Inheritance Tax UK 2026: Thresholds, Nil-Rate Band & How to Plan

Inheritance tax is one of the UK's most misunderstood taxes — widely feared, often overpaid, and almost entirely avoidable with the right planning. This guide covers everything: what IHT is, the current thresholds for 2025/26, who actually pays it, how to calculate your potential liability, and six legitimate strategies to reduce the bill your family might face.

The short version: HMRC collected £7.5 billion in inheritance tax in 2023/24. Much of that was paid by families who either had no will, had an outdated will, or had simply never done the maths. None of it needed to be paid.

What is Inheritance Tax?

Inheritance tax (IHT) is a tax on the estate of a person who has died — their property, savings, investments, and personal possessions, minus any debts. It is paid by the estate before assets are distributed to beneficiaries. In practice, the executors of the will arrange payment, typically funded from liquid estate assets or a bank loan against the estate.

IHT is not a tax on the beneficiary's income. It's not capital gains tax. It's not estate duty by another name, though it shares some features. It's a one-time charge on the transfer of wealth at death, applied at a flat rate of 40% on anything above the threshold.

Two things make IHT unusual compared to most UK taxes:

• It only applies to the portion above the threshold — not the whole estate. An estate worth £500,000 with a £325,000 threshold pays IHT on £175,000, not £500,000.
• The thresholds have been frozen since 2009 (the nil-rate band) and since 2017 (the residence nil-rate band). Frozen thresholds combined with rising property prices mean more estates are being dragged into the IHT net every year.

IHT Thresholds for the 2025/26 Tax Year

There are two main allowances that determine how much of your estate is free from IHT.

The Nil-Rate Band (NRB): £325,000

The nil-rate band is the standard IHT threshold — the amount every individual can pass on free of tax. It has been fixed at £325,000 since April 2009 and is frozen until at least April 2030 under current government policy.

If your estate is worth less than £325,000, there is no IHT liability. If it's worth more, IHT applies at 40% on the excess.

The Residence Nil-Rate Band (RNRB): £175,000

The residence nil-rate band is an additional allowance introduced in April 2017, specifically for people who leave their home (or a share of it) to direct descendants — children, grandchildren, or stepchildren. It is currently £175,000 per person and is also frozen until April 2030.

The RNRB has conditions:

• The property must be a qualifying residential interest — a home you have lived in at some point, not a buy-to-let investment property you have never occupied.
• It must pass to direct descendants — children, grandchildren, stepchildren, foster children, or children adopted by you. Nieces and nephews do not qualify. Neither do your siblings.
• The RNRB is tapered away for large estates: it reduces by £1 for every £2 that the net estate exceeds £2 million. At £2,350,000, the RNRB is fully eliminated.

Combined Threshold: Up to £500,000 per Person

Add the NRB and RNRB together: £325,000 + £175,000 = £500,000 per person. If you're passing a qualifying property to your children and your estate is under £500,000, there should be no IHT at all.

The Transferable Allowance for Married Couples: Up to £1,000,000

When a spouse or civil partner dies, any unused nil-rate band and residence nil-rate band transfers to the survivor. If the first to die leaves everything to their spouse (which uses no NRB, because spousal transfers are fully exempt from IHT), 100% of their NRB transfers.

The result: a married couple or civil partnership with a qualifying property can pass up to £1,000,000 to their children free of IHT:

Allowance	Per Person	Combined (Couple)
Nil-Rate Band	£325,000	£650,000
Residence Nil-Rate Band	£175,000	£350,000
Total	£500,000	£1,000,000

Who Pays Inheritance Tax and When?

Only estates above the applicable threshold pay IHT. According to HMRC data, around 4–5% of UK deaths result in an IHT liability — not the majority, despite widespread anxiety about it. But that proportion is rising as frozen thresholds fail to keep pace with property values.

The estates most likely to have an IHT liability share some common features:

• Property in London, the South East, or other high-value areas
• Accumulated savings and investments above average
• Life insurance policies written into the estate (rather than held in trust)
• No will — meaning the spousal exemption and transferable allowances may not have been properly used
• No lifetime gifting strategy

When is IHT paid? IHT must be paid within six months of the end of the month in which the deceased died. Interest accrues after that. In practice, executors usually apply for probate first (which requires an IHT account if the estate is taxable), pay the tax, then distribute the estate. The process takes six to twelve months for most straightforward estates.

Property-related IHT can be paid in ten annual instalments, which provides some relief when cash isn't readily available but the estate holds significant property value.

Six Ways to Reduce Your IHT Bill

IHT planning is legal, well-established, and widely used. The following strategies are not loopholes — they're features of the tax system that Parliament has deliberately included to encourage certain behaviours.

1. Use the Annual Gift Exemption

Each year, you can give away up to £3,000 free of IHT (the annual exemption). If you didn't use last year's allowance, you can carry it forward once, giving you £6,000 in a single year. For a couple, that's £12,000 per year leaving the estate tax-free.

Additional small gift exemptions: you can give up to £250 to any number of individuals (not the same people using the £3,000 exemption). Wedding gifts are also exempt: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else.

2. Make Potentially Exempt Transfers (PETs)

Any gift to an individual becomes completely exempt from IHT if you survive seven years after making it. These are called potentially exempt transfers. The value is removed from your estate entirely if you live seven years from the date of the gift.

If you die within seven years, IHT may apply — but it tapers down: gifts made 3–4 years before death attract 80% of the full IHT charge, 4–5 years is 60%, and so on. Any gift made more than seven years before death: zero IHT.

3. Use Trusts

Assets held in a trust are generally not part of your estate for IHT purposes — they belong to the trust, not to you personally. The most common trust used in IHT planning is a discretionary trust, which gives trustees flexibility over who benefits and when.

Trusts are more complex to set up and administer than simple gifts. They're usually worth considering for larger estates, for estates where direct gifts aren't appropriate (vulnerable beneficiaries, young children), or for business succession planning. Get professional advice before establishing a trust.

4. Give to Charity

Charitable gifts are completely exempt from IHT. More usefully, if you leave at least 10% of your net estate to charity, the IHT rate on the rest of your taxable estate drops from 40% to 36%. On a large estate, that 4% reduction can outweigh the value of the charitable gift — making strategic charitable giving both personally meaningful and financially efficient.

5. Write Life Insurance Into Trust

Many people hold life insurance policies designed to cover an IHT liability — but if the payout goes into the estate, it inflates the very estate you're trying to reduce. The solution: write the policy into an appropriate trust. The payout then falls outside your estate entirely and can be used to meet the IHT bill without adding to it.

Writing an existing policy into trust is usually straightforward (the insurer provides the documentation) and costs nothing. If you have life insurance and haven't done this, it's one of the easiest planning steps available.

6. Business and Agricultural Relief

If you own a qualifying business or agricultural property, Business Relief (BR) and Agricultural Relief (AR) can reduce the value of those assets for IHT purposes — by 50% or 100% depending on the type of asset. A trading business in which you have an ownership stake may qualify for 100% BR, effectively removing it from your IHT calculation entirely.

This is a specialist area with detailed qualifying conditions. If business or agricultural assets are a significant part of your estate, get specialist advice — the relief can be very substantial.

The Role of a Will in IHT Planning

A will is the foundation of any IHT plan. Without one, the best-designed IHT strategies fall apart in execution.

Three specific ways a well-drafted will affects your IHT position:

Spousal exemption. Assets passing to a spouse or civil partner are completely exempt from IHT. But this exemption only applies on death if a valid will directs the estate to the surviving spouse. Under intestacy, assets may be divided between the spouse and children in ways that create an immediate IHT liability — before the estate has had any chance to use the transferable nil-rate band.

Residence nil-rate band. The RNRB only applies if the qualifying residential interest passes to a direct descendant. A will can ensure this happens explicitly — naming children as the ultimate beneficiaries and structuring the trust provisions correctly. Without a will, intestacy rules may distribute the property in a way that fails to trigger the RNRB, losing up to £350,000 of available threshold for a couple.

Charitable legacy. If you want to use the 36% reduced IHT rate by leaving 10% to charity, that requires a valid will. You can't make a charitable bequest under intestacy.

The interaction between wills and IHT planning is the main reason that IHT is not just a "wealthy people's problem." A couple with a £700,000 house, modest savings, and no will could easily face a six-figure IHT bill that a well-drafted will and basic planning would have eliminated entirely.

If you haven't done the maths, start with our free IHT Estimator. It takes two minutes and shows you your potential liability based on your estate, your allowances, and your circumstances. From there, the Will Readiness Assessment will tell you exactly what planning steps you need.

Common IHT Mistakes (And How to Avoid Them)

Assuming your estate is too small. If you own property in the UK, run the numbers before assuming you're below the threshold. A £350,000 house plus £100,000 in savings is a £450,000 estate — above the individual threshold and potentially subject to IHT if you're not married or your RNRB doesn't apply.

Forgetting pension death benefits. Defined contribution pension pots are currently outside your estate for IHT purposes (though this is under review). If you have a significant pension, factor this into your planning — and ensure you have an up-to-date expression of wishes with your pension provider.

Not using the annual exemption. £3,000 per year sounds modest, but a couple using the full annual exemption for 20 years removes £120,000 from their combined estates. At 40%, that's a potential £48,000 IHT saving — from doing nothing more complex than giving cash to children or grandchildren annually.

Leaving life insurance in the estate. As above: write it into trust. This is free, takes 20 minutes, and can save your beneficiaries tens of thousands.

Not having a will. The most common and most costly mistake. Everything else in IHT planning depends on a valid, up-to-date will that reflects your current estate and intentions.

If you're ready to draft your will — or update an existing one — start here for England and Wales. The process takes about 30 minutes and your will is generated immediately.