UK Inheritance Tax Explained in 2026

UK inheritance tax (IHT) is the tax charged on the value of an estate when someone dies, subject to specific allowances and reliefs. The headline rate of 40 percent is one of the highest direct tax rates in the UK, but it applies only above the nil-rate bands and only to the part of the estate that is not covered by an exemption or relief. For most UK households, the practical question is not whether IHT applies in principle but how much (if any) it actually costs after the available bands and reliefs are deducted.

This article works through the structure of UK IHT, the bands and rates, the main exemptions and reliefs, and the planning levers that affect the eventual bill.

How UK inheritance tax works

UK inheritance tax is charged on the value of a deceased person's estate at death. The estate is the total of everything the deceased owned (property, savings, investments, personal belongings, business interests, life insurance policies not written in trust) less their debts and reasonable funeral expenses.

The tax is paid by the executor of the will (or the administrator in intestacy) from estate funds before the residual is distributed to beneficiaries. HMRC requires the IHT to be paid before probate is granted, which creates a cash-flow problem in some estates that is solved by various mechanisms including HMRC's instalment option for property and the Direct Payment Scheme through banks.

The bands and the 40 percent rate

The standard nil-rate band

Each individual has a standard nil-rate band of 325,000 pounds in 2026. The value of the estate up to this amount is not subject to IHT. The band has been frozen at this level for several years and is currently set to remain frozen under the most recent fiscal announcements.

Any unused portion of an individual's standard nil-rate band can be transferred to a surviving spouse or civil partner. This means a couple can pass on up to 650,000 pounds in standard nil-rate band before any IHT applies.

The residence nil-rate band

An additional residence nil-rate band of 175,000 pounds per individual is available where a qualifying main residence is left to direct descendants (children, stepchildren, adopted children, foster children, and grandchildren, broadly). The residence nil-rate band tapers away at 1 pound for every 2 pounds where the estate exceeds 2 million pounds; large estates can lose the residence nil-rate band entirely.

For a couple, the combined nil-rate bands can total 1 million pounds (650,000 pounds of standard plus 350,000 pounds of residence) where both the standard and the residence bands are fully available. Estates below this threshold typically have no IHT to pay.

The 40 percent rate

Above the available nil-rate bands, IHT is charged at 40 percent. A reduced rate of 36 percent applies where the deceased left at least 10 percent of their net estate (after deducting the nil-rate band) to qualifying charities. The reduction is a meaningful planning lever for estates close to or above the IHT threshold with a charitable intention.

The main exemptions

Spouse and civil partner exemption

Transfers between UK-resident spouses and civil partners are exempt from IHT without limit. This applies both to lifetime gifts and to bequests on death. The exemption is the most important UK IHT exemption in practice because it allows wealth to pass to a surviving partner without any tax charge.

The exemption is capped where one spouse is long-term UK resident and the other is not, unless the non-long-term-resident spouse elects to be treated as long-term resident. The 6 April 2025 reform replaced the old UK domicile concept with the long-term resident test for IHT purposes.

Charity exemption

Transfers to qualifying UK charities are exempt from IHT without limit. The charity must be a UK charity registered with the relevant regulator; foreign charities recognised by HMRC under specific provisions also qualify in some circumstances.

Annual exemption

Each individual has an annual gift exemption of 3,000 pounds per tax year, which can be used for lifetime gifts without any IHT consequence. Unused annual exemption can be carried forward one tax year only.

Small gifts exemption

Gifts of up to 250 pounds per recipient per tax year are exempt, provided the same recipient is not also benefiting from the annual exemption.

Wedding and civil partnership gifts

Wedding and civil partnership gifts are exempt up to: 5,000 pounds from a parent, 2,500 pounds from a grandparent or great-grandparent, 2,500 pounds between the spouses, and 1,000 pounds from any other person.

Gifts from surplus income

Regular gifts made from surplus income (not from capital) that do not affect the donor's standard of living are exempt from IHT. The exemption requires the gifts to be habitual, made from surplus income, and not from capital. Good record-keeping is essential to demonstrate eligibility to HMRC.

The seven-year rule

Lifetime gifts that are not covered by an exemption are potentially exempt transfers (PETs). If the donor survives seven years from the date of the gift, the gift is fully exempt from IHT. If the donor dies within seven years, the gift is added back into the estate and may be subject to IHT, with taper relief applying for gifts made between 3 and 7 years before death.

Taper relief reduces the IHT rate on the gift (not the value of the gift) on a sliding scale: 100 percent of the rate for gifts within 3 years, 80 percent for 3 to 4 years, 60 percent for 4 to 5 years, 40 percent for 5 to 6 years, and 20 percent for 6 to 7 years. Taper relief only benefits gifts large enough to exceed the nil-rate band on their own; smaller gifts that fit within the nil-rate band do not benefit from taper.

The main reliefs

Business Relief

Business Relief reduces the IHT value of qualifying business assets by 50 percent or 100 percent depending on the asset type. Shares in unquoted trading companies and interests in trading partnerships typically qualify for 100 percent relief; shares quoted on AIM and certain other assets qualify for 50 percent. Two years of ownership is normally required.

The Autumn Budget 2024 announced reforms to Business Relief from April 2026, capping the 100 percent relief at 1 million pounds with the excess qualifying for 50 percent relief. The gov.uk pages hold the current authoritative position on the implementation timetable and parameters.

Agricultural Property Relief

Agricultural Property Relief works similarly for qualifying agricultural land and buildings. The 2024 Budget announced parallel reforms to APR from April 2026.

Lifetime gifts and chargeable lifetime transfers

Most lifetime gifts to individuals are PETs and are outside IHT if the donor survives seven years. Lifetime gifts into most types of trust are chargeable lifetime transfers (CLTs) and are subject to an immediate 20 percent IHT charge to the extent they exceed the available nil-rate band; if the donor dies within seven years, a further charge can apply to bring the total up to the death rate of 40 percent (subject to taper).

The post-April 2025 residence-based regime

From 6 April 2025, the UK replaced the historical domicile-based IHT framework with a residence-based regime. A person is now a long-term UK resident, and exposed to IHT on worldwide assets, once they have been UK-resident under the Statutory Residence Test in at least 10 of the previous 20 tax years. Non-long-term residents are exposed to IHT only on UK-situated assets.

Paying IHT

IHT is due 6 months after the end of the month of death. Where the estate includes property, the IHT on the property element can be paid in instalments over 10 years (with interest). The executor obtains an IHT400 reference, calculates the liability, and pays HMRC before probate is granted.

Common pitfalls

The most common pitfalls are failing to claim the transferable nil-rate band from a deceased spouse, failing to claim the residence nil-rate band where eligible, ignoring lifetime gifts in the seven-year window when calculating the estate, and overlooking the surplus-income exemption when documenting historic gifts.

The 36 percent reduced rate calculator

Where at least 10 percent of the net estate (after deducting the available nil-rate band) is left to qualifying charities, the IHT rate on the rest of the estate is reduced from 40 percent to 36 percent. The 10 percent test is calculated on the net estate, not the gross estate. HMRC's Inheritance Tax Reduced Rate Calculator on gov.uk applies the calculation to individual cases.

The reduced rate can sometimes increase the net amount passing to family beneficiaries. Consider an estate of 1 million pounds with 325,000 pounds of nil-rate band and no residence nil-rate band. Without a charitable bequest, IHT on the 675,000 pound chargeable estate is 270,000 pounds at 40 percent. With a 10 percent charitable bequest of 67,500 pounds (10 percent of the 675,000 pound net estate), the charitable portion is exempt, the remaining 607,500 pound chargeable estate is taxed at 36 percent (218,700 pounds), and the total leaving the estate is 67,500 to charity plus 218,700 to HMRC. The family receives 1,000,000 minus 67,500 minus 218,700 equals 713,800 pounds, compared to 730,000 pounds without the charitable bequest. Crossing the 10 percent threshold costs the family 16,200 pounds in this example.

The reduced rate is more advantageous for larger estates where the saved IHT can exceed the charitable bequest. Modelling the threshold carefully can identify cases where increasing a planned charitable bequest from 5 percent to 10 percent saves the family more than the increased charitable amount.

Specific gift exemptions in detail

Several specific gift exemptions reduce the estate immediately without engaging the seven-year clock. The 3,000 pound annual exemption applies to lifetime gifts and can be carried forward one year if unused (so a person who has used neither for two years can together exempt 6,000 pounds in a single year). The small gifts exemption applies to gifts of up to 250 pounds per recipient per tax year, provided the recipient is not also benefiting from the annual exemption.

Wedding and civil partnership gifts are exempt up to defined amounts: 5,000 pounds from a parent of the bride or groom; 2,500 pounds from a grandparent or great-grandparent; 2,500 pounds between the spouses themselves; 1,000 pounds from any other person. The gift must be made before or at the time of the wedding (not afterwards) to qualify.

Gifts from surplus income (regular gifts that come out of the donor's surplus net income, not from capital, and do not affect the donor's standard of living) are exempt without limit. The exemption requires habit, surplus income, and no impact on lifestyle. Good record-keeping is essential because the exemption is claimed on death by the executor and HMRC reviews the evidence carefully.

Agricultural Property Relief overview

Agricultural Property Relief (APR) operates alongside Business Relief and reduces the IHT value of qualifying agricultural land and buildings. The relief is available at 100 percent for land and buildings occupied by the owner for agricultural purposes for at least two years before death (or where used for agriculture in a tenancy granted by the deceased) and at 50 percent in defined other circumstances. APR can apply to agricultural land, farmhouses (subject to character-appropriate tests), woodland used for forestry, and certain agricultural shares and partnership interests.

The April 2026 reforms cap the combined 100 percent relief under Business Relief and APR at 1 million pounds per individual. Above the cap, the relief drops to 50 percent. The reform substantially changes IHT planning for owners of substantial farming businesses and rural estates.

The April 2025 residence-based regime in detail

Before 6 April 2025, UK inheritance tax exposure on worldwide assets turned on the concept of domicile. Long-resident migrants who retained a foreign domicile of origin could shelter their worldwide assets from UK inheritance tax for many years through excluded property trusts and the remittance basis of taxation. From 6 April 2025, the domicile concept was replaced for IHT purposes with the long-term UK resident test: a person is a long-term UK resident once they have been UK-resident under the Statutory Residence Test in at least 10 of the previous 20 tax years.

Long-term UK residents are exposed to IHT on worldwide assets; non-long-term residents are exposed only to UK-situated assets. The reform substantially expanded the population of migrants exposed to UK IHT on worldwide assets and ended the historical use of excluded property trusts for new settlements. Transitional rules govern pre-existing trusts in narrow circumstances; specialist advice is essential for migrants with existing structures.

Important: This article is for general information and does not constitute regulated financial advice or legal advice. UK inheritance tax rules, allowances, and the post-6 April 2025 residence-based regime are subject to legislative change and HMRC guidance. Tax advice from a qualified adviser is essential where the estate is at or near the IHT threshold or where business, agricultural, or cross-border interests are involved.

Frequently asked questions

What is the UK inheritance tax rate?

The standard rate is 40 percent on the value of an estate above the available nil-rate bands. A reduced rate of 36 percent applies where at least 10 percent of the net estate is left to qualifying charities. Lifetime gifts into most trusts attract an immediate 20 percent charge above the available nil-rate band.

How much can I leave without paying inheritance tax?

Each individual has a standard nil-rate band of 325,000 pounds and a residence nil-rate band of up to 175,000 pounds where a qualifying main residence is left to direct descendants. A couple can typically pass on up to 1 million pounds before IHT applies, subject to the residence band conditions and the 2 million pound taper threshold.

Are gifts to my spouse subject to inheritance tax?

Transfers between UK-resident spouses and civil partners are exempt from IHT without limit. Where one spouse is long-term UK resident and the other is not, the exemption is capped unless the non-long-term-resident spouse elects to be treated as long-term resident.

What is the seven-year rule?

Lifetime gifts not covered by an exemption are potentially exempt transfers (PETs). If the donor survives seven years from the date of the gift, the gift is fully exempt from IHT. If the donor dies within seven years, the gift is added back into the estate, with taper relief reducing the IHT rate on gifts made between 3 and 7 years before death.

How do I find out if my estate will pay inheritance tax?

Add up the value of everything the deceased owns and subtract debts and reasonable funeral costs. Deduct the available nil-rate bands and any exemptions or reliefs. If the residual is positive, IHT applies at 40 percent on that residual. HMRC's online tools and the IHT400 forms guide the calculation in detail.

When is inheritance tax due?

IHT is due 6 months after the end of the month of death. The executor pays HMRC before probate is granted. IHT on property can be paid in instalments over 10 years (with interest) where it would otherwise create a cash-flow problem for the estate.