Inheritance tax (IHT) is a tax on the estate of someone who has died, meaning their property, savings, investments and possessions. The standard rate is 40% on anything above the tax-free threshold of £325,000. Leaving your home to your children or grandchildren can add a further £175,000 allowance, and anything passed to a spouse or civil partner is generally exempt. Both the £325,000 nil-rate band and the £175,000 residence nil-rate band are frozen until April 2031.
What Inheritance Tax Actually Is?
IHT is not a tax you pay while you are alive. It is worked out on what you leave behind. Your executor adds up everything you owned, subtracts debts and funeral costs, applies any reliefs, and works out whether a bill is due.
Most families never see one. HMRC data for 2022-23 showed 31,500 taxpaying estates, about 4.62% of UK deaths. That share is growing, though, and I’ll explain why below.
The Thresholds In 2026/27
The nil-rate band. The first £325,000 of an estate is taxed at 0%. It has not moved in years.
The residence nil-rate band. This is an extra £175,000 when you leave your main home to direct descendants (children, grandchildren, step-children). It reduces by £1 for every £2 that the estate exceeds £2 million, so very large estates lose it completely.
Spouses and civil partners. Transfers between spouses and civil partners are fully exempt from inheritance tax. Any unused allowance passes to the surviving partner. A couple can therefore leave up to £1 million tax-free if the home goes to their children (2 × £325,000 plus 2 × £175,000).
The charity rate. If you leave at least 10% of your net estate to charity, the rate on the rest falls from 40% to 36%.
The 2026 and 2027 Changes
This is where the rules are moving.
Thresholds frozen until 2031. The Autumn Budget 2025 confirmed that IHT thresholds are frozen until April 2031. When house prices rise and the thresholds don’t, more estates cross the line. This is usually called fiscal drag.
Farms and businesses: the £2.5 million cap. Agricultural Property Relief and Business Property Relief used to give 100% relief with no upper limit. From April 2026, 100% relief applies only up to £2.5 million of eligible agricultural and business property. Above that, relief drops to 50%, which works out as an effective 20% tax on the excess. Unused allowance can be transferred between spouses, so couples can still pass on up to £5 million at full relief. Shares listed on AIM now get 50% relief rather than 100%.
Pensions from 6 April 2027. Until now, most unused pension pots could be passed on outside the estate. From 6 April 2027, most unused pension funds and death benefits will be counted in the estate. The legislation received Royal Assent in the Finance Act 2026 on 18 March 2026. Death-in-service benefits are excluded.
The Budget on 28 October 2026. The most recent Budget did not touch the main rates or bands. Adviser summaries say it left the IHT rates, the nil-rate bands and the £2.5 million allowance unchanged, and confirmed that pensions enter the estate from April 2027. One technical measure did appear. New rules on trust liabilities apply to transfers and chargeable events, including deaths, on or after 28 October 2026, and are aimed at certain trust-based planning arrangements. If you have a loan or debt-based trust structure, seek advice.
The Seven-Year Rule and Gifting
You can reduce the size of your estate by giving things away while you’re alive. The rules are:
- Annual exemption: £3,000 a year, and you can carry forward one unused year.
- Small gifts: £250 per person, to as many people as you like.
- Wedding gifts: £5,000 for a child, £2,500 for a grandchild, £1,000 for anyone else.
- Gifts from surplus income: regular gifts that don’t affect your standard of living are exempt immediately, but you need records.
- Larger gifts (potentially exempt transfers): these become tax-free if you survive seven years. If you die within that period, taper relief reduces the tax on gifts made three to seven years before death.
Keep a gifting log. Executors who can’t prove a gift was made, or when, often end up paying more than they should.
When and How It Is Paid
IHT is normally due six months after the end of the month in which the person died. Interest builds up after that date. Executors often can’t access the estate’s money until probate is granted, so some banks will release funds to pay the tax directly.
If you inherit property, you can usually pay in ten annual instalments. For assets that qualify for Agricultural or Business Relief, those instalments are interest-free.
Executors report the estate on the relevant HMRC forms, and even estates under the threshold sometimes need one if there are trusts, foreign assets or gifts to account for.
Practical steps worth considering
- Check your will. Wills written before 2026 may not reflect the new pension and business rules.
- Review pension nominations. Because pensions come into the estate in April 2027, decide how drawdown and inheritance fit together.
- Write a gifting log. Record dates, amounts and recipients.
- Consider life insurance written in trust. A policy held in trust pays out outside the estate and can fund the tax bill.
- Think about charity. A bequest of 10% or more can lower the whole rate.
- Get regulated advice if you own a farm, a company or complex trusts.
FAQs
What is the inheritance tax rate in the UK?
40% on the value of an estate above the available threshold. It is 36% if at least 10% of the net estate goes to charity.
Is inheritance tax paid by the person who inherits?
No. The estate pays it, usually through the executor, before assets are distributed. Beneficiaries only pay directly in some cases, such as when they receive gifts or trust assets.
Do I pay inheritance tax on my house?
Only if the total estate, including the home, is above your available allowances. The home can use the £175,000 residence band when it passes to direct descendants.
Will my pension be taxed after I die?
From 6 April 2027, most unused pension funds will count towards your estate. Death-in-service benefits are excluded.
Do spouses pay inheritance tax?
No. Transfers between spouses and civil partners are exempt, though the rules differ if the recipient is not domiciled in the UK.
The Bottom Line
The headline rate hasn’t changed, but the rules around it keep moving. The thresholds are frozen until 2031, farms and businesses face a £2.5 million cap on full relief, and pensions join the estate in April 2027. A review of your will and your pension is worth doing now, not later.
- How Inheritance Tax works: thresholds, rules and allowances
- Work out and apply the residence nil rate band for Inheritance Tax
- Inheritance Tax nil-rate band and residence nil-rate band thresholds from 6 April 2026 to 5 April 2028
- Inheritance Tax thresholds
- Inheritance tax nil-rate band, residence nil-rate bands from 6 April 2028
