Inheritance Tax 2026/27: Everything You Need to Know

Inheritance Tax is one of the most emotive taxes in the UK. Yet despite widespread concern about it, only around 4–5% of estates actually pay it. Understanding the rules clearly can help you assess whether your own estate is at risk and what steps, if any, make sense to take.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate — the property, money, and possessions — of someone who has died. It is also charged on some gifts made during a person's lifetime. In the UK, IHT is administered by HMRC and is separate from any income tax the deceased may have owed.

The standard rate is 40%, but it only applies to the portion of the estate above the available threshold. Most estates fall entirely below the thresholds and pay no IHT at all.

The Nil-Rate Band

Every individual has a nil-rate band of £325,000 in 2026/27. This is the amount up to which no IHT is charged. The nil-rate band has been frozen at £325,000 since 2009 and is set to remain frozen until April 2030 under current government plans — meaning it will cover a smaller proportion of estates as house prices rise.

Anything above £325,000 in your estate is charged at 40%.

The Residence Nil-Rate Band

Since 2017, an additional allowance has existed for people who leave their main home to direct descendants (children, stepchildren, grandchildren). This Residence Nil-Rate Band (RNRB) is currently £175,000 per person in 2026/27.

Combined with the standard nil-rate band, an individual who owns a home and leaves it to children or grandchildren has a potential IHT threshold of £325,000 + £175,000 = £500,000.

The RNRB is tapered away for estates valued above £2 million, at a rate of £1 for every £2 over the threshold. At £2,350,000, the RNRB is entirely lost.

Married Couples and Civil Partners

Assets passed between spouses or civil partners on death are completely exempt from IHT, regardless of value. This is known as the spouse exemption.

Importantly, any unused nil-rate band and unused RNRB from the first spouse's death can be transferred to the surviving spouse. This means a married couple can potentially have a combined IHT threshold of up to £1,000,000 (£325,000 + £325,000 + £175,000 + £175,000) when the second spouse dies.

To claim this transfer, the executors of the second estate must make a claim to HMRC, even if no IHT is due. The transfer is not automatic.

The Seven-Year Rule on Gifts

Gifts made during your lifetime are potentially exempt from IHT, but the rules depend on when the gift was made relative to death:

• Gifts made more than seven years before death are completely exempt from IHT
• Gifts made within seven years are potentially liable, but taper relief reduces the charge if death occurs between 3 and 7 years after the gift

Taper relief rates:

• 0–3 years before death: 40% (full rate)
• 3–4 years: 32%
• 4–5 years: 24%
• 5–6 years: 16%
• 6–7 years: 8%
• Over 7 years: 0%

Note that taper relief only reduces the IHT rate on the gift, not the taxable value. And taper relief only kicks in after the nil-rate band has been used up — so smaller estates may not benefit from it at all.

Annual Gift Exemptions

You can make certain gifts that are immediately exempt from IHT without needing to survive seven years:

• £3,000 annual exemption — you can give away up to £3,000 each year completely free of IHT. Unused exemption from the previous tax year can be carried forward once
• Small gifts exemption — up to £250 per person per tax year to any number of individuals
• Wedding gifts — up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Normal expenditure out of income — regular gifts that come from surplus income (not capital) and do not reduce your standard of living are exempt, with no upper limit

Business Property Relief and Agricultural Relief

Business assets and agricultural property can qualify for significant IHT reliefs:

• Business Property Relief (BPR) — 100% relief for shares in unquoted trading companies and business interests; 50% for certain other business assets. Assets must have been held for at least two years
• Agricultural Property Relief (APR) — 100% or 50% relief for agricultural land and property

From April 2026, there are changes to APR and BPR that cap the combined 100% relief at £1 million per person, with a 50% relief on qualifying assets above that threshold. This change affects large farming and business estates in particular.

How IHT is Paid

IHT must generally be paid within six months of the end of the month in which the person died. Interest is charged on unpaid IHT after this point. However, IHT on property can be paid in ten annual instalments, which gives beneficiaries time to sell if needed.

The executors of the estate are responsible for completing an IHT return and paying any tax due before probate is granted.

Common Ways to Reduce Inheritance Tax

Gifting: making regular use of the annual gift exemptions over many years can meaningfully reduce the size of your estate over time.

Pension planning: pension funds are generally outside your estate for IHT purposes. Keeping wealth in a pension rather than drawing it down unnecessarily can reduce IHT exposure.

Life insurance written in trust: a life insurance policy can be written in trust so that the payout goes directly to beneficiaries without forming part of your estate, avoiding IHT on the proceeds.

Charitable giving: if you leave at least 10% of your net estate to charity, the IHT rate on the remainder is reduced from 40% to 36%.

Professional advice: IHT planning involves complex rules and significant sums. For estates near or above the thresholds, advice from a qualified financial planner or solicitor is likely to pay for itself many times over.