A Guide to Inheritance Tax
Written by Laura, Head of Legal at Octopus Legacy
Last updated: 27 March 2026
What is inheritance tax?
Inheritance tax (IHT) is a tax on the estate of someone who has died. It's charged at 40% on the value above a tax-free threshold. In the 2026/27 tax year, that threshold (called the nil-rate band) is £325,000.
The good news? Most families don't pay it. According to Money Saving Expert, only around 4% of estates are liable for inheritance tax. That's because a combination of allowances, exemptions, and reliefs means most estates fall below the threshold.
But if you're dealing with the estate of someone who has died, you still need to understand how IHT works. Even if no tax is due, you may need to report the estate's value to HMRC. This guide explains the current thresholds, what's changed for 2026/27, and how to work out whether inheritance tax applies.
Inheritance tax thresholds for 2026/27
Everyone has a basic nil-rate band (NRB) of £325,000. This is the amount that can be passed on free of inheritance tax. Anything above it is taxed at 40%.
There's also a residence nil-rate band (RNRB) of £175,000. This applies when a home (or a share of one) passes to direct descendants, which includes children, grandchildren, stepchildren, and foster children.
Both thresholds have been frozen since 2009 (for the NRB) and 2020 (for the RNRB). The government has confirmed they'll stay frozen until at least April 2030, with the current legislative default being that they'll increase in line with CPI from 2030 onwards. See GOV.UK for the full timeline.
Here's how the thresholds add up in 2026/27:
| Situation | Tax-free allowance |
|---|---|
| Single person, no property passing to direct descendants | £325,000 |
| Single person, property passes to direct descendants | £500,000 |
| Surviving spouse/civil partner, no property to direct descendants | Up to £650,000 |
| Surviving spouse/civil partner, property passes to direct descendants | Up to £1,000,000 |
The RNRB starts to taper away for estates worth more than £2 million. It reduces by £1 for every £2 over the £2 million threshold, which means it disappears entirely for estates worth £2.35 million or more (for a single person) or £2.7 million or more (when using a transferred RNRB).
Inheritance tax allowances and exemptions
Depending on who inherits and what type of assets are involved, there are several ways to reduce or eliminate the inheritance tax bill.
Spousal and civil partner exemption
Everything you leave to your UK-domiciled spouse or civil partner is exempt from inheritance tax. There's no upper limit. If one spouse dies and leaves everything to the other, no IHT is due at all on the first death.
What's more, any unused nil-rate band from the first spouse to die can be transferred to the surviving spouse's estate. This is called the transferable nil-rate band. If the first spouse used none of their allowance (because everything passed to the surviving spouse), the full £325,000 transfers across, effectively doubling the tax-free allowance to £650,000 on the second death. If only part of the first spouse's NRB was used, the unused percentage transfers.
The same principle applies to the residence nil-rate band. An unused RNRB from a predeceased spouse can be transferred, potentially adding another £175,000 to the surviving spouse's estate.
Important: Both the transferable NRB and transferable RNRB must be claimed within 24 months of the second death.
Charity exemption
Gifts to UK-registered charities are completely exempt from IHT. There's no limit. If you leave 10% or more of your net estate to charity, the IHT rate on the rest of the estate drops from 40% to 36%.
Annual exemptions and lifetime gifts
Everyone can give away £3,000 per tax year free of IHT (the annual exemption). You can also make small gifts of up to £250 per person per year to any number of people, and wedding gifts of up to £5,000 (from a parent), £2,500 (from a grandparent), or £1,000 (from anyone else).
Gifts made more than seven years before death are fully exempt. Gifts made between three and seven years before death are subject to taper relief, which reduces the IHT rate on a sliding scale:
| Years between gift and death | IHT rate on the gift |
|---|---|
| 0 to 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| More than 7 years | 0% |
Taper relief only applies where the total of gifts made in the seven years before death exceeds the nil-rate band. It reduces the tax on the gift, not the value of the gift itself.
Business Property Relief (BPR)
Business Property Relief reduces the value of business assets for IHT purposes. The rate depends on the type of asset: 100% relief for an interest in an unquoted business, or 50% for controlling shareholdings in a listed company or business assets like land or buildings used in the business.
What's changing from 6 April 2026: 100% BPR will only apply to the first £2.5 million of combined qualifying APR and BPR assets per individual (£5 million for couples who can transfer the allowance). Above that threshold, relief drops to 50%, meaning IHT is charged at an effective rate of 20% on the excess. Shares listed on AIM (the Alternative Investment Market) will qualify for 50% relief only, regardless of value, and won't count towards the £2.5 million allowance.
Agricultural Property Relief (APR)
Agricultural Property Relief works similarly to BPR but applies to agricultural property. It reduces the agricultural value of qualifying farmland, buildings, and farm cottages.
What's changing from 6 April 2026: The same £2.5 million combined cap applies. For farms worth more than £2.5 million in agricultural value, the excess will attract 50% relief instead of 100%. The government estimates that 85% of estates claiming APR in 2026/27 won't pay any more IHT as a result of these changes. But for larger farming estates, the impact could be significant.
Worked example: How inheritance tax is calculated
Understanding how IHT works in practice is easier with numbers. Here are two examples.
Example 1: A single person with no property going to children
David dies in 2026 with an estate worth £450,000. He's single, has no children, and leaves everything to his nieces and nephews.
His available allowance is the nil-rate band of £325,000. The RNRB doesn't apply because there's no property passing to direct descendants.
The IHT calculation: £450,000 minus £325,000 = £125,000 taxable at 40% = £50,000 inheritance tax due.
Example 2: A surviving spouse with a family home
Sarah dies in 2026. Her husband James died in 2021 and left everything to Sarah, using none of his nil-rate band or RNRB. Sarah's estate is worth £850,000, including the family home valued at £350,000. She leaves everything to her two children.
Sarah's available allowances are: her own NRB (£325,000) + transferred NRB from James (£325,000) + her own RNRB (£175,000) + transferred RNRB from James (£175,000) = £1,000,000 total.
The IHT calculation: £850,000 minus £1,000,000 = no taxable amount. No inheritance tax is due.
If Sarah's estate had been worth £1,200,000, the calculation would be: £1,200,000 minus £1,000,000 = £200,000 taxable at 40% = £80,000 inheritance tax due.
Example 3: The charity reduction
Tom dies with an estate worth £500,000. He's single with no RNRB available. His will leaves 10% of his net estate (£50,000) to charity and the rest to his friend.
Because he left at least 10% to charity, the IHT rate drops from 40% to 36%. The taxable amount is £500,000 minus £325,000 (NRB) minus £50,000 (charity exemption) = £125,000. At 36%, the IHT due is £45,000 instead of £50,000 at 40%.
Pensions and inheritance tax: what's changing in April 2027
Currently, unused pension funds are not included in your estate for IHT purposes. That changes from 6 April 2027.
From that date, most unused pension funds and pension death benefits will be brought into scope of inheritance tax. This means the value of any unspent pension pot will count towards the estate's total value when calculating IHT.
There are exceptions. Benefits paid to a surviving spouse or civil partner, or to a registered charity, will remain exempt. Death-in-service lump sum benefits paid from a registered pension scheme will also be excluded.
The practical impact is significant. HMRC estimates that around 10,500 estates that previously had no IHT liability will become liable, and around 38,500 estates will pay more IHT than before. The average increase in liability is expected to be around £34,000.
If you have a large pension pot, this is worth factoring into your estate planning now. Speak to a financial adviser about whether it makes sense to draw down more of your pension, adjust your beneficiary nominations, or make other changes before April 2027.
When do you need to pay inheritance tax?
You need to report the estate's value to HMRC and pay any IHT due if the person who died:
- Was single and their estate is worth more than £325,000 (with no property passing to direct descendants)
- Was single and their estate is worth more than £500,000 (with property passing to direct descendants)
- Was widowed and their estate is worth more than £650,000 (with no property passing to direct descendants)
- Was widowed and their estate is worth more than £1,000,000 (with property passing to direct descendants)
You can use the GOV.UK online tool to check if inheritance tax is due.
Deadlines
If there is IHT to pay, you should pay by the end of the sixth month after the person died to avoid interest. The full IHT account (form IHT400) must be submitted to HMRC within 12 months of the end of the month of death. Missing this deadline means penalties.
Important: You must send the IHT account to HMRC and pay at least the first instalment of any tax due before you can apply for probate. HMRC will send you a code that you'll need to complete your probate application.
For property and certain other assets, you can choose to pay IHT in annual instalments over 10 years, though interest is charged on the outstanding balance.
How to pay inheritance tax
The process works like this:
Step 1: Value the estate. Build a complete picture of everything the person who died owned, including property, savings, investments, personal possessions, and any gifts made in the seven years before death. You can find out more about this process in our guide to key steps before applying for probate.
Step 2: Check if you need to report. Use the GOV.UK estimator to check whether a full IHT account is needed.
Step 3: Get an IHT reference number. If IHT is due, request a reference from HMRC here. You'll need this to make the payment.
Step 4: Complete the IHT400. Fill in the IHT400 form and any supplementary pages that apply. This is the full inheritance tax account that tells HMRC about all the assets, debts, exemptions, and reliefs.
Step 5: Pay the tax. You can pay by bank transfer, cheque, or from the deceased's bank account (some banks will release funds for IHT payment before probate is granted). HMRC will then issue the code you need to apply for probate.
Do you always need to submit a full IHT account?
Not always. If the estate qualifies as an "excepted estate," you won't need to complete the full IHT400 form. For deaths on or after 1 January 2022, an estate is excepted if:
- The gross value (including non-exempt lifetime transfers) is at or below the available nil-rate band (£325,000 for a single person, £650,000 if there's a full transferable NRB)
- Foreign assets are worth less than £100,000
- Assets held in trust are below £250,000
- Non-exempt lifetime gifts total less than £250,000
An estate can also be excepted if it passes entirely to a spouse, civil partner, or charity and the total value is under £3 million.
You will need to file a full IHT400 if:
- The estate exceeds the available NRB and isn't fully exempt
- Non-exempt gifts in the seven years before death exceed £250,000
- The estate includes trust assets in which the deceased had an interest
- Foreign assets exceed £100,000
- You're claiming APR or BPR to bring the estate below the threshold
- The estate is worth over £3 million, even if everything passes to a spouse or charity
For more guidance, visit gov.uk/inheritance-tax.
How to reduce your inheritance tax bill
There's nothing wrong with planning to reduce your IHT liability. Here are some legitimate ways to do it.
Write a will. This is the most basic step. A well-drafted will ensures your estate is distributed in the most tax-efficient way. Without one, the intestacy rules apply, which may mean more of your estate goes to IHT.
Use your annual exemptions. Give away £3,000 each tax year. If you didn't use last year's allowance, you can carry it forward for one year, giving you up to £6,000 in a single year.
Make gifts from surplus income. Regular gifts made from income (not capital) that don't affect your standard of living are exempt from IHT with no upper limit. This could include paying grandchildren's school fees, regular contributions to savings accounts, or insurance premiums.
Leave at least 10% to charity. This reduces the IHT rate from 40% to 36% on the rest of the taxable estate.
Consider life insurance in trust. A life insurance policy written in trust pays out directly to the beneficiaries and doesn't form part of your estate. It can be used to cover an expected IHT bill so your family doesn't have to sell assets to pay the tax.
Plan early. The seven-year rule on gifts means earlier planning gives you more options. Speak to a financial adviser if your estate is likely to be above the threshold.
Frequently Asked Questions
What is the inheritance tax threshold for 2026/27?
The inheritance tax nil-rate band is £325,000 for 2026/27. If a property passes to direct descendants, the residence nil-rate band adds an extra £175,000, giving a total of £500,000. For surviving spouses or civil partners, unused allowances from the first spouse to die can be transferred, potentially doubling these to £650,000 (without RNRB) or £1,000,000 (with RNRB). These thresholds are frozen until at least April 2030.
How much inheritance tax do you pay on £500,000?
It depends on the circumstances. A single person with no qualifying property passing to direct descendants would pay 40% on the amount above £325,000. That's £175,000 x 40% = £70,000. If the estate includes a property passing to children, the RNRB of £175,000 applies, making the total allowance £500,000, so no IHT would be due. A surviving spouse who can claim a transferred nil-rate band may also pay nothing.
Do I pay inheritance tax on money left by my parents?
Inheritance tax is paid by the estate, not by the person who inherits. As a beneficiary, you don't personally pay IHT on what you receive. The executor or administrator settles any IHT from the estate before distributing to beneficiaries. However, the amount you receive may be reduced if IHT was due on the estate.
Is there inheritance tax between husband and wife?
No. Everything left to a UK-domiciled spouse or civil partner is completely exempt from inheritance tax, with no upper limit. Additionally, any unused nil-rate band and residence nil-rate band from the first spouse to die can be transferred to the surviving spouse's estate, effectively doubling the tax-free allowance on the second death.
What is changing with pensions and inheritance tax in 2027?
From 6 April 2027, most unused pension funds and pension death benefits will be included in the deceased's estate for inheritance tax purposes. Currently, pensions are exempt from IHT. After the change, the value of unspent pension pots will count towards the estate's total value. Benefits paid to a surviving spouse, civil partner, or charity will remain exempt. The change is expected to affect around 38,500 estates per year.
What is the 7-year rule for inheritance tax?
If you give away assets during your lifetime, those gifts only become fully exempt from IHT once seven years have passed. If you die within seven years of making a gift, it may be subject to IHT. Gifts made between three and seven years before death benefit from taper relief, which gradually reduces the rate of tax from 40% to 8%. Gifts made within three years of death are taxed at the full 40% rate.
Do I need to fill in an IHT400 form even if no tax is due?
Possibly. Even if no inheritance tax is payable, you may need to submit a full IHT400 if the estate doesn't qualify as an "excepted estate." You'll need to file if the gross estate exceeds the available nil-rate band, lifetime gifts exceed £250,000, foreign assets are worth more than £100,000, the estate includes trust assets, or you're claiming agricultural or business property relief. If the estate is under the threshold and meets the excepted estate criteria, you won't need a full IHT400.
When do you have to pay inheritance tax by?
You should pay inheritance tax by the end of the sixth month after the person died to avoid interest charges. The full IHT account (IHT400) must be submitted within 12 months of the end of the month of death, or penalties apply. For property and certain other assets, you can choose to pay in annual instalments over 10 years. You must pay at least the first instalment before you can apply for probate.
