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.
Table of Contents
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
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
Transfers between spouses (married or civil partners) are completely exempt from IHT:
| 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
The RNRB is reduced by £1 for every £2 the estate exceeds £2 million:
| 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
| 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
Gifts become exempt from IHT if you survive 7 years after making them:
| 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
| 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
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?
| 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
| 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
