Key Takeaways:
- Inheritance Tax is generally charged at 40% on the portion of an estate that exceeds available allowances.
- The nil-rate band is currently £325,000 per person.
- Potentially up to £500,000 allowance with residence relief per person.
- Gifts and transfers between married couples or civil partners are usually exempt.
- The 7-year rule may reduce Inheritance Tax rates on lifetime gifting.
- You can gift up to £3,000 each tax year free from Inheritance Tax.
- Larger estates worth £2 million or more will be subject to tapering of the residence nil-rate band, losing the additional £175,000 allowance at a rate of £1 for every £2 over £2 million.
What is Inheritance Tax in the UK?
Inheritance Tax (IHT) is a tax that may apply when someone dies and leaves behind an estate worth more than the available tax-free allowances. Inheritance Tax is paid from the estate before the beneficiaries receive anything.
An estate includes everything a person owns at the time of their death (minus any qualifying debts or liabilities), such as:
- Property and land.
- Money in bank accounts.
- Investments and shares.
- Personal possessions and valuables.
- Business interests.
In the UK, Inheritance Tax is only charged if the total estate value exceeds certain thresholds, with the excess typically being subject to Inheritance Tax at 40%. However, exemptions, reliefs and gifting rules may help reduce your liability, particularly where assets are passed to a spouse or civil partner, left to a registered charity or qualify for certain business or agricultural reliefs.
Inheritance Tax is therefore not a flat charge on everything, but a tax applied only to specific portions of an estate after reliefs and allowances are considered.
Who pays Inheritance Tax and when is it due?
When someone passes away, responsibility for dealing with any Inheritance Tax (IHT) owed usually falls to the personal representatives managing the estate. These are commonly known as the executors (where there is a will) or administrators (where there is no will).
Their role includes valuing the estate, reporting to HMRC and ensuring any Inheritance Tax liability is paid before assets are distributed to beneficiaries.
Inheritance Tax is not usually due immediately after death. In most cases, payment must be made within six months from the end of the month in which the person died. For example, if someone passes away in January, any Inheritance Tax due would normally need to be paid by the end of July that year.
Different rules can apply to certain lifetime gifts. If someone dies within seven years of making a Potentially Exempt Transfer (PET), the gift may become subject to Inheritance Tax. In these cases, the person who received the gift, or the trustees if the asset was placed into trust, may become responsible for paying any tax due.
How much is Inheritance Tax in the UK in 2026?
In the UK, Inheritance Tax (IHT) is charged at a standard rate of 40% on the portion of an estate above available allowances.
For 2026/27, the Inheritance Tax thresholds are as follows:
| Allowance type and 2026 threshold | Who Qualifies? | What does this mean? |
|---|---|---|
| Nil-rate band (NRB) £325,000 per person. | All individuals. | The first £325,000 of your estate can usually be passed on free from Inheritance Tax. |
| Residence nil-rate band (RNRB) Up to £175,000 per person (subject to eligibility and estate value). | Individuals who leave a qualifying main residence to direct descendants. | An additional £175,000 of your estate can be passed on to your descendants tax-free. |
For estates valued at more than £2 million, the Residence Nil-Rate Band is gradually reduced by £1 for every £2 that the estate exceeds £2 million.
This means:
- £2 million estate: Full £175,000 RNRB available.
- £2.2 million estate: RNRB reduced by £100,000 (£200,000 divided by 2) = £75,000 RNRB available.
- £2.4 million estate: £0 RNRB available (£400,000 divided by 2 = £200,000).
For individuals who qualify for the allowances, the current thresholds mean:
- Up to £500,000 for individuals (£325,000 + £175,000).
- Up to £1 million for married couples or civil partners where full allowances are available and transferable (£325,000 x 2 + £175,000 x 2).
If you are married or in a civil partnership, when the first partner dies any unused portion of their NRB and RNRB can usually be transferred to the surviving partner tax-free.
However, allowances alone are not the only planning tool. Gifting plays a significant role in helping to manage an Inheritance Tax liability.
What reliefs and exemptions can help reduce Inheritance Tax?
There are several Inheritance Tax reliefs and exemptions that may reduce the amount of tax payable on an estate, including the 7-year rule and taper relief. These can apply to lifetime gifts, business assets, agricultural property and certain transfers made after death.
Understanding which reliefs may apply is an important part of estate planning and can help preserve more wealth for future generations.
How does the 7-year rule work when gifting?
The 7-year rule applies when money or assets are gifted to another person during your lifetime and may reduce or eliminate Inheritance Tax on certain lifetime gifts.
Most lifetime gifts made to individuals are classed as Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it will usually fall outside of your estate for Inheritance Tax purposes.
If you die within seven years, the gift may become taxable and be brought back into the value of your estate. However, the rate of Inheritance Tax on the gift may be tapered depending on how long you survived after making it.
What is taper relief?
Taper relief can reduce the amount of Inheritance Tax payable on certain lifetime gifts if death occurs within seven years, but only where the total gifted exceeds the nil-rate band (£325,000) at death.
The relief works on a sliding scale, meaning the rate of Inheritance Tax may reduce depending on how long the individual survived after making the gift. Generally, the longer the period between the gift and death, the lower the rate of tax that may apply.
The current taper relief rates for 2026/27 are as follows:
| Years between gift and death | Taper relief applied | Rate of IHT on the gift |
|---|---|---|
| 0 to 3 years | 0% | Full 40% IHT rate |
| 3 to 4 years | 20% | 32% |
| 4 to 5 years | 40% | 24% |
| 5 to 6 years | 60% | 16% |
| 6 to 7 years | 80% | 8% |
| 7 or more | 100% | 0% |
Are there any gifting exemptions?
Yes, there are several gifting exemptions that are immediately exempt from Inheritance Tax and do not require the seven-year rule to apply, including:
- Annual gifting allowance: Up to £3,000 each tax year which can be given to one person or split between multiple individuals. If unused, the allowance can be carried forward for one tax year, potentially allowing up to £6,000 to be gifted.
- Small gifts exemption: You can give as many gifts of up to £250 per person each tax year as you like, provided you have not used another gifting allowance on the same person.
- Wedding or civil partnership gifts: Up to £5,000 to your child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person. However, these gifts are only exempt from Inheritance Tax if made before the wedding or civil partnership takes place.
- Regular gifts from income: Regular gifts made from surplus income may be exempt, provided they do not affect your standard of living. There is no set limit for this exemption if the conditions are met.
- Gifts between spouses or civil partners: Gifts or transfers made between married couples or civil partners are generally exempt from Inheritance Tax.
- Charitable and political donations: Gifts left to UK-registered charities, qualifying political parties or certain national institutions, such as universities or museums, are typically exempt from Inheritance Tax. In some cases, leaving at least 10% of your net estate to a UK-registered charity may also reduce the overall rate of Inheritance Tax from 40% to 36%.
These exemptions can be used to help gradually reduce the value of an estate over time.
If you own a business or agricultural assets, you may qualify for business relief or agricultural property relief.
What is Business and Agricultural Property Relief?
Business Relief and Agricultural Property Relief can reduce or remove Inheritance Tax on certain qualifying business and agricultural assets. These reliefs are commonly used within estate planning to help preserve family businesses, farms and trading assets between generations.
For the 2026/27 tax year, Business Relief and Agricultural Property Relief includes a combined £2.5 million allowance per individual qualifying for 100% Inheritance Tax relief.
Qualifying assets above the £2.5 million threshold may still receive 50% relief, resulting in an effective Inheritance Tax rate of 20% rather than the standard 40%.
Assets that may qualify include:
- Agricultural land and property actively used for farming.
- Shares in qualifying trading businesses.
- Certain AIM-listed shares.
- Business premises, machinery and equipment.
These changes are particularly important for individuals with:
- Large farming estates.
- Significant AIM investment portfolios.
- Family-owned or unlisted trading businesses.
Previously, many qualifying business and agricultural assets could receive unlimited 100% relief. However, the new £1 million cap implemented from April 2026 means more estates may now face a partial Inheritance Tax liability.
As the rules surrounding eligibility, trusts and transitional arrangements can be complex, seeking professional advice is important when reviewing existing estate or Inheritance Tax planning strategies.
Do pensions count towards Inheritance Tax in 2026?
Pensions are currently outside of an individual’s estate for Inheritance Tax purposes.
However, from April 2027, proposed changes may bring most unused pension funds into a person’s taxable estate and within scope for Inheritance Tax.
When introduced, this change means:
- More estates become liable for Inheritance Tax.
- Larger overall estate values for tax purposes.
- Greater importance placed on estate planning strategies.
When pensions are included in future Inheritance Tax calculations, many individuals who are currently below the threshold could become liable.
This makes it increasingly important to:
- Review pension nominations.
- Consider overall estate value.
- Take early advice on tax-efficient planning.
Frequently asked questions about Inheritance Tax
- How can I legally reduce my Inheritance Tax liability?
Seeking early advice from a financial adviser is the most effective approach to reducing your liability and managing your estate effectively. Common strategies include lifetime gifting, using exemptions, trusts and reliefs, or structuring assets efficiently.
- Do beneficiaries pay Inheritance Tax?
No, beneficiaries do not pay Inheritance Tax directly. The tax is typically paid from the estate before assets are distributed by the executors or administrators.
- Can I gift my house to lower my Inheritance Tax liability?
Gifting a property can reduce Inheritance Tax in some cases, but it is complex and rarely advisable. If you continue to live in the property after gifting it, it will still be treated as part of your estate unless strict conditions are met.
- What happens if Inheritance Tax cannot be paid?
If there is not enough cash in the estate to pay the Inheritance Tax due, assets such as property or investments may need to be sold. In some cases, HMRC may allow payment in instalments, particularly where property is involved.
- When should I start Inheritance Tax planning?
The earlier planning begins, the more options are usually available. Inheritance Tax planning is most effective when reviewed regularly as circumstances, legislation and asset values change over time.
How can Cooper Associates Wealth Management help?
Our expert financial advisers take the time to understand your personal circumstances and can help identify strategies to pass on wealth more efficiently, while maintaining access to income or capital where appropriate, depending on the structure used.
Our advice is tailored to your current circumstances and long-term goals, helping ensure your family’s needs are met and more of your wealth is passed on to loved ones.
Whether you are looking to protect your estate, support your family financially or better understand your potential Inheritance Tax position, we can help you explore the options available.
Get in touch today to arrange a fee-free, no-obligation consultation and start planning for the future with confidence.
* The levels and bases of taxation and relief from taxation can change at any time. The value of any tax relief depends on individual circumstances.
