Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has died. While most estates do not end up paying IHT, it is worth understanding how it works, especially if your estate could be above the threshold.
Key takeaways
- The nil-rate band is £325,000; the residence nil-rate band adds up to £175,000 if you leave your home to direct descendants
- Married couples can potentially pass on up to £1,000,000 tax-free
- Gifts made more than 7 years before death fall outside the estate
- Pensions (defined contribution) are usually outside your estate
- Leaving 10% to charity reduces the IHT rate from 40% to 36%
The Nil-Rate Band
Everyone has an IHT nil-rate band of £325,000. This means the first £325,000 of your estate is tax-free. Anything above this threshold is taxed at 40%.
The nil-rate band has been frozen at £325,000 since 2009 and is currently expected to remain at this level until at least April 2028.
The Residence Nil-Rate Band
If you leave your main home to your children or grandchildren (direct descendants), you may qualify for an additional residence nil-rate band (RNRB) of up to £175,000.
Combined with the standard nil-rate band, this gives an individual a potential tax-free threshold of £500,000. For married couples and civil partners who can transfer unused allowances, the combined threshold can be up to £1,000,000.
The RNRB tapers away for estates worth more than £2 million, reducing by £1 for every £2 above that threshold.
Transfers Between Spouses and Civil Partners
Assets passed between married couples or civil partners are exempt from IHT, regardless of value. This applies during lifetime and on death.
When the first spouse dies, any unused nil-rate band and residence nil-rate band can be transferred to the surviving spouse, potentially doubling their available threshold.
The Seven-Year Rule and Gifting
Gifts made during your lifetime can reduce the value of your estate for IHT purposes, but there are important rules:
- Gifts made more than 7 years before death are completely outside the estate
- Gifts made within 7 years of death may be subject to IHT on a sliding scale (taper relief)
- You can give away £3,000 per year under the annual gift exemption (and carry forward one unused year)
- Small gifts of up to £250 per person per year are exempt
- Wedding gifts up to £5,000 (to a child), £2,500 (to a grandchild), or £1,000 (to anyone else) are exempt
- Regular gifts from surplus income (not affecting your standard of living) can also be exempt. A regulated financial adviser can help you structure a gifting plan that makes the most of available exemptions
Other Exemptions
Several other IHT exemptions exist:
- Gifts to UK-registered charities are exempt. If you leave at least 10% of your net estate to charity, the IHT rate on the rest reduces from 40% to 36%.
- Business Property Relief can reduce the taxable value of qualifying business assets by 50% or 100%.
- Agricultural Property Relief applies to qualifying farmland and farm buildings.
- Pensions — Under the rules that apply until April 2027, unused defined contribution pension pots are generally outside your estate for IHT. However, from April 2027, the government has legislated for unused pension pots to be brought into the estate and become subject to IHT, aligning pensions with other inherited assets. This is a significant change for anyone using their pension as a wealth-transfer vehicle. If you are planning around the current treatment, it is important to review your estate plan before April 2027. Use our estate planning tools to model how your pension and other assets interact with IHT thresholds under both the current and post-2027 rules.
Paying Inheritance Tax
IHT is usually paid by the executor of the estate from the estate's assets before beneficiaries receive their inheritance. It must generally be paid within six months of the end of the month of death.
For property, there is an option to pay IHT in annual instalments over 10 years, which can help if the estate includes a property that takes time to sell.
Video: How HMRC Tracks Gifts (and What It Means for IHT)
Gifting is one of the most common IHT-planning tools — but HMRC now uses data-matching and AI to spot undeclared gifts during estate administration. In this widely-watched explainer (200,000+ views), UK Chartered Financial Planner Steve Barnes walks through how the seven-year rule actually works in practice and the record-keeping mistakes that cause families to fall foul of it:
Video credit: Steve Barnes, Chartered Financial Planner, an independent UK IFA. Wealth365 is not affiliated with Steve Barnes IFA and includes this third-party content for general education only. It is not personal financial advice — if you need advice on your own IHT position, please consult a regulated adviser.
After a Bereavement: Practical Next Steps
Beyond the tax itself, the admin side of a bereavement — notifying every provider, requesting valuations for probate, tracking down forgotten pots — can take weeks. Our free Bereavement Notification Pack generates a Tell Us Once / HMRC checklist plus a separate printable letter for every pension and investment provider you need to contact.
It sits alongside the LOA Generator and Pension Finder in our Pension Admin Toolkit.
Important: This guide 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.