By Chandraketu Tripathi · Updated April 2026 · Fact-checked Tax · April 2026Inheritance tax (IHT) is one of the most discussed — and misunderstood — taxes in the UK. Charged at 40% on estates above the nil-rate band, it affects a growing number of families as property values rise but thresholds remain frozen. With significant rule changes coming in April 2027, understanding IHT has never been more important.
Current Inheritance Tax Rate and ThresholdsInheritance tax is charged at 40% on the value of an estate above the nil-rate band. The standard nil-rate band is £325,000 — unchanged since 2009 and now frozen until April 2031. The residence nil-rate band adds up to £175,000 where the family home is left to direct descendants (children, grandchildren), bringing the effective threshold for homeowners to £500,000 per person or £1,000,000 for a married couple or civil partners. In 2022/23, 31,500 estates paid IHT — representing 4.62% of UK deaths — generating £6.7 billion for HMRC. With thresholds frozen and property values rising, this number is expected to reach 10% of estates by 2030. Pension IHT Changes — April 2027The biggest IHT change in a generation takes effect from 6 April 2027: unused defined contribution pension funds will be included in the value of a deceased person's estate for IHT purposes. Currently, pension pots can be passed on outside the estate — a major planning tool. From 2027, unused pensions will be subject to 40% IHT (with an exemption for assets passing to a spouse or civil partner). Government estimates suggest this will affect around 10,500 estates that would not previously have paid IHT, and increase IHT bills for a further 38,500 estates. The average increase per affected estate is estimated at £34,000. Critically, inherited pensions may also face income tax of up to 45% when drawn by beneficiaries — creating a potential combined effective rate of up to 64-67%. 💡 If you have a significant pension pot that you intended to leave to your children or grandchildren, you need to review your retirement income strategy now. Using pension income during your lifetime (and spending or gifting other assets) may reduce the IHT exposure on your estate from April 2027. Seek regulated financial advice — this area is complex and individual circumstances vary significantly. How to Reduce Your Inheritance Tax BillThe most commonly used IHT reduction strategies are: annual gifting (£3,000 per year per individual, immediately exempt); regular gifts from surplus income (unlimited if genuinely from income not capital); seven-year rule gifts (larger gifts exempt after 7 years with tapering relief from year 3); charitable legacies (gifts to charity reduce the IHT rate on the rest of the estate from 40% to 36% if at least 10% of the estate is left to charity); and life insurance written in trust (pays a lump sum outside the estate to cover the IHT liability). Business and Agricultural Property Relief — April 2026From April 2026, 100% relief on agricultural and business property is capped at £2.5 million per individual (transferable between spouses). Assets above this threshold receive 50% relief — an effective IHT rate of 20% rather than the previous 0%. This affects farmers, business owners and those with significant AIM-listed shareholdings. ⭐ OUR VERDICT UK inheritance tax is becoming unavoidable for more estates as frozen thresholds, rising property values and the upcoming pension changes expand the taxable base. For estates with pension pots, property and investments that together exceed £500,000, a review of IHT strategy — ideally with a specialist financial adviser or solicitor — is increasingly urgent. The pension changes from April 2027 represent the most significant IHT reform in decades and require action before the deadline. Frequently Asked QuestionsWhat is the UK inheritance tax threshold in 2026? The nil-rate band is £325,000 per person. With the residence nil-rate band (£175,000 where the family home passes to direct descendants), the effective threshold is £500,000 for individuals and up to £1,000,000 for married couples or civil partners. Both thresholds are frozen until April 2031. Do pensions count towards inheritance tax? Currently, pension funds are outside the estate for IHT. From 6 April 2027, unused defined contribution pension pots will be included in the estate for IHT purposes. Pensions passing to a spouse or civil partner remain exempt. This change is expected to increase IHT bills for around 49,000 estates per year. What is the seven-year rule for inheritance tax? Gifts made more than seven years before death are completely exempt from IHT — regardless of the amount. Gifts made between 3 and 7 years before death benefit from tapering relief: 20% reduction after 3 years, 40% after 4 years, 60% after 5 years, 80% after 6 years. Gifts within 3 years attract full IHT at 40%. How much is inheritance tax in the UK? Inheritance tax is charged at 40% on the value of an estate above the nil-rate band. The rate reduces to 36% if at least 10% of the net estate is left to charity. There is no IHT on assets passing between spouses or civil partners, and no IHT on gifts to registered charities. |
UK Inheritance Tax 2026: Thresholds, Pension Changes & How to Reduce Your Bill
|
|
