qualifying residential interest.
- Forgetting to register trusts — Trust Registration Service (TRS) penalties up to £5,000 per missed registration.
- Failing to use annual exemptions — over 50 years a couple can gift £600,000 (£6k × 2 × 50) free of IHT planning.
21. Source Authority and Further Reading
- GOV.UK — Inheritance Tax overview
- GOV.UK — IHT thresholds and interest rates
- HMRC IHT Manual (full)
- HMRC IHTM14000 — Lifetime transfers
- HMRC IHTM25131 — Business Property Relief
- HMRC IHTM46000 — Residence Nil-Rate Band
- GOV.UK — Gifts and IHT
- HMRC (HM Revenue & Customs) main page
- STEP — Society of Trust and Estate Practitioners
- CIOT — Chartered Institute of Taxation
- ICAEW — Inheritance Tax guidance
- MoneyHelper — Inheritance tax explained
- GOV.UK — Trusts and taxes
- GOV.UK — IHT400 forms and guidance
- GOV.UK — Probate and estate administration
- UK Legislation — Inheritance Tax Act 1984
- OBR — Office for Budget Responsibility forecasts
22. Related Calculators on UK Calculator
- Inheritance Tax Calculator
- Inheritance Tax Calculator UK
- RNRB Calculator
- 7-Year Gift Taper Calculator
- BPR Calculator
- Charity 36% Rate Calculator
- CGT Calculator
- Estate Planning Calculator
- Probate Fees Calculator
- Discretionary Trust Tax Calculator
- Life Insurance Trust Calculator
- Pension IHT Calculator (post-2027)
23. Frequently Asked Questions
What is the inheritance tax nil-rate band in 2026?
The nil-rate band (NRB) is frozen at £325,000 per person until April 2030, per the Autumn Budget 2024. The residence nil-rate band (RNRB) is an additional £175,000 where a qualifying residence passes to direct descendants, giving £500,000 per person or £1,000,000 per married couple via transferable allowances.
How does the 7-year gift rule work?
Lifetime gifts to individuals are Potentially Exempt Transfers (PETs). Survive 7 years and the gift falls outside the estate completely. Die within 7 years, the gift uses up your NRB first; tax on the excess gets taper relief starting at 3 years (20% relief) up to 6-7 years (80% relief), then fully exempt at 7 years.
How much can I gift each year tax-free?
Annual exemption £3,000 (carry forward one year, max £6,000). Small gifts £250 per recipient unlimited. Wedding gifts £5k child / £2.5k grandchild / £1k anyone else. Unlimited gifts to UK-domiciled spouse, UK charities, political parties. Regular gifts from surplus income with no monetary cap.
What is Business Property Relief (BPR)?
BPR (IHTA 1984 ss.103-114) reduces IHT on qualifying business assets by 100% (unquoted shares, partnerships) or 50% (controlling listed company holdings). Held 2+ years. From April 2026, a £1m combined BPR/APR cap applies; above this, relief reduces to 50%. AIM shares relief falls from 100% to 50%.
What is the charity inheritance tax rate?
Leave 10%+ of net estate to UK/EEA charity and the IHT rate on the remainder reduces from 40% to 36%. Schedule 1A IHTA 1984. Often the beneficiaries receive more after the charity bequest than without it due to the rate saving.
How are trusts used in inheritance tax planning?
Main vehicles: discretionary trusts (assets out of estate after 7 years; entry charge 20% above NRB; 10-yearly principal charges max 6%); IIP trusts; bare trusts; pilot trusts; loan trusts and DGTs. Life insurance written in trust is the simplest tool.
What is the residence nil-rate band tapering?
RNRB tapers by £1 for every £2 the estate exceeds £2,000,000. Full RNRB lost at £2,350,000 (single) or £2,700,000 (couple). Plan to keep estates below £2m through gifting, charity bequests, BPR-qualifying assets and pension wealth (until April 2027).
How will pensions be subject to IHT from April 2027?
From 6 April 2027 most unused DC pension pots and pension death benefits fall into the estate. Combined with income tax on inherited pensions where deceased was 75+, effective rate can exceed 67%. Plan via accelerated drawdown, annuity purchase, or life insurance to cover shortfall.
Does life insurance affect inheritance tax?
Yes — write the policy in trust at outset using the insurer's trust deed (free at inception). Payout bypasses estate and probate; beneficiaries get funds in 2-4 weeks to settle IHT without selling assets.
What is a deed of variation?
A DoV (s.142 IHTA 1984) allows beneficiaries to redirect inheritance within 2 years of death, treated for IHT and CGT as if made by the deceased. Used to skip generations, increase charity bequests, equalise estates or introduce trusts post-death.
Can I avoid IHT by gifting my home to children?
Gifting the home while continuing to live in it triggers GWROB (FA 1986 s.102) — the property stays in your estate regardless. To escape GWROB you must move out or pay full market rent. POAT applies as a backstop income tax charge. Most home-gifting plans fail.
What is the Direct Payment Scheme for IHT?
Executors can use form IHT423 to instruct banks to pay HMRC directly from the deceased's accounts before probate. Removes the historic chicken-and-egg problem. Where insufficient liquid assets, IHT on land/businesses can be paid in 10 annual instalments under s.227 IHTA 1984.
How do I calculate IHT on a £1.5m estate?
Single person, £1.5m, £600k home to children, no gifts, no charity: NRB £325k + RNRB £175k = £500k allowance. Taxable £1m × 40% = £400k IHT. With 10% (£150k) charity: taxable £850k × 36% = £306k IHT. Net to beneficiaries £1,044k vs £1,100k without — only £56k cost for £150k charity.
What is the 14-year shadow rule?
While basic gift rule is 7 years, earlier Chargeable Lifetime Transfers (CLTs, e.g. into discretionary trusts above NRB) can still affect cumulation calculations for later failed PETs up to 14 years prior. HMRC IHT Manual IHTM14513. Complex mixed gift sequences need professional modelling.
Do I need to file IHT400 even if no tax is due?
For deaths from 1 January 2022, many estates avoid IHT400 under widened excepted estates rules (gross value below £3m, no foreign assets >£100k, trust assets <£250k, no GWROB). Executors of excepted estates provide values to the probate registry directly.
About this calculator
Last updated 2026-05-25 by Mustafa Bilgic, independent operator of UK Calculator. Calculations are aligned with the HMRC IHT Manual, the Inheritance Tax Act 1984 (as amended), and Autumn Budget 2024 announcements. Worked examples cross-checked against published HMRC IHT400 calculation guidance. This is for guidance only; consult a qualified tax adviser (CIOT, ATT, STEP) or solicitor for personal estate-planning decisions, particularly where business property, trusts, cross-border assets or pre-2025 domicile is involved.