UK Inheritance Tax 2026: Complete Guide to Thresholds, the £2.5M BPR/APR Cap and the April 2027 Pension Change

Will you pay Inheritance Tax? Decision tree

Most UK estates pay no Inheritance Tax. According to HMRC's Inheritance Tax statistics commentary (31 July 2025), only 4.62% of all UK deaths in 2022/23 — the most recent year for outturn data — resulted in any IHT being paid. That's 31,500 estates out of approximately 682,000 deaths. The rate has crept up from a low of 2.6% in 2009/10 but remains below the all-time peak of 5.96% recorded in 2006/07.

Use the decision tree below to find out where your estate sits. Each branch references the rule that applies, with section numbers below for the detail.

2026/27 thresholds and rates

The Inheritance Tax framework rests on two allowances and one rate. All three are unchanged from 2025/26 and frozen until at least 5 April 2030 (gov.uk Inheritance Tax thresholds, updated 26 November 2025; Finance Act 2025 amended the freeze period set by Finance Acts 2021 and 2023).

Sources: gov.uk Inheritance Tax thresholds; Inheritance Tax Act 1984 sections 8A (transferable allowance), 8D (RNRB), 18 (spouse exemption), Schedule 1A (charity rate); Commons Library Research Briefing CBP-10181 (8 April 2026).

How the allowances stack: married vs single

An individual can pass up to £500,000 tax-free (£325,000 NRB plus £175,000 RNRB) if they leave their main residence to a direct descendant. A married couple or civil partners can combine and transfer unused allowances under section 8A IHTA 1984, taking the joint tax-free total to £1,000,000 on the second death. Cohabiting couples cannot transfer allowances between them under any circumstances — this is one of the largest planning gaps in UK estate law.

Six worked examples by estate value

The arithmetic of IHT is simple but counter-intuitive at the boundaries. These six examples cover the value bands where most estates sit. All assume a single individual with no spouse exemption available, leaving home to direct descendants where applicable, with no charity gift.

The £2,500,000 example shows the RNRB taper trap: the £175,000 residence allowance reduces by £1 for every £2 above £2 million, so an estate of £2.35 million sees the RNRB tapered to zero. Estates that creep over £2 million can pay disproportionately more tax than slightly smaller ones (Finance Act 2024, schedule 12).

April 2026: BPR/APR £2.5M cap and AIM relief halved

The biggest IHT reform in a decade took effect on 6 April 2026. Three changes apply, all enacted by Finance Act 2026 (Royal Assent 18 March 2026).

Change 1: 100% relief on business and agricultural property capped at £2.5M combined

Previously, qualifying agricultural property and qualifying business property could attract unlimited 100% relief from IHT — meaning farms and trading businesses could be passed down with no tax bill regardless of value. Section 65 and Schedule 12 of Finance Act 2026 introduced a combined cap.

From 6 April 2026, the first £2.5 million of combined APR and BPR-qualifying assets remains 100% exempt. Anything above that level receives only 50% relief, producing an effective IHT rate of 20% on the excess. The £2.5M allowance is per estate and is now transferable between spouses and civil partners following the Budget 2025 amendment confirmed at the Bill's Committee stage on 12 January 2026.

HMRC estimated in December 2025 that approximately 1,100 estates per year will pay more tax as a result of this change. The Treasury said three-quarters of APR claims and the majority of BPR claims will be unaffected (Commons Library CBP-10181, 8 April 2026).

Change 2: AIM and unlisted shares relief reduced from 100% to 50%

Shares in companies listed on the Alternative Investment Market (AIM), and other unlisted qualifying shares, previously attracted 100% BPR after a two-year holding period. From 6 April 2026, the relief rate drops to 50% in all cases, regardless of value. Critically, the £2.5M 100% allowance does not apply to AIM/unlisted shares — they are simply at 50% from the first pound.

This is a material change for investors who used AIM portfolios as part of an IHT planning strategy. A £500,000 AIM holding that previously passed IHT-free now produces a £100,000 IHT liability if held in an estate above the NRB.

Change 3: 10-year interest-free instalments extended to all APR/BPR property

From 6 April 2026, the option to pay IHT on qualifying agricultural and business property by ten equal annual instalments, interest-free, is extended to all property eligible for APR or BPR. This was designed to address the concern that family farms and trading businesses might have to be liquidated to pay an IHT bill — though critics including the Country Land and Business Association argue ten years remains insufficient for working farms.

April 2027: Pension funds inside IHT for the first time

The second seismic change has not happened yet, but the legislation is now law. From 6 April 2027, most unused pension funds and lump sum death benefits will form part of the deceased's estate for IHT purposes (Mayer Brown analysis of Finance Act 2026, April 2026).

This reverses a long-standing planning quirk where defined-contribution pension pots passed to beneficiaries outside the IHT estate. Pensions had become — explicitly — an estate-planning vehicle for higher earners. From April 2027, that strategy ends.

Two narrow exceptions remain:

• Death-in-service benefits — whether paid at trustee discretion or otherwise — remain outside the estate
• Charity lump sum death benefits remain outside

For everyone else, an unused SIPP or workplace DC pot now potentially attracts both income tax (if the member dies aged 75 or over) and IHT (if estate value exceeds the NRB) — meaning effective tax rates above 60% on the same money in some cases.

HMRC's draft regulations on pension scheme administrator information-sharing requirements are expected to consult publicly in autumn/winter 2026.

Why IHT receipts have doubled in five years

IHT raised £6.70 billion in 2022/23, the most recent year of HMRC outturn data (HMRC, 31 July 2025). The Office for Budget Responsibility forecasts £8.7 billion for 2025/26 — over 25% higher in three years. The chart below shows the trajectory.

Three forces explain the increase. First, the nil-rate band has been frozen at £325,000 since 6 April 2009 while average UK house prices have approximately doubled — pulling more estates over the threshold (a phenomenon known as fiscal drag). Second, the share of deaths resulting in an IHT charge has crept back up to 4.62% in 2022/23 from a 2009/10 low of 2.6% (HMRC, 31 July 2025). Third, the average tax bill per chargeable estate is around £212,000, with London and the South East producing a disproportionate share of receipts.

12 legal ways to reduce your IHT bill

Each of the strategies below uses a specific provision of the Inheritance Tax Act 1984 or related primary legislation. None involves "avoidance" in the legal sense — they are reliefs HMRC explicitly provides. Most require planning years in advance.

1. Use the spouse exemption. Anything left to a UK-domiciled spouse or civil partner is exempt without limit (s.18 IHTA 1984). The transferable nil-rate band (s.8A) lets the survivor inherit any unused allowance, taking the joint tax-free total to up to £1,000,000.
2. Take the £3,000 annual gift exemption. Each individual can give away £3,000 per tax year free of IHT — and unused exemption from the immediately preceding year can be carried forward (s.19 IHTA 1984). A married couple gifting jointly can therefore move £6,000–£12,000 out of their estate annually without using any allowance.
3. Make small gifts of up to £250. Unlimited gifts of up to £250 per recipient per tax year, provided you have not used the £3,000 annual exemption on the same person (s.20).
4. Wedding gifts. Up to £5,000 to each child, £2,500 to each grandchild and £1,000 to anyone else getting married, IHT-free at the time (s.22).
5. Gifts out of normal expenditure from income. Regular gifts from surplus income that don't reduce your standard of living are immediately exempt — no 7-year clock applies (s.21 IHTA 1984). This is the most powerful and least-used relief: a higher earner gifting £1,000/month from genuine surplus income removes £12,000 a year from the estate, indefinitely.
6. The 7-year rule on larger gifts. Gifts above the annual exemptions are Potentially Exempt Transfers (PETs). They become fully exempt seven years after being made. Survive seven years and the gift drops out of your estate entirely (s.3A).
7. Taper relief on gifts made 3-7 years before death. If you die between three and seven years after making a gift above the NRB, the IHT due on that gift reduces on a sliding scale: 32% (3-4 years), 24% (4-5 years), 16% (5-6 years), 8% (6-7 years). See our deep-dive on IHT taper relief.
8. Leave 10% or more to charity. If at least 10% of the net chargeable estate goes to a registered charity or community amateur sports club, the residue is taxed at 36% rather than 40% (Schedule 1A IHTA 1984). On a £1M taxable estate this saves more than the donation costs.
9. Use the residence nil-rate band properly. The £175,000 RNRB applies only when a main residence passes to a direct descendant. If your home is held in a discretionary trust at death, the RNRB is lost — even if the eventual beneficiaries are your children. See our nil-rate band guide.
10. Trusts for life-interest planning. A bare trust, life-interest trust or discretionary trust can be used to control how assets are passed down, with periodic charge regimes that often produce lower effective IHT rates than direct inheritance. Read our trusts and gifting guide before establishing.
11. Life insurance written in trust. A whole-of-life policy written under trust pays out outside the estate, providing the liquidity to pay IHT without having to sell the house or business. Premiums themselves can fall under the gifts-from-income exemption (item 5).
12. Spend it. The least technical strategy and often the most effective: enjoy the money in life. The lifetime gift to oneself reduces the estate at the moment of expenditure and creates no IHT charge.

For complex estates, our planning strategies guide covers the more advanced techniques (deed of variation, business succession via APR, and excluded-property trusts for non-doms).

Gift rules and the 7-year clock

Gift rules cause more confusion than any other part of UK inheritance law. The key concept is Potentially Exempt Transfers (PETs) — gifts that become fully IHT-exempt seven years after being made, but trigger a tax charge if the donor dies first.

Source: Inheritance Tax Act 1984, s.7(4) and gov.uk gift rules. Note: taper relief reduces the tax on the gift, not the value of the gift itself.

A common misconception: taper relief only applies if the gift exceeds the nil-rate band. Gifts within the NRB are IHT-free regardless of how long the donor lives after making them — taper is irrelevant.

Special situations

Cohabiting couples

Cohabiting couples receive none of the spousal IHT advantages. Anything passed between unmarried partners on death is a transfer to a non-spouse and is subject to the normal IHT rules. There is no transferable allowance, no spouse exemption, no automatic combining of NRBs. A cohabiting couple with a £900,000 estate including a £400,000 home faces an IHT bill of approximately £160,000 on the second death — the same couple, married, would pay nothing.

Expats and non-doms

From 6 April 2025, the UK moved from a domicile-based to a residence-based IHT framework for foreign-situs assets. Long-term UK residents (10+ of the last 20 tax years) become liable to IHT on worldwide assets. New arrivals are exempt from UK IHT on foreign-situs assets for their first 10 years of residence. UK-situs assets (UK real estate, UK shares, UK bank accounts) remain in scope for everyone, regardless of residence. See our expat IHT guide for the detailed mechanics.

Family business owners

From 6 April 2026, the £2.5M cap on 100% BPR fundamentally changes succession planning for trading businesses worth more than that. Three structural responses are emerging: (1) lifetime transfer of shares more than 7 years before expected death (to use the PET regime), (2) restructuring to use both spouses' £2.5M allowances (now transferable), and (3) life insurance written in trust to fund the eventual IHT bill while keeping the business intact.

Farms and agricultural land

The same £2.5M combined cap applies to APR. The Treasury estimates approximately 500 farming estates per year will pay IHT for the first time. The 10-year interest-free instalment option may help cash-flow but does not reduce the underlying liability. Farms over £2.5M frequently exceed £5M including farmhouses, cottages and machinery — the planning window before April 2026 has now closed.

Second marriages and step-children

The RNRB applies to "direct descendants", which under s.8K IHTA 1984 includes step-children and adopted children — but only of the deceased, not of a spouse the deceased remarries. Blended-family planning often requires a deed of variation post-death or a life-interest trust to preserve allowances across both bloodlines.

How to actually pay IHT: forms, deadlines, instalments

The administrative mechanics of IHT trip up many executors. Three things to know.

The 6-month deadline

IHT is due within 6 months of the end of the month of death, after which interest accrues at HMRC's standard rate (currently 7.75% as of gov.uk HMRC interest rates, May 2026). Probate cannot be granted until IHT due (or arrangements to pay) is settled — meaning estates may need to borrow the funds to release assets.

The forms

• IHT400 — full IHT return, required for any estate where IHT is payable
• IHT205 (England, Wales, NI) / C5 (Scotland) — short return for excepted estates where no IHT is payable
• IHT100 — for chargeable lifetime transfers (e.g. into discretionary trusts) and 10-year periodic charges
• IHT436 — to claim the transferable RNRB from a deceased spouse

10-year instalment option

IHT on certain assets (land and buildings, controlling shareholdings in companies, qualifying business and agricultural property) can be paid in ten equal annual instalments. Interest applies in most cases — but from 6 April 2026, qualifying APR/BPR property can be paid by ten interest-free annual instalments under the extended provision in Finance Act 2026.

Frequently asked questions

How much can I inherit before paying tax?

A single individual can inherit up to £325,000 with no IHT (the nil-rate band). If the deceased left their main residence to direct descendants, the threshold rises to £500,000. A surviving spouse or civil partner can use any unused allowance from the deceased, taking the combined tax-free total to up to £1,000,000.

Is the £2.5 million BPR/APR cap per person or per couple?

£2.5 million is per individual, but is now transferable between spouses and civil partners following Royal Assent of Finance Act 2026 in March 2026. A married couple can therefore pass up to £5 million of qualifying APR/BPR property at 100% relief.

When do pensions become subject to IHT?

Most lump-sum and unspent DC pension benefits will be brought into the IHT estate from 6 April 2027. Death-in-service benefits and charity lump sum benefits remain outside the estate. The change is now in primary legislation (Finance Act 2026).

Can I give my house to my children to avoid IHT?

You can, but with a major caveat: if you continue living in the property without paying market rent to the new owners, the gift becomes a "gift with reservation of benefit" (s.102 Finance Act 1986) and is treated as still being in your estate. The 7-year clock does not start until you genuinely leave the property or start paying full market rent.

Does a gift to my children count if I die within 7 years?

Yes — but the IHT charge is reduced by taper relief if you survive at least 3 years. See the gifts table in section 8 above.

What if I'm not married — can my partner inherit my allowance?

No. Only legally married couples and civil partners can transfer unused IHT allowances. Cohabiting partners — regardless of how long they have lived together or whether they have children — cannot transfer allowances.

How is "main residence" defined for the RNRB?

Section 8H IHTA 1984 defines a qualifying residential interest. It must be a property that the deceased lived in at some point (it does not need to be at the date of death). If the deceased downsized or sold the home before death, the "downsizing addition" rules may preserve the RNRB — see s.8FA-FE.

What is the "taper" on the residence nil-rate band?

The £175,000 RNRB reduces by £1 for every £2 of estate value above £2 million, falling to zero at £2.35 million for an estate without spousal transfer. Estates that creep over £2 million can pay disproportionately more tax than slightly smaller ones — a planning trap.

Can charity giving really reduce my IHT rate?

Yes. If 10% or more of the net chargeable estate is left to a registered charity, the IHT rate on the rest of the estate drops from 40% to 36% (Schedule 1A IHTA 1984). On a £1 million taxable estate this means £40,000 of tax saved — often more than the cost of the charitable gift itself.

How do I reclaim IHT if I overpaid?

Use form IHT38 within 4 years of the death if you overpaid because asset values fell after probate. Form IHT35 applies to investments sold within 12 months of death at a loss.

Is there an IHT-free amount for grandchildren?

No specific allowance exists. Grandchildren are direct descendants for RNRB purposes and qualify for normal gift exemptions including £2,500 wedding gifts. There is no extra "grandchild" allowance.

What happens to my pension if I die after 75?

From April 2027: the pension may attract both income tax (at the beneficiary's marginal rate, since you died aged 75+) and IHT (if the estate exceeds the NRB). Effective tax rates above 60% on the same money are possible in high-income recipient cases.

Do I need a financial adviser to plan IHT?

For estates approaching or exceeding £1 million, almost always yes. Solicitors handle the will and probate; an FCA-authorised IFA handles the tax-efficient structuring. See our IHT adviser directory for FCA-verified specialists.

Will the government abolish IHT?

There are no current plans to abolish IHT. The Conservative government in 2024 considered scrapping it, but the Labour government elected in July 2024 instead reformed it (capping reliefs, bringing pensions into scope). The Commons Library notes that abolition has been periodically discussed for decades but never enacted (Commons Library SN00093, April 2026).

Do I pay IHT on a gift I receive?

Generally no — IHT is paid by the estate of the person who died, not the recipient. The exception: gifts made in the 7 years before death where the deceased's estate cannot cover the IHT — in that case the recipient may become liable for the tax on the gift (s.199 IHTA 1984).

Sources and methodology

This guide cites only primary or directly authoritative secondary sources. All numerical claims are linked to a specific HMRC publication, a specific section of legislation, or a specific Commons Library briefing. We do not cite secondary blogs, comparison sites, or commercial estate-planning marketing materials.

Primary legislation

• Inheritance Tax Act 1984 — full text on legislation.gov.uk
• Finance Act 1986 (s.102 — gifts with reservation of benefit)
• Finance Act 2026 (Royal Assent 18 March 2026) — Section 65 and Schedule 12 (BPR/APR cap), Schedule 13 (pension IHT)

Government and statistics

• gov.uk: Inheritance Tax thresholds (updated 26 November 2025)
• gov.uk: Inheritance Tax (citizen-facing guidance)
• HMRC: Inheritance Tax statistics commentary (31 July 2025)
• Office for Budget Responsibility: Economic and Fiscal Outlook (March 2026)

Parliamentary research

• House of Commons Library SN00093: Inheritance tax — Current policy and debates (April 2026)
• House of Commons Library CBP-10181: Changes to agricultural and business property reliefs for inheritance tax (8 April 2026)

Cross-references on Kaeltripton

• IHT Taper Relief Explained
• UK Inheritance Tax for Expats
• Inheritance Tax Gift Rules UK 2026
• Inheritance Tax Nil Rate Band UK 2026
• 12 Inheritance Tax Planning Strategies
• Trusts and Gifting UK 2026
• Inheritance Tax Adviser Directory UK

How we verified this guide

Every numerical claim in this guide was checked against the cited primary source on the date of publication. Tax rates, thresholds and allowances reflect the law as of 10 May 2026, including all provisions of Finance Act 2026 (Royal Assent 18 March 2026). The £2.5 million BPR/APR cap reflects the amendment voted at Bill Committee on 12 January 2026 (House divided 327 ayes to 182 noes), which raised the original £1 million proposal to £2.5 million. Where commentary differs from the cited primary source, we follow the primary source. This guide will be reviewed and updated whenever HMRC publishes new statistics, the Office for Budget Responsibility issues a new forecast, or relevant primary legislation changes.