UK Inheritance Tax Guide (IHT Rates, Nil Rate Band, 2026/27)

IHT Rates 2026/27

Inheritance Tax is charged at 40% on the value of your estate above the available nil rate bands. If you leave at least 10% of your net estate to charity, the rate reduces to 36%. The nil rate band has been frozen at £325,000 since 2009 and is currently scheduled to remain at this level until 2028. The residence nil rate band is also frozen at £175,000 until 2028. Together, an individual can pass on up to £500,000 tax-free — and a married couple or civil partners can pass on up to £1 million.

IHT raises more than £7 billion annually for HMRC. Despite this, only around 4% of UK estates actually pay Inheritance Tax, because most estates fall below the combined thresholds or are left to a spouse or civil partner (which is exempt). However, with property prices having risen substantially over the past two decades, the proportion of estates paying IHT is expected to increase as the thresholds remain frozen.

The 36% reduced rate applies where 10% or more of the net estate (after deducting debts, liabilities, reliefs, and exemptions) is left to qualifying charities. This can result in significant tax savings while supporting charitable causes. The estate executor must make the claim on the IHT return.

Business Relief and Agricultural Relief can reduce the value of qualifying assets by 50% or 100%, potentially bringing an estate below the nil rate band threshold. These reliefs are particularly valuable for business owners and farmers.

Nil Rate Band and Residence Nil Rate Band

Every individual has a nil rate band of £325,000 — the portion of your estate on which no IHT is payable. Any unused nil rate band can be transferred to a surviving spouse or civil partner, effectively doubling their allowance to £650,000. This transfer must be claimed within two years of the first death, and the executor should complete form IHT402.

The residence nil rate band (RNRB) was introduced in 2017 to help pass on the family home. For 2026/27, the RNRB is £175,000 per person. It applies when a main residence is passed to direct descendants (children, grandchildren, stepchildren, adopted or fostered children). The RNRB is transferable between spouses and civil partners, meaning a couple can pass on up to £350,000 of residence nil rate band plus £650,000 of standard nil rate band — a total of £1 million tax-free.

There is a taper: the RNRB is reduced by £1 for every £2 the estate is worth over £2 million. This means estates worth over £2.35 million lose the RNRB completely. The taper is applied per estate, not per person, so a surviving spouse's estate worth more than £2 million will have the transferred RNRB tapered.

What Is Included in an Estate

Your estate for IHT purposes includes everything you own at the time of death: your house and any other property, investments (shares, funds, ETFs), savings and bank accounts, business assets, personal possessions such as cars, jewellery and art, and life insurance payouts unless the policy is written in trust. Pensions are usually outside your estate if they are in a defined contribution scheme and you have not yet drawn them — but once you take money out of a pension, it becomes part of your estate.

Gifts made during your lifetime may still be counted as part of your estate under the "gift with reservation of benefit" rules. If you give something away but continue to benefit from it (for example, giving away your house but continuing to live in it rent-free), it is still treated as part of your estate. Jointly owned assets are included at your share of the value. For tenants in common, this is your specified share; for joint tenants, it is half the value.

Exemptions and Reliefs

The spouse exemption is the most valuable IHT relief: transfers between married couples and civil partners are completely exempt from IHT, regardless of value. This applies both during lifetime and on death. Charity exemption means gifts to UK charities are exempt from IHT, and leaving 10% or more to charity reduces the IHT rate to 36%.

Business Relief (formerly Business Property Relief) provides 100% relief on most business assets (sole trader businesses, partnership interests, unquoted company shares) and 50% relief on controlling shareholdings in quoted companies and land/buildings used by the business. Agricultural Relief provides 100% relief on agricultural property and 50% relief on tenanted farmland. Woodlands Relief defers IHT on growing timber. Heritage Assets relief applies to designated heritage property open to the public.

Gifting Strategies

Making gifts during your lifetime is one of the most effective ways to reduce IHT. The annual exemption allows you to give away £3,000 worth of gifts each tax year, free of IHT. You can carry forward any unused annual exemption for one year only. The small gifts allowance lets you give up to £250 per person per year to as many people as you like. Wedding gifts are exempt up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for any other person.

Regular gifts from your surplus income (not capital) are exempt from IHT if they are made out of normal expenditure, form part of a regular pattern, and do not affect your standard of living. The 7-year rule applies to Potentially Exempt Transfers (PETs): gifts to individuals are PETs and become fully exempt if you survive for 7 years after making the gift. If you die within 7 years, the gift is added back to your estate and may be subject to IHT, with Taper Relief potentially reducing the tax depending on how many years have passed. See our Taper Relief guide for full details.

Trusts and Wills

Trusts can be powerful tools for reducing IHT. A bare trust gives assets to beneficiaries absolutely, removing them from your estate immediately. An interest in possession trust gives a beneficiary the right to income from the trust assets. A discretionary trust gives trustees discretion over how to distribute income and capital. Trusts are subject to the relevant property regime, with IHT charges on entry (up to 20%), every 10 years (up to 6%), and when assets leave the trust.

Will planning is essential: a well-drafted will can incorporate a discretionary trust for the surviving spouse's benefit, known as a "nil rate band discretionary trust." This preserves the nil rate band while giving the survivor access to the trust income. A deed of variation (also known as a deed of family arrangement) allows beneficiaries to change the distribution of an estate within two years of death — the changes are treated as if the deceased had made them for IHT purposes. See also our Estate Planning guide for more comprehensive strategies.

Making a Claim and Paying IHT

Inheritance Tax must be paid by the end of the sixth month after the person's death (the "account period"). Most executors apply for probate online through the HMRC and GOV.UK portals. The IHT400 form must be submitted along with detailed schedules of the estate's assets and liabilities. For straightforward estates under the nil rate band, the simpler IHT205 form may be used. Payment can be made from the estate's bank account, via a direct transfer from the deceased's bank, or using the estate's own funds. HMRC also accepts payment in instalments for certain assets — land, buildings, business assets, and shares in unquoted companies — over 10 years, with interest charged on the outstanding balance.

The instalment option is particularly useful when the estate includes assets that are not easily sold, such as a family home or a business. Interest on instalments is charged at the HMRC rate (currently 2.75% for 2026/27), while late payment interest is charged at 3.25%. If the estate is complex, hiring a professional probate practitioner or solicitor is advisable, especially where there are trusts, foreign assets, or business interests. HMRC can charge penalties for incorrect returns, so accuracy is essential.

IHT Planning for High-Net-Worth Individuals

For estates worth more than £2 million, the residence nil rate band is fully tapered away, so planning becomes more complex. High-net-worth individuals often use a combination of strategies: making full use of annual exemptions (£3,000 per year and normal expenditure out of income), setting up a trust to hold assets outside the estate, using Business Relief to invest in AIM-listed shares or unquoted companies (which qualify for 100% relief after two years), and taking out a whole-of-life insurance policy written in trust to provide a tax-free lump sum to pay any IHT bill.

Agricultural property and woodland offer significant reliefs. Farmers can pass on farmland and buildings with 100% relief, and growing timber is excluded from the estate value. Heritage assets (land, buildings, and objects of national importance) can be exempt from IHT if the owner undertakes to maintain them and allow reasonable public access. For business owners, a family investment company (FIC) can help manage succession and control. Professional advice from a specialist tax advisor and solicitor is essential for any estate over £1 million, given the complexity of the rules and the severe penalties for getting it wrong.

FAQs

What is the Inheritance Tax threshold for 2026/27?

The standard nil rate band is £325,000, and the residence nil rate band is £175,000, giving a total tax-free allowance of up to £500,000 for an individual. Married couples and civil partners can pass on up to £1 million tax-free.

Do I have to pay IHT if I leave everything to my spouse?

No. Transfers between married couples and civil partners are exempt from Inheritance Tax, regardless of value. Any unused nil rate band can also be transferred to the surviving spouse.

How do I claim the residence nil rate band?

The executor claims the RNRB on the IHT account form (IHT400). It applies automatically if the main home is left to direct descendants. The RNRB is tapered for estates worth over £2 million.

What is the 7-year rule for gifts?

Gifts to individuals are Potentially Exempt Transfers. If you survive for 7 years after making the gift, it falls outside your estate for IHT purposes. If you die within 7 years, the gift is added back and may be taxed at 40%, with Taper Relief reducing the rate from year 3 onwards.

Can I reduce IHT by giving money to charity?

Yes. Gifts to charity are exempt from IHT. If you leave at least 10% of your net estate to charity, the IHT rate on the rest of your estate reduces from 40% to 36%.