Inheritance Tax is the tax most people worry about but understand least. It only touches estates above a set of tax-free thresholds, yet the 40% headline rate, the freeze on those thresholds until 2031 and a web of exemptions mean that ordinary families, not just the very wealthy, increasingly get caught. The good news is that most Inheritance Tax is avoidable with planning done early enough.
This guide explains, in plain English, exactly how UK Inheritance Tax works in 2026/27: who pays it, the thresholds, a worked example of a real bill, and the legitimate ways to reduce or remove it. Every figure is checked against gov.uk so you can act on it with confidence, and we flag where a decision is big enough to be worth professional advice.
What is Inheritance Tax and who pays it?
Inheritance Tax (IHT) is a 40% tax on the part of a deceased person's estate, their property, money and possessions, that sits above the available tax-free thresholds. It is paid by the estate itself, not by the individuals who inherit, and it is reported and settled by the executors or administrators before the estate is distributed.
There is normally no Inheritance Tax to pay at all if the estate is worth less than the £325,000 threshold, or if everything above that threshold is left to a spouse, civil partner, a charity or a community amateur sports club. The standard rate of 40% applies only to the value above the available allowances, and per GOV.UK a reduced rate of 36% applies where 10% or more of the net estate is left to charity. Inheritance Tax sits alongside the other tax that can arise on death or on lifetime gifts, Capital Gains Tax, which our complete guide to Capital Gains Tax covers in full.
What are the Inheritance Tax thresholds for 2026/27?
For 2026/27 the nil-rate band is £325,000 per person and the residence nil-rate band is a further £175,000 where a home is left to direct descendants. Both are frozen until 5 April 2031. Because unused allowances pass to a surviving spouse or civil partner, a married couple can pass on up to £1,000,000 before any Inheritance Tax is due.
| Allowance | 2026/27 amount | Key condition |
|---|---|---|
| Nil-rate band | £325,000 per person | Available to every estate; frozen to 5 April 2031 |
| Residence nil-rate band | £175,000 per person | Only where a home passes to children, grandchildren or other direct descendants |
| Transferable allowances | Up to £1,000,000 for a couple | Unused bands pass to a surviving spouse or civil partner |
| Taper threshold | £2,000,000 | The residence band is reduced by £1 for every £2 the estate exceeds £2m |
The residence nil-rate band is the one most people miss. It is only available when a qualifying home passes to direct descendants, and it tapers away once the estate is worth more than £2,000,000, confirmed on GOV.UK. A large estate can therefore lose the £175,000 band entirely, which is one reason estate planning matters above the £2m mark.
How much Inheritance Tax will you actually pay?
The quickest way to see Inheritance Tax in action is a worked example. Take a single person who dies owning a home and savings worth £900,000 in total, leaving the house to their children. They have a £325,000 nil-rate band plus a £175,000 residence nil-rate band, so £500,000 passes tax-free and 40% is charged on the remaining £400,000.
| Step | Single person | Married couple (combined) |
|---|---|---|
| Estate value | £900,000 | £900,000 |
| Nil-rate band | £325,000 | £650,000 |
| Residence nil-rate band | £175,000 | £350,000 |
| Total tax-free | £500,000 | £1,000,000 |
| Taxable at 40% | £400,000 | £0 |
| Inheritance Tax due | £160,000 | £0 |
The same £900,000 estate produces a £160,000 bill for a single person but nothing for a married couple who leave everything first to each other and then to their children, because the couple combines two sets of allowances. That single difference, worth £160,000 here, is why the order in which assets pass and whether allowances are used is the heart of Inheritance Tax planning.
How can you legally reduce Inheritance Tax?
You can reduce or remove an Inheritance Tax bill through exemptions and reliefs that are written into the rules: leaving assets to a spouse, using annual gift allowances, surviving gifts by seven years, claiming Business or Agricultural Relief, and giving to charity. None of these is a loophole; they are the planning levers HMRC expects families to use, and the earlier you start the more they are worth.
Leave assets to a spouse or civil partner
Anything you leave to a UK-domiciled spouse or civil partner is completely exempt from Inheritance Tax, with no upper limit, and their estate also inherits any nil-rate band you did not use. This is the single biggest lever for most couples and is why the worked example above falls to zero. Lifetime transfers between spouses are equally free of tax, a point our guide to gifts between spouses and the CGT and IHT rules works through in detail.
Use your gift allowances every year
Several gifts are exempt straight away. You can give away £3,000 in total each tax year under the annual exemption (and carry one unused year forward), make small gifts of up to £250 per person to any number of people, and give regular gifts out of surplus income without limit, provided they do not reduce your standard of living. Wedding gifts are also exempt up to set limits. The full detail is on GOV.UK, and our guide to the annual gift exemption and how much you can give tax-free shows how to stack these each year.
Understand the seven-year rule and taper relief
Larger gifts that are not otherwise exempt are potentially exempt transfers: survive seven years from the date of the gift and they fall out of your estate entirely. Die within seven years and the gift uses up your nil-rate band first, with any tax above it reduced by taper relief on a sliding scale. Taper reduces the tax, not the value of the gift, and only bites once gifts exceed the £325,000 threshold.
| Years between gift and death | Tax charged on the gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
You can check the position on any gift using the HMRC tool to work out Inheritance Tax due on gifts. The practical message is simple: significant gifting works best when done early, because the seven-year clock only helps those who start it in good time.
Claim Business Relief and Agricultural Relief
Qualifying business and agricultural assets attract Business Relief or Agricultural Relief, which can take their value out of the Inheritance Tax calculation. From 6 April 2026 the 100% rate of relief is capped at a combined £2,500,000 of qualifying business and agricultural property per person, up from £1,000,000, with 50% relief on qualifying assets above that level. As the allowance is transferable between spouses, a surviving spouse can pass on up to £5,000,000 of qualifying assets at the 100% rate, confirmed in the GOV.UK announcement that the relief threshold rises to £2.5m for farmers and businesses. Owner-managed company shares are exactly the kind of asset this relief is designed for, so family business owners should take advice before assuming the whole estate is covered.
Give 10% to charity and cut the rate to 36%
If you leave at least 10% of the net value of your estate to charity in your will, the Inheritance Tax rate on the rest of the estate drops from 40% to 36%. For larger estates this can mean the charity is funded substantially by the tax that would otherwise have gone to HMRC, so the cost to the family of giving is far smaller than the headline gift suggests.
When and how is Inheritance Tax paid?
Inheritance Tax must be paid by the end of the sixth month after the person died, and interest runs on anything paid late. The executors report the estate to HMRC, usually on form IHT400, obtain a reference number, and in many cases have to pay the tax before they can get the grant of probate that releases the estate's assets, which can create a short-term funding problem.
Tax on a house or other land can be spread over ten annual instalments, and banks will often release funds directly to HMRC under the Direct Payment Scheme to help executors over the probate hurdle. Because these mechanics are time-pressured and the figures are large, most families use an accountant or solicitor to prepare the return; our tax advisory service helps clients plan ahead so the estate is not a scramble, and you can book a free call to talk it through.
Frequently asked questions
How much can you inherit tax free in the UK?
An individual can pass on £325,000 free of Inheritance Tax, rising to £500,000 where a home is left to direct descendants and the £175,000 residence nil-rate band applies. Because unused allowances transfer to a surviving spouse or civil partner, a married couple can pass on up to £1,000,000 tax-free.
Do I have to pay Inheritance Tax on my parents' house?
Only if their whole estate, including the house, exceeds the available thresholds, and even then the tax is paid by the estate rather than by you. If the house passes to children or grandchildren, the £175,000 residence nil-rate band can be claimed on top of the £325,000 nil-rate band, so many family homes pass without a bill.
How does the seven-year rule work?
If you give away assets and survive for seven years from the date of the gift, they normally fall out of your estate completely and no Inheritance Tax is due. If you die within seven years, the gift counts against your nil-rate band first, and any tax on the excess is reduced by taper relief on a sliding scale from three years onward.
Can I avoid Inheritance Tax by giving money away?
Gifting is one of the most effective ways to reduce Inheritance Tax, but timing matters. Exempt gifts such as the £3,000 annual allowance and regular gifts out of surplus income work immediately, while larger gifts only leave your estate fully after seven years. Giving away assets you still benefit from, such as a home you continue to live in, does not work.
Is there Inheritance Tax between husband and wife?
No. Transfers between UK-domiciled spouses and civil partners are completely exempt from Inheritance Tax, both during life and on death, with no upper limit. The surviving partner also inherits any unused nil-rate band, which is what allows a couple to pass on up to £1,000,000 to the next generation tax-free.
Plan your estate before it costs your family
Inheritance Tax rewards planning and punishes delay: the thresholds are frozen until 2031, the seven-year clock only helps those who start it, and the biggest savings come from using allowances in the right order. If your estate is near or above the thresholds, or you own a business or property, it is worth modelling the position now rather than leaving it to your executors. Zmartly is a CIMA-regulated firm and our qualified accountants can help you plan.
