UK Inheritance Tax Explained: The Complete 2026/27 Guide

Inheritance tax is a tax on the estate (the property, money and possessions) of someone who has died. It is charged at 40% on the value of the estate above the available tax-free thresholds. Many estates pay nothing, either because they fall below the thresholds or because everything passes to an exempt beneficiary such as a spouse or a charity.

Your estate is broadly the total value of everything you own at death, less what you owe. It includes your home and any other property, savings and investments, cars and valuables, business interests, and the proceeds of most life insurance policies that are not written in trust. Reasonable funeral expenses, mortgages and outstanding debts are deducted. Certain lifetime gifts made in the 7 years before death are added back in when working out the tax.

The tax is usually paid by the executors or administrators (the personal representatives) out of the estate itself, not by the individual beneficiaries. Beneficiaries do not normally pay tax on what they inherit, although they may face other taxes later, for example capital gains tax if they later sell an asset that has risen in value, or income tax on income the asset produces.

Whether your estate is exposed to UK inheritance tax on your worldwide assets, or only on your UK assets, now depends on your long-term residence status rather than the old concept of domicile. Since 6 April 2025 you are a long-term UK resident, and taxable on your worldwide estate, once you have been UK resident for at least 10 of the previous 20 tax years. This matters for anyone with an international footprint, and is covered in our residence-based IHT guide.

Everyone has a nil-rate band of GBP 325,000. This is the amount of your estate that is taxed at 0% before the 40% rate applies. On top of this, a residence nil-rate band of up to GBP 175,000 is available where you leave your main home (or the proceeds of one you had sold) to direct descendants, meaning children, grandchildren, step-children, adopted children and foster children.

Both thresholds are frozen. The nil-rate band has been fixed at GBP 325,000 since the 2009/10 tax year, and following the extension announced at Budget 2025 the nil-rate band, residence nil-rate band and the taper threshold are all held at their current levels until 5 April 2031. Because these figures do not rise with inflation or house prices, more estates are drawn into the tax over time.

The residence nil-rate band is not available to every estate. It is tapered away for larger estates: for every GBP 2 that the net estate exceeds GBP 2 million, the residence band is reduced by GBP 1. This means an individual's full GBP 175,000 residence band is completely withdrawn once the estate reaches GBP 2.35 million. The residence band also only applies where a qualifying home passes to direct descendants, so estates without children, or where the home is left to others, generally cannot claim it.

• Nil-rate band: GBP 325,000 per person, available to every estate.
• Residence nil-rate band: up to GBP 175,000 per person, where a home passes to direct descendants.
• Taper: the residence band falls by GBP 1 for every GBP 2 of estate above GBP 2 million.
• Both bands are currently frozen at these levels until 5 April 2031.

A married couple or civil partners can often pass on up to GBP 1 million to their children with no inheritance tax. This works through two rules: the unlimited spouse exemption and the transferable nil-rate bands.

First, anything you leave to your spouse or civil partner who is a UK long-term resident is exempt from inheritance tax without limit. So when the first partner dies leaving everything to the survivor, no IHT is due at that point, and importantly the first partner's nil-rate bands are not used up.

Second, any unused nil-rate band and residence nil-rate band transfer to the surviving partner. When the second partner dies, their estate can therefore use two nil-rate bands (2 x GBP 325,000 = GBP 650,000) plus two residence nil-rate bands (2 x GBP 175,000 = GBP 350,000), giving a combined GBP 1 million. This full GBP 1 million is only available where the residence band conditions are met, meaning a qualifying home is passed to direct descendants and the estate is below the GBP 2 million taper threshold. The transfer of the unused bands is claimed by the personal representatives of the second estate and is not automatic.

The standard inheritance tax rate is 40%. It applies only to the portion of the estate above your available nil-rate bands and after all exemptions and reliefs. For example, an estate of GBP 500,000 with only the standard GBP 325,000 nil-rate band available would have GBP 175,000 taxed at 40%, producing an inheritance tax bill of GBP 70,000.

A reduced rate of 36% applies to the taxable estate where you leave at least 10% of the net estate to a qualifying charity. The 10% is measured against a specific figure called the baseline amount rather than the whole estate, so the calculation needs care, but the effect is that leaving a meaningful charitable legacy can lower the rate on everything else that is taxable. In some cases the tax saving from the lower rate can offset much of the cost of the gift itself.

• 40%: the standard rate on the taxable estate above the nil-rate bands.
• 36%: the reduced rate where 10% or more of the net estate passes to charity.
• Gifts to UK-qualifying charities are themselves exempt from inheritance tax.

Gifts you make during your lifetime can reduce your estate, but the timing matters. Most outright gifts to individuals are potentially exempt transfers: if you survive 7 years after making the gift, it falls completely outside your estate. If you die within 7 years, the gift is brought back into the calculation and can use up your nil-rate band, potentially leaving less to shelter the rest of your estate.

Where a gift is taxable because death occurs within 7 years, taper relief can reduce the tax due (not the value of the gift) once you have survived at least 3 years. The reduction in tax increases the longer you live after the gift: broadly, tax is reduced by 20% for gifts made 3 to 4 years before death, 40% at 4 to 5 years, 60% at 5 to 6 years, and 80% at 6 to 7 years. That gives effective rates of 32%, 24%, 16% and 8% on those gifts. A common misconception is that taper relief applies to every gift; in practice it only helps where the gift exceeds the nil-rate band, because the band is set against the earliest gifts first.

Several exemptions let you give without any 7-year clock at all. Each tax year you can give away GBP 3,000 in total under the annual exemption (and carry any unused amount forward one year), make unlimited small gifts of up to GBP 250 per person, and make regular gifts out of surplus income under the normal expenditure out of income exemption. Wedding or civil partnership gifts are also exempt up to GBP 5,000 to a child, GBP 2,500 to a grandchild or great-grandchild, and GBP 1,000 to anyone else. Our dedicated gifts and 7-year rule guide works through these in detail.

Inheritance tax must normally be paid by the end of the sixth month after the month in which the person died. For example, if someone dies in January, the tax is due by the end of the following July. HMRC charges interest on any amount paid after this deadline, so executors need to act promptly even while the estate is still being valued.

This creates a practical challenge: in most cases the tax has to be paid before probate (or confirmation in Scotland) is granted, and therefore before the executors can access much of the estate. Executors often fund the payment from the deceased's bank accounts using the Direct Payment Scheme, from assets that can be released early, or occasionally through a short-term loan.

Tax on some assets that cannot easily be sold, such as land, buildings and certain business interests, can be paid in 10 equal annual instalments. Interest usually applies to the outstanding balance for most instalment-option assets. The estate reports its value to HMRC using the inheritance tax account (the IHT400 and supporting schedules) unless it qualifies as an excepted estate with lighter reporting.

Placing assets in a trust can help control how and when they pass, but most trusts fall within the relevant property regime, which carries its own inheritance tax charges. Transferring more than your available nil-rate band into such a trust during your lifetime triggers an immediate lifetime charge of 20% on the excess (a further charge can arise if you die within 7 years). Each trust generally has its own nil-rate band, though this is reduced by earlier chargeable gifts.

Once inside the trust, assets can face a principal charge on each 10-year anniversary of up to 6% of their value, and an exit charge of up to 6% when assets leave the trust. Since 6 April 2025 whether non-UK assets in a trust are excluded property depends on the settlor's long-term residence status rather than domicile. These charges are covered in our offshore trusts and UK tax guide.

There are many legitimate ways to reduce a future inheritance tax bill, but the right approach depends on your assets, your family and your wider financial plans. The starting point is nearly always a well-drafted, up-to-date will that makes full use of the nil-rate bands, the residence band and the spouse exemption, and directs a qualifying home to direct descendants where appropriate.

• Use lifetime gifting and the annual exemptions, and consider larger gifts early so the 7-year clock has time to run.
• Make regular gifts out of surplus income, which are immediately exempt if properly documented.
• Leave 10% or more of the net estate to charity to secure the reduced 36% rate on the rest.
• Consider trusts to control how and when assets pass, keeping in mind the 20% entry charge, 10-year anniversary charges and exit charges of up to 6% covered in our offshore trusts guide.
• Review business and agricultural assets in light of reform: from 6 April 2026 a new GBP 2.5 million combined allowance per person qualifies for 100% business and agricultural relief, with 50% relief above that, so a couple can pass on up to GBP 5 million of qualifying assets. Business relief on AIM and other not-listed shares falls to 50% in all cases and is not covered by that allowance (finer scope points to confirm as legislation is finalised).
• Plan for pensions: from 6 April 2027, most unused pension funds and death benefits are expected to fall within the estate for inheritance tax, so pension death planning is changing significantly. Death-in-service benefits and certain dependants' scheme pensions are set to remain outside the charge (detail to confirm).

Because these reforms interact and some finer points remain subject to final legislation, anything you plan now should be reviewed against the confirmed rules before you act. Our reducing inheritance tax, business property relief and pensions and inheritance tax guides go deeper on each area, and a Horizon Global Compliance Manager can coordinate estate planning across every jurisdiction where you hold assets.