Inheritance tax in the UK is charged at 40% on the part of an estate above the available tax-free thresholds — but most estates pay nothing at all. Every person has a nil rate band of £325,000, plus a residence nil rate band of up to £175,000 when a home passes to direct descendants. Lifetime gifts can also fall outside the tax net if you survive seven years. Figures are current for 2026/27.
What Is Inheritance Tax?
Inheritance tax (IHT) is a tax on the estate of someone who has died — their property, money, savings, investments and possessions, minus their debts. It is charged at 40% only on the value above the available thresholds, not on the whole estate. The tax is normally paid by the executors out of the estate before it is distributed, usually within six months of the death.
The Nil Rate Band: £325,000
Every individual has a nil rate band of £325,000. The first £325,000 of an estate passes free of IHT, and only the amount above it is taxed. The band has been frozen at £325,000 since 2009 and is currently frozen until 5 April 2031. Because the threshold does not rise with inflation or house prices, more estates are drawn into IHT each year as property values grow. Any unused nil rate band can transfer to a surviving spouse or civil partner — see the section on couples below.
The Residence Nil Rate Band: Up to £175,000
The residence nil rate band adds up to £175,000 of extra tax-free allowance, but only when two conditions are met: the estate includes a home the deceased lived in, and that home passes to direct descendants — children, stepchildren, adopted children, foster children or grandchildren. The allowance is capped at the value of the home itself. Combined with the standard nil rate band, a single person leaving a home to their children can pass up to £500,000 free of IHT. The band is tapered away for larger estates: it falls by £1 for every £2 the estate exceeds £2 million, and disappears entirely at £2.35 million.
Worked Example: How Much Inheritance Tax on a £700,000 Estate?
Example: a single person dies leaving an estate worth £700,000, including a home worth £350,000 that passes to their children. Their allowances are £325,000 plus £175,000 — the home is worth more than £175,000, so the full residence band applies. Combined thresholds: £500,000. Taxable estate: £700,000 − £500,000 = £200,000. IHT at 40%: £80,000. The executors pay £80,000 from the estate; £620,000 passes to the beneficiaries.
Inheritance Tax for Married Couples and Civil Partners: Up to £1 Million
Assets passing to a surviving spouse or civil partner are normally exempt from IHT, so no tax is due on the first death. Any unused nil rate band and residence nil rate band can then transfer to the survivor’s estate. That means a married couple can potentially pass up to £1 million tax-free: two nil rate bands of £325,000 (£650,000) plus two residence nil rate bands of £175,000 (£350,000), provided the home passes to direct descendants. A detailed look at how the allowances transfer is set out in this guide to inheritance tax when the second parent dies.
The 7-Year Rule: How Inheritance Tax Treats Lifetime Gifts
Most gifts between individuals are potentially exempt transfers (PETs). A gift is fully exempt from IHT if the donor survives seven years after making it. If the donor dies within seven years, the gift is added back into the estate calculation and can use up the nil rate band first. Taper relief reduces the tax on the gift itself — not the gift’s value — when the donor survives at least three years:
- Death within 3 years: 40% (no reduction)
- 3–4 years: 32%
- 4–5 years: 24%
- 5–6 years: 16%
- 6–7 years: 8%
- After 7 years: 0% — fully exempt
Taper relief only helps where tax is actually due on the gift. One trap is a gift with reservation of benefit: if you give away your home but keep living in it rent-free, HMRC treats it as still part of your estate. More detail is in this guide to taxes on gifted money.
Gifts That Are Exempt from Inheritance Tax
Not every gift is subject to the 7-year rule. The annual exemption lets each person give away up to £3,000 per tax year free of IHT, with one year’s carry-forward — up to £6,000 in a single year. Small gifts of up to £250 per person per year are also exempt, as are wedding gifts: up to £5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else.
Gifts to a spouse or civil partner are completely exempt with no limit and no 7-year rule, and gifts to registered charities are exempt too — leaving at least 10% of the net estate to charity reduces the IHT rate on the rest from 40% to 36%. Keep a record of every significant gift for your executors.
Changes Coming: Pensions and Property Reliefs
Two changes are worth knowing about. From 6 April 2027, most unused pension funds and death benefits are due to be brought within the IHT net under reforms announced by the government — pensions can no longer be assumed to sit outside IHT, so anyone with substantial pension savings should review their estate plan before then. Our guide to pension contributions through a limited company explains how pension saving works for company directors today. Reliefs for agricultural and business property were also reformed from April 2026, capping the amount that qualifies for 100% relief.
How and When Is Inheritance Tax Paid?
IHT is normally due by the end of the sixth month after the person died — for example, if someone dies in January, the tax is due by 31 July. Executors must value the estate, review seven years of gifts, claim the allowances and file an IHT account (form IHT400) with HMRC where required. Tax on property and some business assets can be paid in instalments over up to 10 years; most other tax is due before probate. Interest runs on late payment, so executors should act early. Executors may also need to deal with the deceased’s final tax affairs — our guide to Self Assessment deadlines and penalties sets out the dates that apply.
Practical Steps to Plan Ahead
- Write or update your will so the home passes to direct descendants.
- Start gifting early — the 7-year clock rewards gifts made sooner rather than later.
- Use the £3,000 annual exemption every year, and keep a written record of gifts.
- Take professional advice before using trusts — they have their own IHT rules, including 10-year anniversary charges.
Frequently Asked Questions
Do I pay inheritance tax if the estate is under £325,000?
No. If the estate is within the nil rate band (plus any residence nil rate band that applies), no IHT is due — though executors may still need to report the estate to HMRC.
Does inheritance tax apply to gifts made more than seven years before death?
No. A gift made more than seven years before death is fully exempt, provided it was a genuine gift and the donor kept no benefit from it — for example, living rent-free in a gifted home.
Can I give my house to my children to avoid IHT?
Only if you genuinely give it up. If you gift your home but keep living there without paying full market rent, HMRC treats it as still part of your estate.
What is the inheritance tax rate if I leave money to charity?
The standard rate is 40%. If at least 10% of the net estate is left to charity, the rate on the rest of the estate falls to 36% — and gifts to charities are themselves exempt.
If you are planning your estate, reviewing gifts, or acting as an executor working out an IHT bill, we can help you value the estate, claim the allowances and file the returns. See our services or contact us — email info@financialaccountingfirm.co.uk.
This article is general information, not personal tax or financial advice.
