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Most people assume inheritance tax is a problem for the very rich. It isn’t, and it hasn’t been for years. The tax-free threshold has been stuck at the same figure since 2009 while house prices have roughly doubled, so estates that would never have paid a penny a decade ago now get a bill. If you own a home in London or the South East, you are already closer to the line than you probably think.
This guide explains how inheritance tax works in 2026, what the thresholds are, the reliefs that can cut or remove the bill, and the changes coming in over the next two years that catch a lot of families off guard.
Not sure whether your estate is exposed? IBISS & CO offers a confidential, no-obligation review of your position. You can book a review here.
The 2026 numbers at a glance
| Allowance / rate | 2026/27 | Notes |
|---|---|---|
| Nil-rate band (per person) | £325,000 | Frozen until April 2031 |
| Residence nil-rate band (per person) | £175,000 | For a main home left to direct descendants; frozen until April 2031 |
| Combined threshold (couple, with home to children) | up to £1,000,000 | Two nil-rate bands plus two residence bands |
| Standard IHT rate | 40% | On the estate above available allowances |
| Reduced rate | 36% | If 10% or more of the net estate goes to charity |
| Annual gift exemption | £3,000 | Per person, per tax year |
| Taper threshold for the residence band | £2,000,000 | RNRB tapers away above this; also frozen until April 2031 |
Two things on this table are doing the real work, and neither is a headline rate. The first is the freeze: holding the bands still while values rise is a stealth tax increase, and it is the main reason more middle-income households now pay. The second is the residence band taper, which quietly strips the allowance from larger estates.
Understanding inheritance tax
Inheritance Tax (IHT) is a tax on the estate of someone who has died. The estate is everything they owned at the point of death: property, savings, investments, vehicles, and personal possessions like jewellery or art. Debts, the mortgage, and reasonable funeral costs are taken off the gross figure to give the net estate, and that net figure is what gets tested against the thresholds.
If your estate sits under the available allowances, there is usually no IHT to pay. Above them, the excess is normally taxed at 40%. How the rules land for you depends on your marital status, how your will is written, and who inherits.
Plan badly and your family can receive a lot less than you intended. That is the whole point of getting it right early: the planning is what protects the estate, not the hoping.
The nil rate band: your tax free threshold
Everyone gets a nil-rate band of £325,000. That first £325,000 of your estate passes free of IHT, and anything above it is generally taxed at 40%.
For married couples and civil partners, any unused nil-rate band passes to the survivor. So a couple can combine their allowances and shelter up to £650,000 between them. Claiming the transfer in full takes a bit of care with how the first estate is handled, which is where advice usually pays for itself.
This band has been £325,000 since April 2009. In the November 2025 Budget the government extended the freeze again, this time to April 2031. The figure looks generous until you remember what a house cost in 2009.
Residence nil-rate band: extra relief for family homes
The residence nil-rate band (RNRB) arrived in April 2017 and gives homeowners a further allowance when they leave their main home to direct descendants such as children or grandchildren. It is currently £175,000.
Add it to the standard band and one person can pass on up to £500,000 tax-free, or £1 million for a couple. There is a catch for bigger estates: once the estate is worth more than £2 million, the RNRB shrinks by £1 for every £2 over that line. For a high-value estate this taper can wipe the residence band out entirely, so it is worth modelling rather than assuming you get it. The £175,000 figure and the £2 million taper threshold are both frozen until April 2031.
You can read HMRC’s own summary of passing on a home for the official position.
How the rates are applied
The standard rate is 40%, charged only on the part of the estate above your available bands. A reduced rate of 36% applies if you leave at least 10% of your net estate to a registered charity. The charity rate is a genuine planning lever for people who already give, and it can lower the bill on the rest of the estate at the same time.
Who pays, and when
IHT is normally paid by the executor named in the will, or by the administrator if there is no will. Payment is due by the end of the sixth month after the month of death. Miss that and HMRC charges interest on what is outstanding.
For some assets, mainly property, the tax can be paid in instalments over ten years, though interest still runs on the balance. If asset values fall after death, or mistakes come to light during administration, overpaid IHT can sometimes be reclaimed. From April 2026 the government also extended interest-free instalment options to a wider set of business and agricultural property, which gives families more room to keep an asset rather than sell it to fund the tax.
IBISS & CO supports executors and administrators through the payment timeline, the HMRC forms, and the reliefs that are easy to miss under time pressure.
Gifts and lifetime transfers
Giving assets away during your lifetime is one of the oldest ways to reduce an IHT bill, but the rules have teeth. The 7-year rule means gifts made more than seven years before death usually fall out of the estate entirely. These are potentially exempt transfers, or PETs. Die within seven years and the gift can be pulled back in, with the tax tapering depending on how long you survived.
On top of that, several gifts are exempt regardless of the seven years:
- You can give away £3,000 a year free of IHT. If you didn’t use last year’s allowance, you can carry it forward once, so £6,000 in a single year.
- Wedding gifts are exempt up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for anyone else.
- Small gifts of up to £250 per person per year are exempt, as long as that person hasn’t already received part of your £3,000 allowance.
One trap catches people every year. If you give something away but keep using it, say you gift the house to your children but carry on living there rent-free, HMRC treats it as still being yours. This is a gift with reservation of benefit, and it undoes the whole exercise. The government’s guidance on the rules for giving gifts is worth a read before you act.
If you want to pass an estate to wider family rather than direct descendants, the rules shift again. We cover that in detail in our guide to passing your estate to nieces and nephews tax-efficiently.
The 2026 and 2027 changes you need to know about
This is the part most older guides skip, and it matters more than any single threshold.
Business and agricultural property relief was capped from April 2026
For years, qualifying trading businesses and farms could pass almost untouched by IHT thanks to 100% Business Property Relief (BPR) and Agricultural Property Relief (APR). That changed on 6 April 2026.
Now, 100% relief applies only to the first £2.5 million of combined qualifying business and agricultural property per person. Anything above that gets 50% relief instead, which works out as an effective 20% tax on the excess. The £2.5m allowance is transferable between spouses and civil partners, so a married couple can shelter up to £5 million at the 100% rate before the standard nil-rate bands are even counted.
Worth flagging how messy the road here was: the original October 2024 announcement set the cap at £1 million per person, the 2025 Budget made it transferable, and then on 23 December 2025 the figure jumped to £2.5 million. It is now law under the Finance Act 2026. If you run a family business or own farmland, the planning you did before 2024 may no longer fit. The House of Commons Library keeps a clear running summary of the APR and BPR changes if you want the source.
If your wealth is tied up in a trading company or land, this is the change to act on. Our family-owned business and high net worth teams deal with exactly this.
Inherited pensions come into the IHT net from April 2027
Until now, an unused pension pot has been one of the most tax-efficient things to leave behind, because it usually sat outside the estate. From 6 April 2027 most unused pension funds and death benefits will count as part of the taxable estate. Anyone who has been using a pension as a quiet way to pass wealth down should review that plan well before the date, because the maths changes.
The freeze keeps pulling more families in
None of the main thresholds are rising. The nil-rate band, the residence band, and the £2 million taper line are all frozen until April 2031. As wages and house prices climb, more estates cross thresholds that haven’t moved since 2009. You don’t have to get richer to get a tax bill; the line just stays still while you do.
Trusts and inheritance tax
Trusts are a more advanced tool. They let you move assets out of your estate while keeping some control over how and when beneficiaries receive them.
Discretionary trusts give the trustees the power to decide what each beneficiary gets and when. Bare trusts do the opposite: the beneficiary owns the assets outright, even if they are too young to get their hands on them yet.
Trusts are useful, but they are not free of friction. Many face periodic charges every ten years and exit charges when assets leave. The structure has to match your goals and your circumstances, or it can cost more than it saves. Our inheritance tax specialists can tell you honestly whether a trust earns its place in your plan, or whether something simpler does the job.
Ways to reduce an IHT bill
Good planning can take a real bite out of the eventual tax. The main levers are:
- Lifetime gifting. Start early enough to clear the seven-year window, and use the annual exemptions every year rather than in a panic.
- Charitable giving. Leaving 10% or more of the net estate to charity drops the rate on the rest from 40% to 36%.
- Life insurance written in trust. A policy held in trust pays out outside the estate and can cover the IHT bill, so the family isn’t forced to sell the house or the business to pay HMRC.
- Using both spouses’ allowances. Transfers between spouses and civil partners are exempt, and structuring wills to use both nil-rate bands protects more of the estate.
- Reviewing business and pension assets in light of the 2026 and 2027 changes above.
We go deeper on the practical options in our guide to reducing inheritance tax in the UK.
Common mistakes
Most IHT problems come from a handful of avoidable errors:
- Giving assets away without clearing the seven-year rule, or without truly giving up the benefit, so the gift stays in the estate anyway.
- Forgetting that inherited assets can carry their own tax. Rent from an inherited property or dividends from inherited shares are income, and they’re taxable.
- Ignoring foreign property and investments. Assets abroad can trigger tax in another country as well as the UK, and the interaction between the two systems needs care.
If you live abroad or own UK assets as a non-resident, the rules are different again, especially since the move to a residence-based system in 2025. Our inheritance tax guide for UK non-residents covers that ground.
Practical steps to prepare your estate
Good estate planning starts with writing things down.
- Write or update your will so it reflects what you actually want now, not what you wanted ten years ago.
- List your assets and liabilities accounts, property, investments, valuables and keep the list current.
- Store the paperwork somewhere your executor can find it: the will, title deeds, insurance policies, pension details. A perfect plan helps no one if nobody can locate it.
Why advice is worth it here
IHT planning isn’t one move; it is a set of decisions that interact, and the rules keep shifting under your feet. The thresholds are frozen, business relief has been recut, and pensions are about to change category. A good adviser keeps your plan current and stops the expensive mistakes that only show up after death, when it’s too late to fix them.
If you’d rather know where you stand than guess, talk to an IBISS & CO adviser. We’ll review your estate, tell you plainly whether you have an IHT problem, and set out the options if you do.
Frequently Asked Questions
What is the inheritance tax threshold in 2026?
£325,000 per person (the nil-rate band), plus up to £175,000 if you leave a main home to children or grandchildren. A couple can combine these for up to £1 million. Both figures are frozen until April 2031.
How much is inheritance tax in the UK?
40% on the value of the estate above your available allowances. It drops to 36% if at least 10% of the net estate is left to charity.
Who pays the inheritance tax bill?
The executor of the will, or the administrator if there is no will. It’s paid from the estate, not by the beneficiaries personally, and it’s due within six months of the end of the month of death.
What changed for inheritance tax in 2026?
From 6 April 2026, 100% business and agricultural property relief is capped at £2.5 million per person, with 50% relief above that. The cap is transferable between spouses. Separately, most inherited pensions come into the estate from April 2027.
Does the 7-year rule still apply to gifts?
Yes. Gifts made more than seven years before death are usually free of IHT. Gifts within seven years can be taxed, with the rate tapering the longer you survive after making them.
Can I avoid inheritance tax legally?
You usually can’t remove it entirely, but allowances, reliefs, gifting, and trusts can reduce it substantially. The right combination depends on your estate, which is what a review is for.
