Inheritance Tax UK: The 2026/27 Complete Guide

For an estate worth more than £325,000, Inheritance Tax UK is the most expensive single tax most families ever face. The headline rate is 40%, the thresholds have been frozen since 2009, and the Office for Budget Responsibility now expects HMRC to collect a record £9 billion a year in IHT by the late 2020s. None of that is accidental.

This guide walks through how IHT works in 2026/27, what the nil-rate band and residence nil-rate band actually cover, the gifting rules people most often get wrong, and the legitimate planning moves that genuinely reduce a bill - without crossing into the avoidance schemes that HMRC unwinds.

Contents

• What is Inheritance Tax?
• The 2026/27 IHT thresholds
• How spouses inherit unused allowances
• Lifetime gifts and the 7-year rule
• Annual gift allowances most people miss
• Exempt assets and special reliefs
• How to actually reduce your IHT bill
• Frequently asked questions

What Is Inheritance Tax?

Inheritance Tax (IHT) is the tax HMRC charges on the value of your estate when you die. Your estate is the sum of everything you owned: property, investments, cash, pensions outside the wrapper, jewellery, cars. The tax is paid out of the estate before anything is distributed to your beneficiaries.

For 2026/27, the standard rate is 40% on everything above the combined nil-rate threshold. The rate falls to 36% if you leave 10% or more of your net estate to charity. Almost everything you own at death counts. Almost.

The 2026/27 IHT Thresholds

Two thresholds matter, and they stack.

The Nil-Rate Band (NRB): £325,000. Estates below this pay no IHT. This figure has been frozen since 2009 and is set to stay frozen until at least April 2030, which is one of the clearest examples of stealth tax via fiscal drag on the books - the threshold halves in real terms every 25 years of average inflation.

The Residence Nil-Rate Band (RNRB): £175,000 extra, available only when you pass your main home (or the proceeds of having sold it) to a direct descendant - children, grandchildren, stepchildren, or adopted children. Not nieces and nephews. Not friends. The RNRB also tapers above £2 million of estate value: it falls by £1 for every £2 above the taper threshold and is fully gone at £2.35 million.

Combine the two and a single homeowner can pass £500,000 to children before any IHT applies. A married couple can pass up to £1 million.

Above whichever threshold applies, IHT is 40% on the excess.

How Spouses Inherit Unused Allowances

Spouses and civil partners can pass any amount to each other on death, IHT-free. The receiving spouse also inherits any unused nil-rate band and residence nil-rate band of the first to die. This is the mechanism that gets most homeowning couples to a £1 million combined threshold.

Two consequences flow from this:

• The first spouse to die rarely needs to "use" their nil-rate band. Leaving everything to the surviving spouse is usually fine, because the unused allowance transfers to them.
• Couples who divorced and never remarried do not inherit allowances from a former spouse. The transferred allowance only applies to spouses or civil partners as defined at the date of death.

The allowance transfer must be claimed by the executor of the second estate. Keep records of the first spouse's estate (especially anything that used part of their NRB) so the figure can be calculated on the second death.

If you have not yet claimed the Marriage Allowance, that is a separate mechanism for transferring income tax allowance during life, not death.

Lifetime Gifts and the 7-Year Rule

You can give away unlimited amounts during your lifetime, but those gifts are not automatically free of IHT. The rule:

• Gifts made within 7 years of death are added back to your estate for IHT calculation.
• If the cumulative value of those gifts is below the nil-rate band, no IHT is due on them.
• If the gifts are above the nil-rate band, IHT is charged on the excess at a rate that tapers based on how long ago the gift was made.

Taper relief schedule:

Two important details people get wrong:

• Taper relief only applies to gifts above the nil-rate band. The first £325,000 of taxable gifts gets no taper - it just sits inside the threshold.
• The 7-year clock runs from the date of the gift, not the date of any related transaction.

Annual Gift Allowances Most People Miss

You can give away these amounts every year without them counting as part of your estate at all - no 7-year rule, no taper, just gone:

• Annual exemption: £3,000 per tax year. If unused in one year, you can carry forward one year of exemption (so up to £6,000 in the year after a year you didn't use it).
• Small gifts: £250 per recipient per tax year, to as many people as you like. Cannot be combined with the £3,000 to the same person.
• Wedding or civil partnership gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.
• Regular gifts out of surplus income: unlimited, as long as they come from regular income (not capital), do not reduce your standard of living, and form part of a normal pattern. This is the most powerful and most underused exemption. Pensioners with surplus income can give thousands per year free of IHT.

The annual £3,000 sounds small, but a couple gifting their full allowance every year for 20 years moves £120,000 out of their combined estate, saving £48,000 in IHT.

Exempt Assets and Special Reliefs

Some assets do not count towards your estate for IHT purposes:

• Pensions. Defined contribution pensions sit outside your estate for IHT in 2026/27. Drawing down ISA money before pension money is the standard advice for IHT-aware retirees, so the pension can be passed on tax-free. The Treasury announced in 2024 that DC pensions will be brought into IHT from April 2027, so this is changing.
• Spousal transfers. Anything to a spouse or civil partner.
• Charity gifts. Anything left to a UK charity is exempt, and charity gifts of 10% or more of the net estate also drop the rate on the rest from 40% to 36%.
• Business Relief (BR). 100% relief on qualifying unlisted shares (most AIM-listed companies still qualify), 50% relief on certain other business assets, after a two-year holding period.
• Agricultural Property Relief (APR). Up to 100% relief on qualifying farmland and farm buildings.

The Autumn 2024 Budget announced changes to BR and APR from April 2026, capping the 100% rate at the first £1 million of qualifying assets and dropping to 50% above that. If you are relying on these reliefs, check the current rules with a specialist before assuming the full relief still applies.

How to Actually Reduce Your IHT Bill

The legitimate IHT planning toolkit is shorter than most people think.

1. Use both nil-rate bands. Make sure the family home (or proceeds) is being left to direct descendants if you want the £175,000 RNRB to apply. Get the will right.
2. Use spouse exemptions, then transfer unused allowances. The default of leaving everything to a spouse is usually correct, with the second estate claiming the transferred NRB and RNRB.
3. Spend, don't hoard. The cheapest IHT planning is enjoying the money. Bill Perkins makes this case in Die With Zero, and the maths is hard to argue with - 40% of every saved-but-unspent pound goes to HMRC at the end.
4. Gift early and often. The annual £3,000, the small gifts, and surplus-income gifts all compound across decades. A couple gifting £6,000 a year for 25 years removes £150,000 from their combined estate.
5. Leverage your pension. Defined contribution pensions are outside the estate until April 2027. Spend ISA and GIA money first if your goal is to pass wealth on - though after April 2027 the calculus changes.
6. Consider charity gifts. Leaving 10%+ of the net estate to charity drops the rate from 40% to 36% on the remainder. The arithmetic often means giving more to charity costs your beneficiaries less than you expect.
7. Get a will. Without one, intestacy rules apply and the residence nil-rate band can fail entirely if assets go to the wrong relatives. A simple will from a solicitor costs £150-£300 and protects an enormous amount of value.

What does not work, despite what TikTok says: putting the family home into a trust to escape IHT (the gift-with-reservation rules pull it back in), giving children the house and continuing to live there rent-free (same trap), or buying complicated offshore products.

Frequently Asked Questions

How much can a married couple pass on without paying Inheritance Tax?

Up to £1 million if the family home (or proceeds) is being passed to direct descendants. The figure is built from two nil-rate bands of £325,000 plus two residence nil-rate bands of £175,000. Estates above £2 million see the residence band taper away.

Do gifts always trigger Inheritance Tax?

No. The £3,000 annual exemption, the £250 small-gift allowance per recipient, wedding gifts, and regular gifts out of surplus income are all immediately exempt - no 7-year clock, no IHT. Gifts above those amounts are added back to the estate if you die within 7 years, with taper relief on amounts above the nil-rate band.

Are pensions subject to Inheritance Tax in the UK?

In 2026/27, defined contribution pensions remain outside the estate for IHT purposes. The Treasury announced in 2024 that pensions will be brought into IHT from April 2027, so this is changing - pension savers should review their plans before that date.

How long does Inheritance Tax take to pay?

IHT is generally due 6 months after the end of the month of death. Probate cannot be granted until the bill (or at least the part not relating to property and certain other assets) is paid. Executors can pay over 10 years for property, in instalments with interest. Most estates settle within 12-18 months.

Can I use a trust to avoid Inheritance Tax?

Most "IHT trusts" advertised online do not work. The gift-with-reservation rules pull the asset back into the estate if you continue to benefit from it. Trusts have legitimate uses (protecting assets for minor beneficiaries, controlling distributions), but as a way to dodge IHT they rarely deliver what the marketing promises.