Inheritance Tax (IHT) is a tax on the estate of someone who has died. An estate includes all property, money, investments and possessions owned at the date of death, minus debts (mortgages, loans) and reasonable funeral expenses.
IHT is charged at 40% on the portion of the estate above available tax-free thresholds. It must be paid — usually within 6 months of the date of death — before the estate can be distributed to beneficiaries. Executors and administrators are legally responsible for calculating and paying any IHT owed.
Roughly 1 in 20 UK estates currently pay IHT. However, frozen thresholds and rising property values mean more estates cross the threshold each year — a process known as fiscal drag. Understanding IHT is increasingly relevant for homeowners, anyone accumulating significant savings, and those planning to pass wealth to children or grandchildren.
The 2026/27 tax year runs from 6 April 2026 to 5 April 2027. See our Inheritance Tax Calculator to estimate the IHT on a specific estate.
| Allowance | Amount (2026/27) | Who it applies to |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Every individual — frozen since 2009 |
| Residence nil-rate band (RNRB) | £175,000 | Where residential property is left to direct descendants |
| Single person maximum | £500,000 | NRB + RNRB (qualifying property to children/grandchildren) |
| Married couple / civil partner maximum | £1,000,000 | Both NRBs + both RNRBs fully transferred on second death |
| Standard IHT rate | 40% | On value above available thresholds |
| Reduced rate (charity legacy) | 36% | If at least 10% of net estate is left to a registered UK charity |
| Spouse / civil partner exemption | Unlimited | Assets passing to a UK-domiciled spouse are fully exempt |
The nil-rate band (NRB) is the basic IHT-free threshold: every individual has a NRB of £325,000. You pay no inheritance tax on the first £325,000 of an estate. Above that threshold, IHT is charged at 40%.
The NRB has been frozen at £325,000 since 2009 and is currently frozen through to at least 2029/30. In 2009, the average UK house price was around £160,000. By 2026, it exceeds £285,000. This freeze — a form of fiscal drag — means more estates are caught by IHT with each passing year.
The NRB applies to the total taxable estate: not just property, but all assets including savings, investments, cars, and personal possessions above their debts.
The Residence Nil-Rate Band (RNRB) — introduced in 2017 — provides an additional IHT-free allowance of £175,000 per person in 2026/27. It applies when a residential property is passed to direct descendants (children, stepchildren, adopted children, grandchildren).
The RNRB is also available if a property that was previously owned has been sold — for example, if someone moved into care and sold their home, the RNRB can still be claimed against the estate provided the proceeds were reinvested in another form. HMRC's "downsizing" provisions cover this scenario.
For estates worth more than £2 million at death, the RNRB is reduced by £1 for every £2 of estate value above £2 million. For a single person, the RNRB is fully withdrawn at £2,350,000.
| Estate value at death | RNRB available (individual) | Reduction from full amount |
|---|---|---|
| Up to £2,000,000 | £175,000 | None — full RNRB applies |
| £2,100,000 | £125,000 | −£50,000 |
| £2,200,000 | £75,000 | −£100,000 |
| £2,300,000 | £25,000 | −£150,000 |
| £2,350,000+ | £0 | Fully withdrawn |
The taper is applied to the estate value before deducting IHT allowances. This means large-estate planning — particularly for married couples where the combined estate might exceed £2 million — requires specific attention to whether gifts or other planning can reduce the estate below the taper threshold.
Married couples and civil partners have two significant IHT advantages. First, transfers between them during life and on death are entirely exempt from IHT — regardless of the amount. Second, any unused NRB and RNRB from the first spouse's death is transferred to the survivor and added to their own allowances when they die.
| Scenario | Available on second death | Notes |
|---|---|---|
| First spouse leaves everything to second (most common) | £1,000,000 | Full NRB × 2 + full RNRB × 2; property must go to direct descendants |
| First spouse left £100,000 to children (used some NRB) | £900,000 | 69.2% of NRB transferred + full RNRB × 2 |
| No residential property in estate | £650,000 | NRB × 2 only; RNRB does not apply |
| Property left to siblings, not direct descendants | £650,000 | RNRB requires direct descendants — siblings do not qualify |
| Maximum combined allowance | £1,000,000 | Both spouses' full NRB + RNRB, property to children/grandchildren |
Cohabiting couples are not treated as married for IHT purposes. There is no IHT exemption for assets passed between unmarried partners, and no transfer of allowances. This is one of the most significant IHT differences between married and cohabiting couples, and often surprises families when the first partner dies.
Enter the estate value, available allowances and any gifts to calculate the inheritance tax bill.
Inheritance Tax Calculator →Not all assets are treated the same way for IHT. Understanding what falls inside the taxable estate — and what does not — is fundamental to any planning.
| Asset / item | In estate for IHT? | Notes |
|---|---|---|
| Main residence (home) | Yes | Market value at death, less outstanding mortgage |
| Investment properties | Yes | Market value, less outstanding mortgages; see property IHT guide |
| Cash savings and bank accounts | Yes | Balance at date of death |
| Stocks, shares and investment ISAs | Yes | ISA wrapper ceases at death; proceeds become part of estate |
| Life insurance (not in trust) | Yes | Payout becomes part of estate if not written in trust |
| Defined contribution (DC) pension fund | No (currently) | Sits outside estate in 2026/27; proposed change from April 2027 |
| Life insurance written in trust | No | Trust payout does not form part of estate — must be properly established |
| Qualifying business assets | Reduced/exempt | Business Property Relief: 100% on most trading businesses, 50% on some |
| Qualifying agricultural land | Reduced/exempt | Agricultural Property Relief: 100% or 50% depending on usage |
| Gifts made within 7 years of death | Yes (potentially) | PETs brought back into estate; taper relief may apply |
| Regular gifts from surplus income | No | Must meet HMRC criteria: regular pattern, from income not capital, lifestyle maintained |
Gifts made during your lifetime can reduce your taxable estate — but only if you survive for 7 years after making them. These are called Potentially Exempt Transfers (PETs). If you die within 7 years, the gift is brought back into your estate and assessed for IHT.
The nil-rate band is applied first against gifts (in chronological order, oldest first), then against the remaining estate. Only the portion of a gift above the nil-rate band is potentially taxable — and taper relief reduces the rate for gifts made more than 3 years before death.
| Years between gift and death | IHT rate on gift above NRB | Taper saving vs full rate |
|---|---|---|
| Less than 3 years | 40% | None |
| 3–4 years | 32% | 8% saving |
| 4–5 years | 24% | 16% saving |
| 5–6 years | 16% | 24% saving |
| 6–7 years | 8% | 32% saving |
| More than 7 years | 0% | Fully exempt |
Taper relief only helps when the gift exceeds the available nil-rate band. If the gift is within your NRB, taper is irrelevant — the gift is already protected by the allowance.
One of the most valuable and under-used IHT exemptions is the normal expenditure out of income exemption. Gifts that meet all three conditions below are immediately exempt from IHT — there is no 7-year wait:
Examples: monthly payments towards grandchildren's school fees, a regular annual gift of £5,000 from salary or pension income, standing orders to family members. HMRC scrutinises these claims carefully — keeping records of income, expenditure and the pattern of giving is essential. Form IHT403 is used to document exemption claims on death.
A retired person receiving £40,000/year in pension and investment income who lives on £28,000 can potentially give away £12,000 per year under this exemption — entirely free of IHT, on top of the £3,000 annual exemption.
Defined contribution (DC) pension funds — workplace pensions and personal pensions (SIPPs) — currently sit outside your estate for IHT purposes in 2026/27. They are not counted when calculating the IHT bill, and the nominated beneficiaries receive the fund directly, typically tax-free if the pension holder dies before age 75.
This makes unspent pension funds one of the most IHT-efficient assets to hold and pass on. Many individuals have deliberately delayed drawing down their pensions, instead using ISA savings and other assets first, to maximise what they pass on tax-efficiently.
Proposed change from April 2027: The government has announced plans to bring unspent defined contribution pension funds into estates for IHT purposes from April 2027. If implemented, this would fundamentally change pension planning strategies. The legislation has not yet been finalised. Anyone who has structured their estate around pension IHT exemption should seek current professional advice before April 2027.
Defined benefit (DB) pensions — final salary schemes — typically do not create an IHT liability; the pension income dies with the member (or passes to a surviving spouse as a reduced pension), and there is no capital sum outside the estate. The IHT concern is specifically with DC pension pots.
Residential property is typically the largest single asset in a UK estate. Its market value at the date of death — less any outstanding mortgage — forms part of the taxable estate. HMRC will expect an accurate valuation; the Valuation Office Agency can challenge estate valuations and has the power to impose penalties for undervaluation.
Leaving your main residence to direct descendants (children, stepchildren, grandchildren) allows the RNRB to reduce the taxable estate by up to £175,000 per person. The property must have been the deceased's home at some point — it does not need to still be their residence at death. See the full guide at Inheritance Tax and Property.
Giving away your home while continuing to live in it — rent-free — does not remove it from your estate. HMRC applies the gift with reservation of benefit rule: if you continue to benefit from the asset, it remains in your estate for IHT purposes. To genuinely remove the property from your estate, you would need to move out and pay full market rent. This is a frequently misunderstood planning strategy that can leave families facing an unexpected IHT bill.
When assets are inherited, the beneficiary receives them at their market value at the date of death — not the original purchase price. This is known as the CGT "uplift at death." No capital gains tax is paid on death. However, if the beneficiary later sells an inherited property that was not their main home, CGT may apply on the gain above the inherited value. Sales of inherited properties must be reported to HMRC within 60 days of completion. See: Capital Gains Tax on Property · 60-Day CGT Reporting Rule
Trusts can be used in estate planning to manage how and when assets are distributed to beneficiaries, and potentially to reduce IHT exposure. Common types include bare trusts, interest in possession trusts and discretionary trusts. Each has different IHT treatment.
Transfers into certain trusts (particularly discretionary trusts) may be immediately chargeable to IHT at 20% if they exceed the nil-rate band at the time of transfer. Trusts also face a 10-year periodic charge (up to 6% of the trust value above the NRB) and exit charges when assets leave the trust.
Trusts are a complex, specialist area. The tax treatment changed significantly with the 2006 Finance Act and continues to evolve. Poorly structured trusts can create IHT charges rather than reducing them. Do not attempt to establish a trust for IHT purposes without qualified legal and tax advice from a solicitor or financial planner specialising in estate planning.
Probate is the legal process of administering a deceased person's estate. In England and Wales, the executor applies for a Grant of Probate (or Grant of Letters of Administration if there is no will) before they can access bank accounts, transfer property, or distribute assets.
A key practical challenge: IHT must generally be paid before probate is granted, but the estate's assets cannot be accessed until probate is granted. This creates a timing problem, particularly when the estate is largely illiquid (property, pension, etc.).
The main IHT return form is IHT400. Estates below certain thresholds can use the simplified IHT205 (or IHT207 for overseas domicile). IHT is due within 6 months of the end of the month of death. Interest is charged by HMRC on late payments.
Estate: £400,000 (savings, investments, personal possessions — property left to sibling)
NRB: −£325,000 | RNRB: £0 (no property passing to direct descendants)
Taxable estate: £400,000 − £325,000 = £75,000
IHT at 40%: £30,000
Had the property passed to a child instead: RNRB of £175,000 would apply, reducing taxable estate to £0 and saving £30,000.
Estate: £650,000 (includes main home worth £320,000, left to children)
NRB: −£325,000 | RNRB: −£175,000
Taxable estate: £650,000 − £500,000 = £150,000
IHT at 40%: £60,000
First spouse left everything to second spouse (fully exempt). Both NRBs and RNRBs transfer.
Estate on second death: £1,000,000 (includes family home worth £450,000, left to children)
Combined NRB: −£650,000 | Combined RNRB: −£350,000
Total allowance: £1,000,000
Taxable estate: £0
IHT: £0
Estate: £2,300,000 (includes home worth £800,000, left to children)
NRB: −£325,000
RNRB before taper: £175,000
Taper reduction: (£2,300,000 − £2,000,000) ÷ 2 = £150,000 reduction
RNRB after taper: £175,000 − £150,000 = £25,000
Total allowances: £325,000 + £25,000 = £350,000
Taxable estate: £2,300,000 − £350,000 = £1,950,000
IHT at 40%: £780,000
Compare: if the estate were £2,000,000, the RNRB would be full (£175,000) and IHT would be £600,000 — the extra £300,000 in estate value generates an IHT increase of £180,000 (60% effective rate in the taper zone).
James gave his daughter £400,000 exactly 4 years before he died. His estate at death was £300,000.
NRB (£325,000) is applied to the gift first (oldest transfer first):
Gift within NRB: £325,000 → £0 tax | Gift above NRB: £400,000 − £325,000 = £75,000 taxable
Taper rate at 4 years: 24% (instead of 40%)
IHT on gift: £75,000 × 24% = £18,000 (saving of £12,000 vs full rate)
Remaining NRB for estate: £0 (fully used by gift)
IHT on estate: £300,000 × 40% = £120,000
Total IHT: £138,000
For detailed IHT planning strategies: How to Reduce Inheritance Tax → · UK Property Hub · UK Tax Hub