Inheritance tax sounds complicated, but for most grandparents it comes down to a handful of thresholds and a single rate. Here is what you actually need to know to understand whether your estate might face a bill — and what reduces it.
Key takeaways
- The nil-rate band is £325,000; the residence band adds up to £175,000 when a home passes to direct descendants (grandchildren count)
- One person can pass on up to £500,000 tax-free; a couple up to £1 million
- Anything above the threshold is taxed at 40% — or 36% if 10%+ of the estate goes to charity
- From April 2027 unused pension pots are due to count towards the estate for IHT
- Gifting, charitable legacies and leaving the home to descendants all reduce the bill
- This is general information, not personal financial, tax or legal advice
The two thresholds that matter
Inheritance tax (IHT) is charged on the value of your estate when you die, above certain tax-free thresholds (all figures illustrative and approximate, sourced as of June 2026, per GOV.UK):
- Nil-rate band — £325,000. The first £325,000 of any estate is tax-free. This figure has been frozen for years and is set to stay frozen until at least April 2030.
- Residence nil-rate band — up to £175,000. An extra tax-free slice when you leave your home to direct descendants. Crucially for you, direct descendants include grandchildren, not only children. It reduces by £1 for every £2 your estate exceeds £2 million.
So one person can pass on up to £500,000 tax-free, and a married couple or civil partners up to £1 million, because unused allowances transfer to the survivor.
The rate — and how giving to charity cuts it
Anything above your available threshold is generally taxed at 40%. There is one notable discount: if you leave at least 10% of your net estate to charity, the rate on the rest drops to 36%. Gifts to a spouse or civil partner, and to charities, are normally free of IHT altogether.
If your estate is anywhere near the thresholds, it is well worth putting real numbers against it. You can model your IHT position under the current rules, see the effect of leaving part of your estate to charity, and test how lifetime gifts change the result.
The April 2027 pension change
One change is reshaping estate planning for many families: from April 2027, unused defined-contribution pension pots are due to be brought into the estate for inheritance tax (a confirmed government change, sourced as of June 2026). Pensions have long been a tax-efficient way to pass on wealth, so for some estates this is significant — it can push an estate over the threshold for the first time.
If a chunk of your wealth sits in a pension, it is worth understanding how the rules will apply to your beneficiaries and revisiting your plan before the change lands. A qualified financial adviser can help you weigh up the options.
What reduces an inheritance-tax bill
The main levers, in plain terms (illustrative, sourced as of June 2026):
- Use the gifting exemptions — £3,000 a year, £250 small gifts, wedding gifts and regular gifts from income.
- Make larger gifts early so they pass the seven-year point and leave your estate.
- Leave your home to children or grandchildren to unlock the residence nil-rate band.
- Consider charitable legacies to access the 36% rate.
For the full toolkit — including the gifting rules and how to leave money to grandchildren — see our grandparents' guide to gifting and legacy.
This is general information, not personal financial, tax or legal advice. Every figure is illustrative and approximate, sourced as of June 2026, and the rules change — speak to a qualified financial adviser, and a solicitor for wills and trusts, before you act.
Important: This article is for general educational purposes only and does not constitute financial advice. Tax rules can change and individual circumstances vary. If you need advice tailored to your situation, please consult a qualified, FCA-regulated financial adviser. You can browse advisers in our adviser directory.
