Inheritance Tax Explained: Thresholds, Exemptions and How to Reduce It

Reviewed 30 October 2026 · United Kingdom · General information, not legal advice

Inheritance tax is charged at 40% on the part of an estate above the £325,000 nil-rate band, plus up to £175,000 more where a home passes to children or grandchildren. Both allowances are frozen until 5 April 2031.

Inheritance tax (IHT) is charged at 40% on the value of what you leave above your tax-free allowances: a nil-rate band of £325,000 for everyone, plus a residence nil-rate band of up to £175,000 where your home passes to children or grandchildren. Married couples and civil partners can pass unused allowances to each other, so a couple can leave up to £1 million tax-free, and anything left to a spouse, civil partner or charity is exempt altogether. Both allowances are frozen until 5 April 2031. This guide explains the thresholds and rates, which gifts are tax-free, the seven-year rule, the 2026 and 2027 changes to business, farm and pension assets, who pays and when, and when to get advice.

The thresholds: nil-rate band and residence nil-rate band

Every estate has a nil-rate band of £325,000, unchanged since April 2009. The estate means everything you own at death, less debts and funeral costs, plus certain gifts made in the previous seven years. Tax applies only to the part above the band.

The residence nil-rate band adds up to £175,000 where a home you lived in, or the proceeds of one you sold on or after 8 July 2015 when moving to a smaller home or into care, passes to direct descendants: children, step-children, adopted and foster children, grandchildren, and the spouses or civil partners of any of them. It cannot exceed the value of the home share they receive, and it tapers for larger estates: for every £2 by which the net estate exceeds £2 million, the residence band falls by £1, disappearing at £2.35 million for one person. Leaving the home to a nephew or a discretionary trust loses the allowance, so have an old will reviewed by a will solicitor.

Both bands were due to be frozen until April 2030; the Autumn Budget of 26 November 2025 extended the freeze to 5 April 2031, and the Budget of 28 October 2026 left the rates, the bands and the freeze unchanged.

Married couples and civil partners

Anything you leave to your spouse or civil partner is exempt without limit, provided they count as a long-term UK resident. Since 6 April 2025 that test depends on residence (broadly, living in the UK for ten of the last twenty tax years) rather than domicile; where the survivor falls outside it, the exemption is capped at £325,000 unless they elect to be treated as a long-term resident. Because the first death usually passes everything to the survivor, none of the first estate's allowances is used, and the unused percentage of both bands can be claimed on the second death, on forms IHT402 and IHT436, within two years of the end of the month of that death. The result is the widely quoted £1 million for a couple.

Unmarried partners get none of this: no exemption, no transferable allowance and nothing on intestacy, so a partner who inherits a half share of a house under a will can face a 40% bill on everything above £325,000. Marriage, civil partnership, life insurance written in trust and a properly drafted will are the usual answers.

The rate: 40%, or 36% with a gift to charity

Tax is charged at 40% on the value above the available allowances. Gifts to charities and registered community amateur sports clubs are exempt, and if you leave at least 10% of your net estate (the "baseline amount" after allowances and exemptions) to charity, the rate on the rest drops to 36%. A will can include a formula clause fixing the gift at exactly 10%. For deaths from 6 April 2026 the exemption is confined to charities registered in the UK, so a bequest to an overseas charity no longer qualifies.

Gifts you can make tax-free

Several exemptions mean a gift never counts towards your estate at all:

• An annual exemption of £3,000 per tax year, with one year's unused exemption carried forward, so a couple who have given nothing recently can give £12,000 between them in one year.
• Small gifts of up to £250 per recipient per tax year, to as many people as you like, provided the same person has not also received part of the £3,000.
• Wedding or civil partnership gifts of £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else, made on or shortly before the day.
• Normal expenditure out of income: regular gifts, such as a grandchild's school fees or a monthly standing order, made from surplus income rather than capital and leaving you able to maintain your usual standard of living. There is no upper limit, but keep records so that executors can prove the pattern on form IHT403.
• Gifts to a spouse or civil partner, to UK charities and to political parties, and payments for the maintenance of a child or a dependent relative.

Neither the November 2025 Budget nor the October 2026 Budget introduced a cap on lifetime gifts, despite speculation beforehand.

The seven-year rule, taper relief and gifts with strings attached

Any other gift to an individual is a potentially exempt transfer: it falls out of your estate completely if you survive seven years. If you die within seven years, the gift is added back and uses up your nil-rate band first, in date order, before the estate itself. Where the gifts made in the seven years before death exceed £325,000, the tax on the excess is reduced by taper relief according to how long you survived: the full 40% within three years, 32% between three and four years, 24% between four and five, 16% between five and six and 8% between six and seven. Taper reduces the tax, not the value of the gift, so it does nothing for gifts that sit within the nil-rate band.

The recipient of a failed gift is primarily liable for the tax on it, and executors must report gifts made in the previous seven years, so tell your family what you have given and keep a simple schedule.

A gift with reservation of benefit does not work. If you give your house to your children but carry on living there rent-free, HM Revenue and Customs (HMRC) treats it as still yours at death however long ago the gift was made. Paying a full market rent, with records, removes the reservation, but the rent is taxable income for the children. Gifts into most trusts are chargeable lifetime transfers, taxed at 20% above the nil-rate band when made, with a top-up to 40% if you die within seven years.

Business property, farms, shares and pensions: the 2026 and 2027 changes

Until April 2026, qualifying business and agricultural property passed free of inheritance tax without limit. From 6 April 2026, 100% relief is limited to a combined allowance of £2.5 million per person (raised from the £1 million first announced, in a change confirmed on 23 December 2025), with 50% relief above that, an effective rate of 20%. Unused allowance passes to a surviving spouse or civil partner, even where the first death was before April 2026, and the tax on relieved assets can be paid in ten annual instalments free of interest. Shares traded on AIM get 50% relief whatever the value.

Pensions change next. Under the Finance Act 2026, which received Royal Assent on 18 March 2026, most unused pension funds and lump sum death benefits form part of the estate for deaths on or after 6 April 2027. Funds passing to a spouse or civil partner remain exempt, as do death-in-service lump sums and dependants' scheme pensions, but a pension left to children will be counted alongside the house and savings, and where the member dies at 75 or over the beneficiaries pay income tax on withdrawals as well. The personal representatives, not the scheme, report and pay the tax, with new powers to require the scheme to pay it directly to HMRC. Anyone relying on a pension to pass on wealth should take advice before April 2027; see what pension law covers.

Trusts in brief

Trusts no longer avoid inheritance tax, but they still have uses: controlling when children inherit, protecting a vulnerable beneficiary or keeping life insurance outside the estate. Most lifetime trusts fall within the "relevant property" regime: a 20% entry charge on value above the nil-rate band, a charge of up to 6% of the value above the band every ten years, and proportionate exit charges when capital leaves. The October 2026 Budget tightened the deduction of trustee borrowing against trust property for charges arising on or after 28 October 2026. The wills, trusts and probate overview explains the basic structures.

Who pays, when, and when to get advice

The personal representatives (executors under a will, administrators where there is none) pay inheritance tax out of the estate before anything is distributed, and they are personally liable if they distribute first and the tax goes unpaid; see what an executor must do. The tax is due by the end of the sixth month after the month of death: for a death in March, by 30 September. Interest runs from then, and the tax not being paid by instalments must normally be paid before the probate registry issues the grant; banks will usually release money straight to HMRC under the Direct Payment Scheme. Tax on land, buildings, a business or a controlling shareholding can be paid in ten yearly instalments, with interest, but the whole balance falls due if the asset is sold.

Smaller estates escape the paperwork. An "excepted estate" (broadly, one below £325,000, or below £650,000 with a transferred allowance, or one passing entirely to a spouse or charity and worth under £3 million) is reported within the probate application itself. Anything else needs the full IHT400 account, submitted within 12 months of the death and before the grant; the guide to how long probate takes explains where the tax stage sits. Beneficiaries can also agree a deed of variation within two years of a death to redirect an inheritance and have it read back into the will for tax purposes.

Get advice when the estate is near or above the thresholds, when you own a business, farm or AIM shares, when you have a large pension and are not married, when you own property with a partner you are not married to, or when you are considering a trust or giving away the family home. A solicitor specialising in private client work, often also a member of the Society of Trust and Estate Practitioners (STEP), will usually charge a fixed fee for a will with tax planning and an hourly rate for bespoke advice; see how much a will costs and what probate costs. You can find firms through will and probate solicitors in Bristol or the solicitors near me search. Inheritance tax is UK-wide, but probate in England and Wales and its Scottish equivalent, confirmation, follow separate procedures, and planning for someone who has lost mental capacity needs an attorney or deputy with the right authority, explained in the guide to lasting powers of attorney and deputyship.

Frequently asked questions

Do I pay inheritance tax on money I inherit from my parents?

Not personally, in most cases. Inheritance tax is paid by the estate before the money reaches you, so what you receive is yours free of further inheritance tax. A parent's estate benefits from the £325,000 nil-rate band and, if the family home passes to children, the £175,000 residence band, with a surviving parent able to use the first parent's unused allowances too. You could be liable only for tax on a lifetime gift made to you within seven years of the death.

Can I give my house to my children to avoid inheritance tax?

Only if you genuinely give it away and stop benefiting from it. If you carry on living there without paying a full market rent, the gift is a "gift with reservation of benefit" and HMRC counts the house as still yours when you die, however many years have passed. Paying a market rent works but creates taxable income for your children, and giving the house away also exposes it to their divorce, bankruptcy or death and can affect care fee assessments. Take advice first.

Is there inheritance tax between husband and wife?

No. Anything left to a spouse or civil partner who is a long-term UK resident is exempt without limit, and the unused part of the first spouse's allowances transfers to the survivor, so the second estate can have up to £650,000 of nil-rate band and £350,000 of residence band. The exemption is capped at £325,000 if the survivor is not a long-term UK resident, unless they elect to be treated as one. Unmarried partners have no equivalent exemption.

How much can I gift each year without paying inheritance tax?

You can give £3,000 a year in total under the annual exemption, carrying forward one unused year, plus as many £250 gifts as you like to different people, wedding gifts of £5,000, £2,500 or £1,000 depending on the relationship, and unlimited regular gifts from surplus income. Larger gifts to individuals are tax-free if you survive seven years; if you do not, they use up your nil-rate band first and may be taxed at a tapered rate.

Will my pension be subject to inheritance tax?

For deaths before 6 April 2027, unused pension funds and most lump sum death benefits are outside the estate. For deaths on or after that date, under the Finance Act 2026, they are included and taxed at 40% above the allowances unless they pass to a spouse or civil partner or to charity. Death-in-service lump sums and dependants' scheme pensions remain outside. Your executors, not the scheme, will report and pay the tax, so review your nominations and your will before 2027.

Did the October 2026 Budget change inheritance tax?

Not in any headline way. The Budget of 28 October 2026 left the 40% rate, the £325,000 nil-rate band, the £175,000 residence nil-rate band and their freeze to 5 April 2031 unchanged, and introduced no cap on lifetime gifts or change to the seven-year rule. The measures announced were technical: restricting the deduction of trustee liabilities, adjusting the pension death benefit rules due in 2027 and giving prospective personal representatives power to direct a pension scheme to pay tax.

Related guides

• How Long Does Probate Take?
• Lasting Power of Attorney vs Deputyship: What Is the Difference?
• What Does an Executor Do? Duties, Responsibilities and Risks
• How much does a will cost?
• Wills, Trusts & Probate Explained

This guide describes the law in United Kingdom as at 30 October 2026. It is general information, not legal advice about your situation; the law and the figures it quotes change, so check the position with a solicitor before acting. LawFirms.co.uk is a directory and does not provide legal services.