Inheritance Tax (IHT) is a tax charged on the estate of someone who has died. It is levied at 40% on the value of the estate above certain thresholds — and with property prices where they are, more estates than ever are crossing those thresholds.
Most people have a rough awareness of IHT but are unclear on the detail: what counts towards the threshold, which reliefs apply, how gifts made during your lifetime affect the calculation, and what role your Will plays in the outcome. This guide covers all of it in plain English.
IHT rules are set by central government and apply across England, Wales, Scotland, and Northern Ireland. This guide reflects the rules as at May 2026. IHT thresholds are subject to change in each Budget. Always take professional advice for your specific circumstances.
The Basic Threshold: The Nil-Rate Band
Every individual has a nil-rate band (NRB) — the amount of their estate that is free from IHT. Anything above this is taxed at 40%.
The nil-rate band has been frozen at £325,000 since 2009, and is currently frozen until at least April 2030. As house prices have risen, this freeze has brought increasing numbers of estates into the IHT net.
Transferring the nil-rate band between spouses
When one spouse or civil partner dies and leaves their entire estate to the other, their nil-rate band is not used. It is instead transferred to the surviving spouse, meaning the survivor's estate can pass up to £650,000 free of IHT — two nil-rate bands combined.
The Residence Nil-Rate Band
An additional allowance — the residence nil-rate band (RNRB) — is available when a home is left to direct descendants (children, stepchildren, or grandchildren).
The RNRB is currently £175,000 per person. Like the basic NRB, it can be transferred between spouses, potentially giving a combined residential nil-rate band of £350,000.
| Scenario | IHT-free threshold |
|---|---|
| Single person, no home to direct descendants | £325,000 |
| Single person, home passed to children | £500,000 |
| Surviving spouse, no home to direct descendants | £650,000 |
| Surviving spouse, home passed to children | £1,000,000 |
The residence nil-rate band is tapered away for estates worth more than £2 million — it reduces by £1 for every £2 over the threshold. For very large estates, the RNRB may be nil. This is a common planning consideration for wealthier families.
The Spouse and Civil Partner Exemption
Gifts between spouses and civil partners are entirely exempt from IHT, regardless of the value. This means assets can pass between spouses on first death without any IHT charge.
However, this does not eliminate IHT — it defers it. The IHT charge arises on the second death, when the combined estate passes to children or other beneficiaries. This is why the transferable nil-rate band and transferable RNRB matter so much for married couples.
The spouse exemption does not apply to unmarried couples, regardless of how long they have been together. Passing assets to an unmarried partner on death uses up nil-rate band or creates an IHT charge — which is one of the key reasons cohabiting couples should take specialist advice when making their Wills.
Gifts Made During Your Lifetime
Many people believe that giving assets away before death avoids IHT entirely. This is only partially true — HMRC has rules that can pull lifetime gifts back into your estate.
Potentially Exempt Transfers (PETs)
Most gifts made to individuals are Potentially Exempt Transfers. They become fully exempt from IHT if you survive for seven years after making the gift. If you die within seven years, the gift may be subject to IHT — though tapering relief reduces the charge if you survive between three and seven years.
Annual exemptions and small gifts
Certain gifts are always exempt, regardless of the seven-year rule:
- Annual exemption: you can give away up to £3,000 per year free of IHT (unused allowance can carry forward one year)
- Small gifts: gifts of up to £250 to any number of individuals per year
- Wedding gifts: up to £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Regular gifts from surplus income: regular gifts made from income (not capital) can be fully exempt if they don't affect your standard of living
- Gifts to charity: all gifts to qualifying UK charities are exempt
Business and Agricultural Reliefs
Two significant reliefs can reduce or eliminate IHT on certain assets.
Business Relief (BR)
Business Relief can reduce the value of qualifying business assets by 50% or 100% for IHT purposes. Qualifying assets include shares in an unlisted company, an interest in a business, and certain other business property. The asset must generally have been held for at least two years.
Agricultural Property Relief (APR)
Agricultural Property Relief reduces the agricultural value of qualifying farmland and buildings by 50% or 100%. The rules are complex and there are significant differences between owner-occupied and let land. APR applies only to the agricultural value of land — not any development or "hope" value above that.
From April 2026, the government has announced significant changes to APR and BR. Qualifying assets above £1 million will only attract 50% relief rather than 100%, effectively introducing IHT at 20% on the excess. Farmers and landowners with substantial estates should take urgent specialist advice.
The Charitable Legacy Reduction
If you leave 10% or more of your net estate to charity, the IHT rate on the remainder is reduced from 40% to 36%. For larger estates, the saving from the lower rate can be comparable to the cost of the charitable gift — effectively giving to charity at a substantial discount.
Example
If your estate is worth £800,000 and your nil-rate band is £325,000, the taxable estate is £475,000. At 40%, the IHT charge would be £190,000. If you leave 10% of the net estate (approximately £47,500) to charity, the remaining taxable estate falls and is taxed at 36% — the total IHT bill and the charitable gift combined may cost less than the IHT charge alone at 40%.
Specialist calculation is needed to find the optimal amount — your Will writer or solicitor can advise.
How Your Will Interacts with IHT Planning
A carefully drafted Will is one of the most effective IHT planning tools available. Key considerations include:
- Using nil-rate band trusts — directing assets into a discretionary trust on first death can preserve the nil-rate band for use on second death while keeping assets accessible for the surviving spouse
- Directing assets to direct descendants — to maximise use of the residence nil-rate band, your home should pass to children or grandchildren, not just to your spouse
- Charitable legacies — qualifying the estate for the 36% rate where the numbers work
- Life interest trusts — allowing a surviving spouse to benefit from assets during their lifetime while directing the ultimate gift to children, preserving RNRB eligibility
- Equalising estates — for couples where one partner holds most assets, lifetime transfers can ensure each partner's nil-rate band is fully used
IHT planning is one of the more complex areas of estate law, and mistakes can be costly. The planning strategies above are introductory summaries only. If your estate may be affected by IHT, speak with a qualified Will writer or solicitor who can review your full position and advise accordingly.
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