Inheritance Tax Thresholds Explained: IHT, Nil-Rate Band and Gifts
Inheritance Tax (IHT) affects more families every year as property values rise and the nil-rate band remains frozen. Understanding the thresholds, allowances and rules around gifts could save your beneficiaries tens of thousands of pounds. This guide explains every IHT threshold for 2026/27 and the practical steps to reduce your liability.
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Calculate IHT →Nil-Rate Band (£325,000)
The standard Inheritance Tax nil-rate band has been frozen at £325,000 since 2009 and remains at this level for 2026/27. This means the first £325,000 of your estate is completely tax-free. Everything above this is taxed at 40%.
Taxable estate: £500,000 - £325,000 = £175,000. IHT due: £175,000 x 40% = £70,000. Your beneficiaries receive £430,000.
The nil-rate band has been frozen since 2009 and is set to remain at £325,000 until at least April 2028. With house prices rising, more estates than ever are being pushed above this threshold.
Residence Nil-Rate Band (£175,000)
The residence nil-rate band (RNRB) is an additional £175,000 allowance introduced in 2017. It applies when you leave your main residence to direct descendants:
- Children (including step-children and adopted children)
- Grandchildren and great-grandchildren
This gives a total tax-free threshold of £500,000 per person (£325,000 + £175,000).
The RNRB is tapered by £1 for every £2 your estate exceeds £2,000,000. Estates worth £2,350,000 or more lose the RNRB entirely. This affects high-net-worth individuals significantly.
Combined Thresholds for Couples
For married couples and civil partners, the IHT rules are generous:
| Scenario | Total Tax-Free Threshold | IHT Saved |
|---|---|---|
| Single person, no property | £325,000 | £0 on first £325k |
| Single person with RNRB | £500,000 | £0 on first £500k |
| Married couple, no RNRB | £650,000 | £0 on first £650k |
| Married couple with RNRB (both) | £1,000,000 | £0 on first £1m |
When the first spouse dies, any unused nil-rate band and RNRB transfers to the surviving spouse. The executors claim the transfer when the second spouse dies.
James and Mary have a house worth £600,000 and savings of £600,000. James dies first, leaving everything to Mary (spouse exemption — no IHT). Mary dies later. Combined allowances: £325k + £325k + £175k + £175k = £1,000,000. Taxable estate: £1,200,000 - £1,000,000 = £200,000. IHT due: £200,000 x 40% = £80,000.
7-Year Gift Rule and Taper Relief
Gifts made more than 7 years before death are completely exempt from IHT. This is called a potentially exempt transfer (PET). Gifts within 7 years are taxed on a sliding scale:
| Years Before Death | Tax Rate |
|---|---|
| 0-3 years | 40% (full rate) |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% (exempt) |
Exempt Gifts (Always Tax-Free)
These gifts are exempt from IHT regardless of when you make them:
- Spouse exemption — unlimited gifts to your spouse/civil partner
- Annual exemption — £3,000 per year (can carry forward 1 year = £6,000)
- Small gifts — up to £250 per person per year
- Wedding gifts — £5,000 to children, £2,500 to grandchildren, £1,000 to others
- Regular gifts from income — must be from surplus income, not capital
- Charitable gifts — unlimited to UK registered charities
- Political party gifts — to qualifying parties
Over 10 years, using just the £3,000 annual exemption removes £30,000 from your estate, saving £12,000 in IHT. If you also give £250 to 4 grandchildren each year, that's another £10,000 over 10 years, saving £4,000 more. Total IHT saved: £16,000 — from relatively modest gifts.
Strategies to Reduce IHT
- Make regular gifts from surplus income — must be regular, from income (not capital), and not reduce your standard of living. Document this carefully.
- Use your annual exemption — £3,000 per year, every year. Carry forward 1 year if unused.
- Make 7-year gifts — larger gifts that become fully exempt after 7 years.
- Leave 10%+ to charity — reduces the IHT rate from 40% to 36% on the entire estate.
- Maximise pension contributions — pensions are usually outside your estate for IHT purposes.
- Use trusts — with professional advice, trusts can remove assets from your estate.
- Take out life insurance in trust — a whole-of-life policy written in trust pays out on death, providing funds to cover the IHT bill.
For estates above the nil-rate band, professional financial advice is strongly recommended. IHT planning is complex and mistakes can be costly. A good financial adviser can save your family far more than their fee.
What Counts as Your Estate?
For IHT purposes, your estate includes:
- Property (main residence and any other properties)
- Savings and investments
- Life insurance policies (unless written in trust)
- Vehicles and valuables
- Business assets (may qualify for Business Relief)
- Money owed to you
Not included: Pensions (usually), assets in certain trusts, and anything left to a UK-registered charity.
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