Inheritance tax explained: thresholds, rates and who actually pays
Inheritance tax (IHT) is the 40% tax on the part of a deceased person's estate above the tax-free thresholds — £325,000, plus up to £175,000 extra when a home passes to children, with anything left to a spouse exempt. Only about 1 estate in 20 pays it — but frozen thresholds and the April 2027 pension change are pulling in thousands more families each year.
How inheritance tax works in 2026/27
IHT is charged on the estate — everything a person owns at death (property, savings, investments, possessions), minus debts — not on the people receiving it. Three thresholds do most of the work:
- The nil-rate band: £325,000. Every estate gets this tax-free. It has been frozen since 2009 and stays frozen until 2030/31 — had it risen with inflation it would be over £500,000, which is why more ordinary estates are caught every year (fiscal drag, applied to death).
- The residence nil-rate band: up to £175,000 more when a home (or the proceeds of one, if you downsized) passes to children or grandchildren. It tapers away by £1 for every £2 an estate exceeds £2 million.
- The spouse exemption. Anything left to a spouse or civil partner is entirely tax-free, and any unused bands transfer to the survivor — which is how a married couple can typically pass on up to £1 million before any IHT is due.
Above the available thresholds the rate is 40% — or 36% if at least 10% of the net estate goes to charity. Gifts to charities and most political parties are exempt entirely.
A worked example
A widow dies leaving a £750,000 estate, including a £400,000 house, to her two children. Her late husband left everything to her, so both his bands transferred. Available allowances: 2 × £325,000 + 2 × £175,000 = £1 million. Tax bill: £0. Now make it a £1.3 million estate: £300,000 is taxable, and the bill is £120,000. This cliff between "nothing" and "six figures" is why IHT planning is an industry — and the calculator shows where your own estate sits.
Gifts and the 7-year rule
Lifetime giving is the main legal route around IHT, and it has its own rulebook:
- The 7-year rule. Most gifts to people ("potentially exempt transfers") fall out of your estate entirely if you survive seven years. Die sooner and the gift uses up your nil-rate band first.
- Taper relief — widely misunderstood — reduces the tax on the portion of gifts above the nil-rate band: 40% within 3 years, then 32%, 24%, 16% and 8% in the years to seven. It does not reduce the value counted against your band.
- Always-exempt gifts: £3,000 a year (one year's carry-forward allowed), £250 small gifts per recipient, wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone), and — the under-used one — regular gifts out of surplus income, unlimited if they're genuinely from income and don't cut your standard of living. Keep records.
Budget speculation keeps returning to a lifetime cap on tax-free gifts; nothing has been legislated. Our Budget watch page tracks it.
What's changing — the two dates that matter
- April 2026 (in force): agricultural and business property relief capped — 100% relief now applies only to the first £1 million of combined qualifying assets, 50% above. This is the change behind the farmers' protests, and it pulls family firms and farms into planning conversations they've never needed before.
- April 2027: unused pension funds and death benefits count as part of the estate. A generation of retirement planning ("spend the ISA, leave the pension") flips overnight — an estate comfortably under the thresholds today can be pushed well over by a £300,000 pension pot. The pension pot calculator and IHT calculator together show the combined effect.
Who actually pays it
Despite being regularly polled as Britain's most hated tax, only around 1 in 20 estates pays any IHT — the exemptions do their job for most families. But the net is widening fast: house-price growth into frozen thresholds, the pension change and the relief caps mean the OBR expects receipts to climb from roughly £8 billion a year toward £14 billion+ by 2030. The typical paying estate is no longer a country pile; it's a London or South East family home plus a pension.
Where every party stands
- Labour (in government) — keeps the 40% rate but broadens the base: relief caps from 2026, pensions in scope from 2027, frozen thresholds to 2030/31. A gifts cap is speculated, not announced.
- Reform UK — abolish IHT for estates under £2 million; 20% above, with an option to give to charity instead. Part of a package whose funding is contested.
- Conservatives — no formal policy, but abolition or major cuts are a recurring demand from the party's right.
- Greens — replace death-time taxation with an annual wealth tax on fortunes above £10 million.
- Prosperity 2030 (UCL blueprint) — abolish IHT altogether, folding it (with income tax, NI, CGT and dividend tax) into a single National Contribution.
Plain-English guide for general information only — not financial, legal or tax advice. Rates are 2026/27 unless stated. Last reviewed 16 July 2026.
Frequently asked questions
How much can I inherit tax-free in the UK?
There's no tax on receiving an inheritance itself — IHT is charged on the estate. A single person's estate is tax-free up to £325,000 (plus £175,000 if a home passes to children or grandchildren); married couples and civil partners can combine both sets of bands to pass on up to £1 million tax-free.
What is the 7-year rule for gifts?
Gifts you make more than seven years before you die are free of inheritance tax. Die within seven years and the gift uses up your nil-rate band first; on the portion of gifts above the band, taper relief reduces the tax rate from 40% (0–3 years) down to 8% (6–7 years). Taper reduces the tax, not the value counted.
How much can I gift each year without inheritance tax?
£3,000 a year (the annual exemption, carried forward one year if unused), unlimited £250 small gifts to different people, wedding gifts of £5,000 to a child (£2,500 grandchild, £1,000 anyone), and unlimited regular gifts made out of surplus income — a powerful but under-used exemption that requires records.
Are pensions subject to inheritance tax?
Historically no — pension pots passed outside the estate. From 6 April 2027 unused pension funds and death benefits are brought into the estate for IHT, one of the biggest changes to retirement planning in a generation. Estates that were comfortably under the thresholds can be pushed over by a pension pot.
What is the inheritance tax rate in 2026/27?
40% on the part of the estate above the available thresholds, reduced to 36% if at least 10% of the net estate is left to charity. Anything passing to a spouse or civil partner, or to charity, is exempt entirely.
Which parties would change inheritance tax?
Reform UK has proposed abolishing IHT for estates below £2 million with 20% above; some Conservatives push outright abolition; Labour has instead broadened the base (farm/business relief capped from April 2026, pensions in scope from April 2027); the Greens favour taxing large fortunes annually; UCL's Prosperity 2030 blueprint would fold IHT into a single National Contribution.