Tax Guide: Inheritance Tax UK 2025/26 — Rates, Thresholds and Planning

Inheritance Tax is a tax on the estate — the property, money, and possessions — of someone who has died. It is paid by the estate before assets are distributed to beneficiaries, not by the people who inherit.

The standard IHT rate is 40%, charged only on the portion of the estate above the tax-free threshold (known as the nil-rate band). There is no IHT to pay if the total value of the estate is below £325,000 For more tax planning strategies, see our tax hub., or if everything above the threshold is left to a spouse, civil partner, charity, or community amateur sports club.

For example, if your estate is worth £500,000, IHT would be charged at 40% on £175,000 (the amount above £325,000), resulting in a bill of £70,000. If you leave at least 10% of the net value of your estate to charity, the rate drops to 36% — a meaningful saving on larger estates.

Importantly, the nil-rate band has been frozen at £325,000 since 2009 and will remain at this level until at least April 2030. With inflation and rising property values, this prolonged freeze is pulling more estates into the IHT net every year — a phenomenon known as fiscal drag.

Since April 2017, an additional allowance called the residence nil-rate band (RNRB) has been available when you pass your home to direct descendants. This adds up to £175,000 to the standard nil-rate band, giving an individual a combined tax-free threshold of £500,000.

For married couples and civil partners, unused allowances can be transferred to the surviving partner. This means a couple can potentially pass on up to £1 million free of Inheritance Tax — £325,000 + £175,000 each.

However, there are important conditions. The RNRB only applies if you leave your home (or a share of it) to your children, including adopted, foster or stepchildren, or to grandchildren. It does not apply to homes left to siblings, nieces, nephews, or friends.

There is also a taper for larger estates. If the total value of your estate exceeds £2 million, the RNRB is reduced by £1 for every £2 over the limit. This means the RNRB is completely eliminated for individuals with estates worth £2.35 million or more. Like the nil-rate band, the RNRB has been frozen at £175,000 and will remain so until April 2030.

One of the most effective ways to reduce your estate's IHT exposure is through lifetime gifts. Under the seven-year rule, gifts made more than seven years before your death are completely exempt from IHT — regardless of their value.

If you die within seven years of making a gift, IHT may be due. Gifts made within three years of death are taxed at the full 40% rate. After that, taper relief For more on reducing your IHT liability, see our detailed IHT planning guide. reduces the tax rate on a sliding scale:

Taper relief only applies when the total value of gifts exceeds the £325,000 nil-rate band. Below that threshold, gifts are tax-free regardless of timing.

In addition to the seven-year rule, several annual exemptions allow you to give away assets tax-free immediately:

• Annual exemption: £3,000 per tax year (can carry forward one year's unused allowance)
• Small gifts: Up to £250 per recipient per year (unlimited number of recipients)
• Wedding gifts: Up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Normal expenditure out of income: Unlimited regular payments from your income (not capital), provided they don't affect your standard of living

Gifts between spouses and civil partners are always exempt, as are gifts to UK-registered charities and political parties.

The Autumn Budget 2024 announced two significant changes to Inheritance Tax that will affect estate planning:

Pensions brought into IHT from April 2027: Currently, unused pension funds can be passed on outside of your estate, making pensions one of the most tax-efficient vehicles for intergenerational wealth transfer Our pensions hub covers pension types and tax treatment in depth.. From 6 April 2027, unspent pension pots will be included in the value of your estate for IHT purposes. This is a major shift — for many retirees, the strategy of drawing down ISAs and other savings first while preserving their pension has been a cornerstone of IHT planning. That strategy will need revisiting.

Agricultural and Business Property Relief changes from April 2026: Currently, qualifying agricultural property and business assets can attract 100% relief from IHT. From April 2026, 100% relief will be capped at the first £1 million of combined agricultural and business property. Assets above that threshold will receive only 50% relief, meaning they will be taxed at an effective rate of 20%. This has caused significant concern among farming families and small business owners, where asset values (particularly farmland) can easily exceed £1 million despite relatively modest incomes.

These changes make early planning even more important. The pension change alone could bring hundreds of thousands of additional estates into the IHT net.

While IHT planning can be complex, several straightforward strategies can meaningfully reduce your estate's exposure:

1. Use your gift allowances every year Our ISA guide can help you shelter investments from IHT through regular gifting into family members' ISAs.. The £3,000 annual exemption and £250 small gift allowance are use-it-or-lose-it. A couple giving away £6,000 per year for 10 years removes £60,000 from their estate with zero tax consequences.

2. Make larger gifts early. The seven-year rule means that substantial gifts — helping a child with a house deposit, for example — can be entirely tax-free if you survive seven years. The earlier you give, the better the odds.

3. Write your pension and life insurance into trust. Life insurance policies written in trust are paid directly to beneficiaries outside of the estate, avoiding IHT entirely. Given the upcoming pension changes, consider whether a whole-of-life policy in trust could help your beneficiaries cover an expected IHT bill.

4. Leave at least 10% to charity. Leaving 10% or more of the net estate to charity reduces the IHT rate from 40% to 36%. On a £1 million estate above the threshold, this could save £40,000 — meaning both the charity and your beneficiaries are better off.

5. Consider a deed of variation. Beneficiaries can redirect their inheritance within two years of a death using a deed of variation, potentially optimising the estate's IHT position after the fact.

6. Get professional advice. IHT planning interacts with income tax, capital gains tax, and pension rules. A qualified financial adviser or tax solicitor can identify strategies specific to your circumstances — and help you avoid common pitfalls like gifts with reservation, where you give away an asset but continue to benefit from it (which HMRC will treat as still part of your estate).

Important: This guide is for information only and does not constitute regulated financial advice. Inheritance Tax planning can have significant legal and financial consequences. Always consult a qualified financial adviser or solicitor before making decisions about your estate.