Inheritance tax (IHT) used to be a problem for the wealthy. In 2026 it is a problem for ordinary homeowners. The £325,000 nil-rate band has not moved since April 2009 and is now frozen until April 2031. The £175,000 residence nil-rate band that helps pass the family home to children is frozen for the same period. House prices have doubled. From 6 April 2027 most defined-contribution pensions will also count toward your estate. HMRC collected a record £8.2 billion in IHT in 2024/25 — a 10.8% jump on the year before — and the Office for Budget Responsibility expects £8.7 billion in 2025/26. Around 31,500 estates paid IHT in the latest year of data, and the pension change alone is forecast to add roughly 10,500 more estates annually.
The good news: legal, well-trodden planning can cut the bill — often to zero — for families with estates up to about £1 million. This guide explains how the 2026 rules work, what changed in the November 2025 Autumn Budget, and the practical steps to take now.
How inheritance tax works in 2026
IHT is charged at 40% on the value of your estate above the available allowances when you die. The rate drops to 36% if you leave at least 10% of the net estate to a UK-registered charity. There are two main allowances every individual gets:
- Nil-rate band (NRB): £325,000. Applies to any assets, gifted to anyone.
- Residence nil-rate band (RNRB): £175,000. Only applies when a qualifying main home passes to direct descendants — children, stepchildren, adopted or foster children, grandchildren. Tapers by £1 for every £2 your estate exceeds £2 million and disappears entirely at £2.35 million.
Both allowances are transferable between spouses and civil partners. When the first partner dies leaving everything to the other, no IHT is due (unlimited spousal exemption) and the unused allowances pass across. That gives a married couple up to £1 million tax-free on the second death, provided the home is passed to direct descendants.
The 2026 thresholds at a glance
| Allowance / rate | Single person | Married couple / civil partners | Notes |
|---|---|---|---|
| Nil-rate band | £325,000 | £650,000 | Frozen to April 2031 |
| Residence nil-rate band | £175,000 | £350,000 | Home to direct descendants only; tapered above £2m estate |
| Total tax-free | £500,000 | £1,000,000 | If home left to children |
| Standard IHT rate | 40% | On excess above allowances | |
| Reduced charity rate | 36% | If 10%+ of baseline left to charity | |
| HMRC IHT receipts | £8.2bn (2024/25) | OBR forecast £8.7bn for 2025/26 | |
Three numbers do most of the work here: £325,000, £175,000 and 7 years. Everything else is detail.
The 7-year rule and lifetime gifts
You can give away assets during your lifetime to reduce your eventual estate. Most lifetime gifts are potentially exempt transfers (PETs). If you survive seven years from the date of the gift, it falls completely out of your estate. Die within seven years and it counts back in — eating your nil-rate band first.
Taper relief is widely misunderstood. It only reduces the IHT rate, and only on the portion of gifts that exceed your nil-rate band. For gifts within the NRB, taper relief does nothing — the gift simply uses up some of your £325,000.
| Years between gift and death | IHT rate on gifts above NRB |
|---|---|
| 0 – 3 years | 40% |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| 7+ years | 0% — fully exempt |
Gifts that never wait seven years
Several categories of gift are immediately exempt — no clock, no risk.
- Annual exemption £3,000. Per donor, per tax year. Unused allowance carries forward one year only, so you can give £6,000 in a single year if you skipped the previous one.
- Small gifts £250. To as many separate people as you like, provided no other allowance has been used on that recipient.
- Wedding gifts. £5,000 to your child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else.
- Gifts to your spouse or civil partner. Unlimited.
- Charity gifts. 100% exempt, and lifting your charitable giving to 10%+ of the baseline estate cuts your rate from 40% to 36%.
- Normal expenditure out of income. An overlooked but powerful exemption: regular gifts paid from surplus income (not capital) are immediately exempt with no cap. You must show they form a pattern and don’t lower your own standard of living. Executors claim this on form IHT403, but most never do — keep a running record of contributions to a child’s mortgage, grandchildren’s school fees or pension top-ups.
Pensions enter the IHT net from 6 April 2027
This is the single biggest change announced in the 2024 Autumn Budget and reconfirmed in November 2025. From 6 April 2027, most unused defined-contribution pension pots and lump-sum death benefits will form part of the deceased’s estate for IHT. Defined-benefit pensions are largely outside scope, and the spousal and charity exemptions still apply.
HMRC expects roughly 10,500 estates a year to be newly liable — about 1.5% of all deaths — out of approximately 213,000 estates with inheritable pension wealth. The 2025 Budget added a practical detail: personal representatives can now serve a withholding notice on the pension administrator, requiring them to hold back up to 50% of a death benefit for up to 15 months while IHT is settled.
If you have used a SIPP or workplace DC pension as a long-term IHT shelter, that strategy stops working in April 2027. Review your retirement income plan now — drawing down on the pension first and preserving ISAs or other capital may be the wrong sequence after 2027. Our SIPP guide and workplace pension guide cover the underlying mechanics.
Business and agricultural reliefs were cut on 6 April 2026
For decades, qualifying business and farm assets attracted 100% IHT relief without any cap. From 6 April 2026 that changed:
- First £1 million of combined business property relief (BPR) and agricultural property relief (APR) qualifying assets keep 100% relief.
- Above £1 million, relief drops to 50% — an effective IHT rate of 20% rather than 40%.
- AIM-listed shares previously qualified for 100% BPR; from 6 April 2026 they get 50%.
- The Autumn Budget 2025 confirmed the £1m allowance is now transferable between spouses and civil partners — giving a couple up to £2m of full relief if both die owning qualifying assets.
This is the change most likely to hit family farms and small-business owners. Specialist advice is essential before transferring shares or land in 2026.
Worked example: how the £1 million couple’s allowance works
The Patel family: married couple, total estate £900,000 including a £500,000 home, two adult children.
| Scenario | Allowances available | Taxable estate | IHT bill |
|---|---|---|---|
| Mr P dies first, leaves everything to Mrs P | Unlimited spousal exemption | £0 | £0 |
| Mrs P later dies, home to children | £325k × 2 + £175k × 2 = £1,000,000 | £0 | £0 |
| Compare: single person, £900k estate, home to children | £325k + £175k = £500,000 | £400,000 | £160,000 |
| Compare: married couple, will leaves home to nephew (no RNRB) | £325k × 2 = £650,000 | £250,000 | £100,000 |
The lesson: marriage or civil partnership, and a will that explicitly leaves the main residence to direct descendants, is the single biggest move available to most families. It’s also free.
Trusts: when they make sense and when they don’t
Trusts split legal ownership from beneficial use. They are powerful but tightly taxed, and the days of trusts as a casual IHT shelter are long gone.
- Bare trust. Beneficiary has an absolute right to capital and income. Treated as their property for tax. A gift into a bare trust is a PET — the 7-year rule applies. Often used for grandchildren’s savings or Junior ISA-style arrangements.
- Discretionary trust. Trustees decide who gets what and when. Treated under the relevant property regime: a 20% chargeable lifetime transfer on any value above the settlor’s nil-rate band, plus 6% periodic charges every 10 years on value above £325,000, plus exit charges when capital leaves.
- Interest in possession (IIP). A named life tenant has a right to the income. Qualifying IIPs (typically created on death or before 22 March 2006) sit inside the life tenant’s estate.
Trusts can be genuinely useful for blended families, for protecting capital from a vulnerable beneficiary, or for skipping a generation. They are rarely sensible just to avoid IHT — the compliance burden and 6% charge usually erode the saving.
The 2026 IHT planning playbook
For most UK families, IHT planning is not exotic. It is six well-known moves, used together:
- Write a will. Dying intestate forfeits the RNRB on assets that don’t pass under the intestacy rules to qualifying descendants. See our wills, power of attorney and probate guide.
- Use your annual gift allowances every year. £3,000 each, £6,000 if you missed last year. A couple gifting £6,000 a year for 20 years removes £120,000 plus growth from their joint estate.
- Start the 7-year clock on bigger gifts now. A £100,000 gift made at age 70 has a 50%+ chance of fully escaping IHT, based on UK life expectancy.
- Document normal expenditure out of income. If you regularly contribute to a grandchild’s Junior ISA, pay an adult child’s life insurance premiums, or top up someone’s pension out of surplus income, keep a record. Save the form IHT403 evidence.
- Review pension drawdown sequencing before April 2027. The IHT shelter that pensions provided ends; revisit which pots you draw first.
- Consider charitable giving. Leaving 10%+ of the net estate to charity cuts the rate on the rest from 40% to 36% — a meaningful saving on larger estates.
Specialist advice is essential where business assets, AIM portfolios, foreign property, multiple marriages or estates above £2 million are involved. The taper of the RNRB and the new BPR/APR cap are technical traps where small differences in structure produce six-figure differences in tax.
Common pitfalls that cost families six-figure bills
- Gift with reservation of benefit. Giving away the house but continuing to live in it rent-free. HMRC treats it as never having left your estate. Recover by paying full market rent, indexed every year. HMRC opened roughly 220 enquiries on GWROB in 2023/24, recovering £61 million.
- Joint bank accounts. HMRC looks at who paid the money in — not whose name is on the account. Funds withdrawn by the non-contributing party can be treated as gifts subject to the 7-year rule. Several reported cases have gone in HMRC’s favour even where the families intended otherwise.
- Forgetting the cumulation rule. Failed PETs eat the nil-rate band in chronological order. A large early gift can use up all £325,000, leaving the death estate fully exposed.
- Pre-Owned Asset Tax (POAT). A backstop income tax charge where you benefit from an asset you previously owned but where the GWROB rules don’t strictly bite.
- Missing the Deed of Variation window. Beneficiaries can redirect part of their inheritance to children or grandchildren within two years of death, and HMRC treats it as if the deceased made the gift. After 2 years, the option closes.
Frequently asked questions
How much can a married couple leave tax-free in 2026?
Up to £1 million, provided the main home is left to direct descendants. That is £325,000 nil-rate band plus £175,000 residence nil-rate band per person, both transferable on first death. Above an estate value of £2 million the RNRB tapers off, and is fully lost at £2.35 million.
Will pensions be subject to inheritance tax?
From 6 April 2027, most defined-contribution pension pots and lump-sum death benefits are pulled into the estate for IHT. Spousal and charity exemptions still apply. Defined-benefit (final salary) pensions are largely outside scope. HMRC expects about 10,500 estates a year to become newly liable.
Does taper relief reduce the value of a gift?
No — it only reduces the rate of IHT, and only on the slice of failed gifts that exceeds the £325,000 nil-rate band. A £200,000 gift made four years before death sits inside the NRB and gets no taper benefit at all; it simply uses up £200,000 of the £325,000 allowance.
Can I gift my house to my children to avoid IHT?
Only if you genuinely move out, or you pay your children full market rent at arm’s length and they declare the rental income. Living in the house rent-free triggers the gift-with-reservation rules and the property stays inside your estate. This is the most common DIY IHT mistake.
What is normal expenditure out of income?
Regular gifts paid from surplus income — not capital — are immediately exempt from IHT with no upper limit. You must show the gifts are part of an established pattern and don’t reduce your own standard of living. Executors claim the exemption on form IHT403. Examples include monthly contributions to a Junior ISA, paying a child’s mortgage instalments, or covering grandchildren’s school fees.
How much inheritance tax does the UK collect?
HMRC collected £8.2 billion in IHT in 2024/25 — a record, and the fourth consecutive year of record receipts. The Office for Budget Responsibility forecasts £8.7 billion for 2025/26. Around 31,500 estates paid IHT, or roughly 4.6% of all UK deaths.
When should I get professional advice?
Most families with estates below £1 million can plan effectively using a good will, the gift allowances and clean record-keeping. Get advice when the estate exceeds £1 million, when you own a trading business or farm, when you hold AIM-listed shares, when you have foreign assets or multiple marriages, or when you are considering trusts. A STEP-qualified solicitor or a Chartered Tax Adviser will pay for themselves on any estate of meaningful size.
Related guides on GetSmartSaver.Uk
- Wills, Power of Attorney & Probate UK 2026: The Complete Guide
- Inheritance Tax Changes April 2026: Why Life Insurance Matters More Than Ever
- SIPP Guide UK 2026: Best Self-Invested Personal Pension Providers
- Best Life Insurance UK 2026: Compare Policies and Find Affordable Cover
- Junior ISA UK 2026: How to Build a Tax-Free Nest Egg for Your Child
Last updated 30 May 2026. Figures verified against gov.uk, HMRC Inheritance Tax Liabilities Statistics, the OBR forecast, and the November 2025 Autumn Budget documents. This article is general information, not personal tax advice.