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Inheritance Tax (IHT) is charged at 40% on estates above £325,000 — but with the residence nil-rate band and spouse exemption, many couples can pass on up to £1 million tax-free. Here’s how it works.
IHT Thresholds (2026/27)
| Threshold | Amount | What It Means |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | First £325K of estate is tax-free |
| Residence nil-rate band (RNRB) | £175,000 | Extra allowance when passing home to direct descendants |
| Single person total | £500,000 | Combined NRB + RNRB |
| Married couple total | £1,000,000 | Both spouses’ NRB + RNRB transfer to survivor |
| IHT rate | 40% | On the amount above thresholds |
| Reduced rate (10%+ to charity) | 36% | If 10%+ of estate goes to charity |
The nil-rate band has been frozen at £325,000 since 2009 — fiscal drag means more estates are caught by IHT each year.
How IHT Is Calculated
The amount of IHT you owe depends on the total value of your estate, which threshold applies, and who inherits. If you leave your main home to direct descendants (children or grandchildren), you get the additional residence nil-rate band on top of the standard nil-rate band — a meaningful tax saving that many families miss.
Single Person — No Home to Descendants
| Estate Value | Nil-Rate Band | Taxable Amount | IHT at 40% |
|---|---|---|---|
| £250,000 | £325,000 | £0 | £0 |
| £325,000 | £325,000 | £0 | £0 |
| £400,000 | £325,000 | £75,000 | £30,000 |
| £500,000 | £325,000 | £175,000 | £70,000 |
| £750,000 | £325,000 | £425,000 | £170,000 |
| £1,000,000 | £325,000 | £675,000 | £270,000 |
Single Person — Home Passed to Children
| Estate Value | NRB + RNRB | Taxable Amount | IHT at 40% |
|---|---|---|---|
| £400,000 | £500,000 | £0 | £0 |
| £500,000 | £500,000 | £0 | £0 |
| £600,000 | £500,000 | £100,000 | £40,000 |
| £750,000 | £500,000 | £250,000 | £100,000 |
| £1,000,000 | £500,000 | £500,000 | £200,000 |
Married Couple — Home Passed to Children
When the first spouse dies, unused thresholds transfer to the survivor:
| Estate Value | Combined NRB + RNRB | Taxable Amount | IHT at 40% |
|---|---|---|---|
| £750,000 | £1,000,000 | £0 | £0 |
| £1,000,000 | £1,000,000 | £0 | £0 |
| £1,250,000 | £1,000,000 | £250,000 | £100,000 |
| £1,500,000 | £1,000,000 | £500,000 | £200,000 |
| £2,000,000 | £1,000,000* | £1,000,000 | £400,000 |
| £3,000,000 | £650,000** | £2,350,000 | £940,000 |
*RNRB tapers for estates over £2M. **RNRB fully lost at £2.7M+ (tapers at £1 for every £2 over £2M).
Spouse Exemption
One of the most valuable IHT reliefs is the unlimited spouse exemption. Transfers between spouses (married or civil partners) are completely exempt from IHT, regardless of the amount. This makes estate planning between married couples particularly powerful — the surviving spouse can also inherit any unused nil-rate band and residence nil-rate band from the first spouse to die.
| Situation | IHT Due |
|---|---|
| All assets left to spouse | £0 |
| £2M estate left entirely to spouse | £0 |
| Spouse leaves £500K to children, rest to surviving spouse | IHT on £500K only |
This means the first death between spouses typically has zero IHT — the tax hits when the surviving spouse dies.
RNRB Taper for Estates Over £2 Million
Wealthy estates face an additional sting: the residence nil-rate band is clawed back for estates valued above £2 million. The RNRB is reduced by £1 for every £2 the estate exceeds £2 million, meaning it disappears entirely at £2.35 million for a single person or £2.7 million for a couple. This creates effective marginal IHT rates of up to 60% in the taper zone.
| Estate Value | RNRB Available | NRB | Total Threshold | IHT |
|---|---|---|---|---|
| £2,000,000 | £175,000 | £325,000 | £500,000 | £600,000 |
| £2,100,000 | £125,000 | £325,000 | £450,000 | £660,000 |
| £2,200,000 | £75,000 | £325,000 | £400,000 | £720,000 |
| £2,350,000 | £0 | £325,000 | £325,000 | £810,000 |
| £3,000,000 | £0 | £325,000 | £325,000 | £1,070,000 |
For very large estates, the RNRB is completely eliminated.
What’s Included in Your Estate
Your estate for IHT purposes includes almost everything you own or are treated as owning at death — property, savings, investments, personal possessions, and gifts made within the last seven years. Some assets qualify for relief or fall outside the estate entirely, which is the basis of most IHT planning strategies.
| Included | Not Included |
|---|---|
| Property (primary + additional) | Pension pots (usually exempt) |
| Savings, investments, ISAs | Assets in certain trusts |
| Life insurance (if no trust) | Business relief qualifying assets |
| Vehicles, jewellery, possessions | Agricultural relief qualifying assets |
| Gifts made within 7 years | Charity donations |
| Share of jointly owned assets | Life insurance in trust |
The 7-Year Rule for Gifts
Gifting assets during your lifetime is one of the most effective ways to reduce IHT. Gifts become fully exempt if you survive 7 years after making them, with a sliding scale of taper relief applying if you die between 3 and 7 years after the gift. The key limitation is that you must genuinely give up ownership and benefit — continuing to use or enjoy the gifted asset (a “gift with reservation”) means it still counts as part of your estate.
| Years Before Death | IHT Rate on Gift |
|---|---|
| 0-3 years | 40% (full rate) |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| 7+ years | 0% (fully exempt) |
Annual Exemptions
In addition to the 7-year rule, there are several annual exemptions that allow you to make smaller gifts that are immediately free of IHT — no need to survive any particular period. These exemptions reset each tax year and can be combined.
| Exemption | Amount |
|---|---|
| Annual gift exemption | £3,000 per year (can carry 1 year forward) |
| Small gifts | £250 per person (unlimited recipients) |
| Wedding gifts (parent) | £5,000 |
| Wedding gifts (grandparent) | £2,500 |
| Wedding gifts (anyone else) | £1,000 |
| Gifts from surplus income | Unlimited (if from regular income, not capital) |
| Charity donations | Unlimited |
Strategies to Reduce IHT
IHT planning doesn’t have to be complicated. The strategies below range from simple (using annual exemptions) to more involved (trusts and business relief). Starting early is always better — the 7-year clock on larger gifts means the sooner you begin, the more you can pass on tax-free.
1. Use Your Annual Exemptions
| Strategy | Annual Amount Gifted | Over 10 Years |
|---|---|---|
| Annual exemption (couple) | £6,000 | £60,000 |
| + Small gifts (10 people) | £5,000 | £50,000 |
| + Regular gifts from income | Variable | Variable |
| Total removed from estate | £11,000+ | £110,000+ |
IHT saved: up to £44,000+ over 10 years.
2. Leave 10%+ to Charity (36% Rate)
| Estate (Above Threshold) | IHT at 40% | IHT at 36% (10% to charity) | Net to Beneficiaries |
|---|---|---|---|
| £500,000 | £200,000 | £162,000 (+ £50K charity) | £288,000 |
| £1,000,000 | £400,000 | £324,000 (+ £100K charity) | £576,000 |
3. Put Life Insurance in Trust
Life insurance in your own name is part of your estate. Placed in trust:
- Proceeds are outside your estate for IHT
- Pays out faster (no probate delay)
- Can cover the expected IHT bill
| Estate Above Threshold | IHT Bill | Life Insurance Needed (in Trust) |
|---|---|---|
| £200,000 | £80,000 | £80,000 policy |
| £500,000 | £200,000 | £200,000 policy |
| £1,000,000 | £400,000 | £400,000 policy |
4. Pension Planning
Pension pots are usually outside your estate for IHT. Strategy:
- Draw from ISAs and savings first in retirement
- Leave pension pots untouched as long as possible
- Pensions pass to beneficiaries IHT-free (income tax may apply if you die after 75)
5. Business & Agricultural Relief
| Relief | Rate | Qualifying Assets |
|---|---|---|
| Business Property Relief (BPR) | 50% or 100% | Unquoted shares, business assets, AIM-listed shares |
| Agricultural Property Relief (APR) | 50% or 100% | Farmland and farm buildings |
Note: From April 2026, BPR and APR will be limited to the first £1M of qualifying assets at 100% relief, with 50% relief above that.
How Many Estates Pay IHT?
Despite the headlines, IHT still only affects a minority of estates — but that minority is growing rapidly. The frozen nil-rate band combined with rising property values means thousands more families are caught by IHT each year, particularly in London and the South East where average house prices push estates above the threshold.
| Tax Year | Estates Paying IHT | % of All Deaths | Total IHT Revenue |
|---|---|---|---|
| 2025/26 | ~42,000 | ~7% | ~£8.5 billion |
| 2023/24 | ~38,000 | ~6% | ~£7.5 billion |
| 2020/21 | ~27,000 | ~4% | ~£5.4 billion |
| 2015/16 | ~24,000 | ~4% | ~£4.7 billion |
The frozen nil-rate band means IHT catches more estates each year as house prices rise.
IHT Timeline After Death
IHT must be paid before probate is granted, which creates a common cashflow problem: the estate’s assets are locked until probate, but HMRC wants payment within six months. Banks can sometimes release funds directly to HMRC under the Direct Payment Scheme, and property IHT can be paid in annual instalments over 10 years.
| Step | Timeframe |
|---|---|
| Death registered | Within 5 days |
| IHT estimated and reported | Within 6-12 months |
| IHT payment due | 6 months after death |
| Probate application | After IHT paid (or instalment plan agreed) |
| Estate distributed | 6-18 months typically |
Property IHT can be paid in annual instalments over 10 years — useful if the estate is illiquid.
Key Takeaways
- IHT is charged at 40% on estates above £325,000 (£500,000 if passing home to children)
- Married couples can pass on £1 million tax-free using combined NRB + RNRB
- The nil-rate band has been frozen since 2009 — fiscal drag brings more estates into scope each year
- Gifts become IHT-free if you survive 7 years after making them
- Pensions are usually IHT-exempt — draw from other assets first and leave pensions to beneficiaries
- Life insurance in trust can cover the IHT bill without adding to your estate
- Leaving 10%+ to charity reduces IHT rate from 40% to 36%
- ~7% of estates now pay IHT — up from 4% in 2015, largely due to frozen thresholds and rising house prices
Sources
- HM Revenue & Customs. “Income Tax Rates and Personal Allowances.” gov.uk/income-tax-rates
- Office for National Statistics. “UK Statistical Data and Analysis.” ons.gov.uk
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy