What Is Inheritance Tax in the UK?

What is inheritance tax?

Inheritance tax is a charge on the estate of someone who has died. HMRC applies it at 40% on the value above a tax-free threshold of £325,000.

Married couples and civil partners can combine allowances to pass on up to £1,000,000. Several reliefs and exemptions exist to reduce or remove the liability.

Your estate could face a 40% charge on everything above £325,000. HMRC froze that threshold in 2009, and property prices have roughly doubled since then.

More families now face an inheritance tax bill than at any point in the past two decades. The nil-rate band stays fixed while asset values climb.

Roughly 4% of UK deaths now trigger a charge, and that share is growing. Effective inheritance tax planning can make a significant difference to what your beneficiaries receive.

This guide covers the rules for rates, thresholds, gifts, trusts, and business relief. It explains who pays inheritance tax, how exemptions reduce the bill, and what changed from April 2026.

Every section focuses on a single area of inheritance tax. Read them in order for a complete picture, or skip to the topic you need.

If you are considering how to reduce inheritance tax on your estate, the planning section is a good starting point.

Inheritance Tax Rates and Thresholds

The standard inheritance tax rate is 40%. It applies only to the value above the nil-rate band, currently £325,000 for 2025/26.

HMRC has frozen this threshold until at least April 2030. A lower rate of 36% applies when you leave 10% or more of your net estate to charity.

This is sometimes called the inheritance tax charity 36% rule. It can save thousands of pounds on larger estates.

The residence nil-rate band adds £175,000 per person for 2025/26. It applies when you pass your main home to direct descendants.

Combined with the nil-rate band, a single person may shield up to £500,000. The inheritance tax spouse exemption means assets passing between spouses are fully exempt.

Married couples can transfer unused allowances to the survivor. A couple leaving their home to children can protect up to £1,000,000.

The residence nil-rate band tapers by £1 for every £2 above £2,000,000 estate value. For a single person, it disappears entirely at £2,350,000.

Full threshold details are on the GOV.UK inheritance tax overview page.

Who Pays IHT on an Estate

Inheritance tax on death is normally paid by the executor named in the deceased’s last wishes. If no executor exists, the administrator takes responsibility.

Payment usually comes from the estate’s own funds. Most families use the Direct Payment Scheme to release money from bank accounts before probate.

Beneficiaries do not usually pay inheritance tax on what they receive. They may face income tax on assets that generate ongoing income from an inherited property.

Inheritance tax on property you inherit does not apply at the point you receive it. The estate settles the liability before distribution.

Capital gains tax may apply later if you sell above the probate value. Understanding both taxes helps you plan effectively.

You can find more detail on the inheritance tax threshold page.

Inheritance Tax on Gifts and the 7-Year Rule

The inheritance tax 7 year rule is one of the most discussed reliefs. It means that gifts you make during your lifetime become exempt if you survive seven years after giving them.

Inheritance tax on gifts applies when you give something away and die within that period. A gift survived by seven years is known as a potentially exempt transfer.

Your inheritance tax annual exemption £3,000 lets you give away up to £3,000 each tax year free of tax. You can carry one unused year forward for a maximum of £6,000.

Inheritance tax wedding gifts have their own separate limits. You can give £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else on their marriage.

Normal expenditure out of income IHT is another valuable exemption. Regular gifts from surplus income, rather than capital, fall outside the estate entirely.

You must demonstrate a pattern of giving. The gifts must not reduce your standard of living.

What is classed as a gift for inheritance tax? Gifts include money, property, possessions, and any loss when you sell below market price.

The estate records all inheritance tax gifts made within seven years before death. Rules on IHT and gifts require accurate records of dates, recipients, and values.

Inheritance tax taper relief reduces the tax on gifts made three to seven years before death. Taper rates for the IHT rate 40% charge are:

• Three to four years: 32% effective rate.
• Four to five years: 24% effective rate.
• Five to six years: 16% effective rate.
• Six to seven years: 8% effective rate.

Taper relief applies only where total gifts exceed the £325,000 nil-rate band. It reduces the tax rate, not the value of the gift.

How to Reduce Inheritance Tax Legally

Inheritance tax planning uses reliefs and exemptions to lower the charge on your estate. Knowing which reliefs are available is the first step.

Understanding how to reduce inheritance tax starts with your own circumstances. Each route suits different estate sizes and family situations.

You can avoid inheritance tax legally through several routes. The main options are:

• Leaving assets to a spouse or civil partner under the inheritance tax spouse exemption.
• Making gifts within the £3,000 annual exemption or as normal expenditure out of income.
• Setting up an inheritance tax trust to hold assets outside your estate.
• Placing a life insurance policy in trust to cover future IHT liability without increasing your estate’s value.
• Paying into a pension, which sits outside your estate for IHT purposes until April 2027.

An inheritance tax trust removes assets from your estate once the transfer is complete. The trust takes ownership, and the value is excluded from IHT on your death.

Inheritance tax life insurance in trust is another option. A policy held in trust pays out directly to beneficiaries without increasing your estate.

For a broader view, read the capital gains tax guide for related planning considerations.

Charitable giving is another effective strategy. Leaving 10% of your net estate to charity lowers the IHT rate from 40% to 36%.

Inheritance Tax Business Relief for 2026

Business property relief reduces or removes the inheritance tax charge on qualifying business assets. Before April 2026, 100% relief applied to most trading businesses with no upper limit.

From April 2026, the rules changed. Inheritance tax business relief now operates under a £2,500,000 cap per individual.

The first £2,500,000 of combined qualifying assets receives 100% relief. Anything above receives 50% relief, giving an effective IHT rate of 20%.

Agricultural property relief inheritance tax follows the same cap. APR and BPR allowances are combined under a single £2,500,000 limit.

Inheritance tax AIM shares also changed from April 2026. Shares on the Alternative Investment Market now receive 50% relief only.

Married couples can transfer unused allowance between them. A couple could shelter up to £5,000,000 of qualifying business or agricultural property.

The executor claims relief by completing the IHT form IHT400 and schedule IHT413. Inheritance tax business property relief 2026 rules also allow interest-free instalments over ten years.

Full details are set out on the HMRC business relief for inheritance tax page.

IHT Exemptions You Can Use

The inheritance tax exemptions UK framework includes several reliefs beyond those above. Knowing which apply to your estate helps you reduce the bill.

Key exemptions include:

• Spouse and civil partner exemption: transfers between partners are fully exempt, with no upper limit.
• Charity exemption: gifts to qualifying charities are exempt and can reduce the rate to 36%.
• Annual exemption: £3,000 per tax year, with one year carry-forward.
• Small gifts exemption: up to £250 per recipient per year, to any number of people.
• Normal expenditure out of income: regular gifts from surplus income, exempt with no cap if conditions are met.

These exemptions apply across the inheritance tax UK framework for gifts made during your lifetime or through your last wishes.

An IHT adviser can review your circumstances and identify which reliefs produce the lowest liability. Professional inheritance tax planning is valuable for estates near the nil-rate band.

You can explore planning options through specialist IHT advice services.

Your Next Step for Inheritance Tax

Inheritance tax affects a growing number of UK estates each year. Frozen thresholds mean rising property values are pulling more families into the IHT net.

Every relief, threshold, and deadline in this guide gives you a clear starting point. Review your own estate against the current nil-rate band and residence nil-rate band.

If your estate approaches £325,000 as an individual or £1,000,000 as a couple, professional advice could save your beneficiaries money. Early planning gives you time to use exemptions, establish trusts, and make potentially exempt transfers.

An IHT adviser can help you identify the reliefs that apply to your situation.

Key Takeaways

The main points from this guide are:

• Inheritance tax is charged at 40% on the value above £325,000 for 2025/26, and thresholds stay frozen until at least April 2030.
• Married couples and civil partners can combine nil-rate bands and residence nil-rate bands to protect up to £1,000,000.
• Gifts become exempt under the 7-year rule if you survive seven years. Taper relief reduces the charge for gifts made three to seven years before death.
• From April 2026, business property relief and agricultural property relief are capped at £2,500,000 per person for 100% relief.
• The £3,000 annual exemption, wedding gift limits, and normal expenditure out of income are immediate ways to lower your estate.

Check each date-specific figure against GOV.UK before making financial decisions.

Common Inheritance Tax Questions

Here are some quick answers to commonly asked questions about IHT.

Do I have to pay inheritance tax while I am still alive?

Inheritance tax is charged on your estate after death, not during your lifetime. You do not receive a personal bill for IHT.

The executor or administrator settles the charge from your assets before distributing them to beneficiaries.

What happens if I give away my house but continue to live in it?

HMRC treats this as a gift with reservation of benefit. The property remains part of your estate for IHT purposes.

To remove it from your estate, you must either move out or pay full market rent to the new owner.

Does inheritance tax apply to jointly owned property?

It depends on how the property is owned. Joint tenants each own the whole property, so the deceased’s share passes automatically to the surviving owner.

Tenants in common each own a defined share. That share forms part of the deceased’s estate and may be subject to IHT.

Can I reduce inheritance tax by putting money into a pension?

Currently, pensions sit outside your estate for IHT purposes. Paying into a pension rather than holding savings in taxable accounts can lower your estate’s value.

From April 2027, inherited pension pots are expected to fall within IHT scope. This strategy may become less effective after that date.

When do I need to file inheritance tax forms with HMRC?

The executor must submit form IHT400 before applying for probate. Payment is due six months after the end of the month in which the person died.

Late payment attracts interest. Instalment payments over ten years may be available for property or qualifying business assets.