Inheritance tax is charged at 40% on the part of an estate above the tax-free thresholds. Everyone has a £325,000 nil rate band, plus up to £175,000 more when a home passes to children or grandchildren, and anything left to a spouse or civil partner is exempt. Many estates therefore pay nothing, but for those that do, the bill can be large, and planning can often reduce it.
Inheritance tax rates and thresholds for 2026/27
| Threshold or rate | 2026/27 |
|---|---|
| Nil rate band | £325,000 |
| Residence nil rate band (home to direct descendants) | £175,000 |
| Residence band tapers away above an estate of | £2,000,000 |
| Rate on death | 40% |
| Reduced rate if 10% or more of the net estate goes to charity | 36% |
| Lifetime rate on chargeable transfers (e.g. into most trusts) | 20% |
Both thresholds are frozen until April 2031. Unused nil rate band and residence nil rate band pass to a surviving spouse or civil partner, so a married couple can leave up to £1 million between them free of inheritance tax, as long as a home passes to their children or grandchildren and the estate is not over £2 million.
How inheritance tax is worked out
- Value the estate: property, savings, investments, business interests and personal possessions, less debts and funeral costs.
- Add gifts made in the seven years before death that were not already exempt.
- Deduct exemptions and reliefs: anything left to a spouse, civil partner or charity, and business or agricultural property relief.
- Deduct the available thresholds: the nil rate band, and the residence nil rate band if a home passes to direct descendants.
- Charge 40% on what remains.
Worked examples
These assume no lifetime gifts, no reliefs, and the 2026/27 thresholds.
1. Single person, £500,000 estate, left to a niece. The residence band does not apply, because a niece is not a direct descendant. Tax: (£500,000 − £325,000) × 40% = £70,000.
2. Widow, £900,000 estate including a £500,000 home, left to her children. Her late husband left everything to her, so she inherits his unused bands. Thresholds: £650,000 nil rate band + £350,000 residence band = £1,000,000. Tax: £0.
3. Single person, £1 million estate including a £400,000 home, left to children. Thresholds: £325,000 + £175,000 = £500,000. Tax: (£1,000,000 − £500,000) × 40% = £200,000.
4. Single person, £2.2 million estate including a home, left to children. The estate is £200,000 over £2 million, so the residence band is reduced by £100,000, to £75,000. Thresholds: £325,000 + £75,000 = £400,000. Tax: (£2,200,000 − £400,000) × 40% = £720,000. At £2.35 million, a single person's residence band disappears entirely.
| Estate | Who inherits | Tax-free thresholds | Inheritance tax |
|---|---|---|---|
| £500,000 | Niece | £325,000 | £70,000 |
| £900,000 | Children (widow with transferred bands) | £1,000,000 | £0 |
| £1,000,000 | Children | £500,000 | £200,000 |
| £2,200,000 | Children | £400,000 | £720,000 |
Pensions and inheritance tax from April 2027
From April 2027, unused pension funds and most death benefits will count towards the estate (see pensions and inheritance tax from April 2027). In example 3 above, a £300,000 unused pension would increase the bill from £200,000 to £320,000. Where death is after 75, beneficiaries may also pay income tax on what they draw from the pension. For many families, that changes which assets should be spent first.
Gifts and the seven-year rule
Gifts to individuals are free of inheritance tax if you survive seven years. If you do not, the gift uses up some or all of the nil rate band first. Any tax on the part of gifts above the nil rate band is reduced on a sliding scale:
| Years between gift and death | Effective rate |
|---|---|
| 0 to 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | Nil |
Some gifts are exempt straight away: £3,000 a year (plus one unused year), small gifts of up to £250 per person, wedding gifts (up to £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else), and regular gifts from surplus income that do not affect your standard of living.
When is inheritance tax paid, and by whom?
The executors pay the tax out of the estate. It is normally due six months after the end of the month of death, with interest charged after that. Tax on property and some business assets can be paid in instalments over ten years. If a lifetime gift becomes taxable, the person who received it may have to pay.
How to reduce inheritance tax legitimately
- Use the annual, small-gift and wedding exemptions every year
- Make regular gifts from surplus income
- Make larger gifts early, so the seven years can run
- Leave at least 10% of the net estate to charity to reduce the rate to 36%
- Use business and agricultural property relief where the conditions are met: 100% on the first £2.5 million per person (transferable to a spouse), and 50% above that. Shares on AIM get 50% relief only
- Review wills, trusts and pension nominations together
The right plan depends on your family, your assets and how much you need to live on. It is worth working through with a Chartered Tax Advisor alongside your solicitor and financial planner.
Our inheritance tax planning service and our page for families explain how we help. To work out your own estate's position, book a consultation.
This article is general information about UK tax, based on the law and HMRC practice at the date shown above. It is not advice, and reading it does not make you our client. Tax rules change and their effect depends on your circumstances, so please speak to us before acting on it.