With the nil-rate band frozen at £325,000 since 2009 and house prices roughly tripling since, Inheritance Tax (IHT) has crept from a small wealthy-estate tax into a mainstream concern for many homeowners. This guide explains the bands, the residence nil-rate band tapering, gifting rules and the major reliefs in 2026.
IHT is charged at 40% on the value of an estate above the available nil-rate bands at death. The standard Nil-Rate Band (NRB) is £325,000 per person; the Residence Nil-Rate Band (RNRB) is up to a further £175,000 if a main residence is left to direct descendants.
Combined: a single person can pass on up to £500,000 IHT-free; a married couple up to £1m by combining both bands. Anything inherited by a spouse or civil partner is fully exempt regardless of value.
RNRB only applies if a residence (or qualifying replacement) is left to children, grandchildren or other lineal descendants — not to nieces/nephews or unrelated beneficiaries.
It tapers by £1 for every £2 of estate value above £2m, disappearing entirely above £2.35m (£2.7m for couples). Estates near £2m can lose hundreds of thousands by going slightly over — careful planning matters.
Outright gifts to individuals (Potentially Exempt Transfers) become fully exempt 7 years after the gift. Die within 7 years and the gift uses up the nil-rate band first; tax on gifts that exceed the NRB is tapered between years 3-7.
Annual exemptions are valuable: £3,000 per donor (can carry forward one year), £250 per recipient unlimited, £5,000 to a child marrying, £2,500 to a grandchild marrying. Regular gifts from surplus income are immediately exempt with no 7-year wait.
Business Relief: 100% relief on qualifying unlisted shares and businesses held 2+ years; 50% on certain assets. The 2024 Budget proposed limiting Business Relief from April 2026 — full relief retained on the first £1m, 50% relief above.
Agricultural Relief: similar 100%/50% relief on qualifying farmland, also being limited from April 2026. Charitable gifts: fully exempt, and a 36% IHT rate (instead of 40%) applies if 10%+ of net estate is left to charity.
Until April 2027, undrawn pension pots are outside the IHT estate — making pensions one of the most tax-efficient inheritance vehicles. The 2024 Budget confirmed pensions will be brought into the IHT estate from April 2027.
This is reshaping retirement planning: many people will now draw from pensions earlier and preserve ISAs/property as the inherited assets. Take regulated advice before changing strategy.
Not without paying market rent — otherwise it's a Gift With Reservation of Benefit and stays in your estate for IHT regardless of when you gave it.
The spouse exemption doesn't apply to unmarried partners — even after decades together. Marriage or civil partnership is a major IHT planning step for cohabiting couples.
Within 6 months of death. Executors often pay a portion from their own funds or use HMRC's Direct Payment Scheme from the deceased's bank account.
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