UK Inheritance Tax 2026: Nil-Rate Bands, the 40% Rate, and How to Reduce IHT

The standard nil-rate band is £325,000 per person, plus an additional £175,000 residence nil-rate band when leaving a main home to direct descendants. A married couple can therefore pass on up to £1 million tax-free if both bands are fully available. These thresholds are frozen at current levels until April 2030, meaning more estates are dragged into IHT each year as house prices rise. The 40% IHT rate applies to the estate value above the available allowances.

The residence nil-rate band (RNRB) is an additional £175,000 IHT allowance available when an individual leaves a main residence (or proceeds from one) to direct descendants — children, stepchildren, adopted children, grandchildren and their spouses. It was introduced in 2017 specifically to make it easier to pass on the family home tax-free. The RNRB tapers away at £1 for every £2 of estate value above £2 million, disappearing entirely above £2.35 million. It is available to anyone leaving qualifying property to qualifying descendants, even if the property is downsized or sold before death (the "downsizing addition" rules).

Several gifting allowances are completely outside the seven-year rule: £3,000 a year (the annual exemption, can carry one year forward to £6,000), £250 per recipient per year (unlimited recipients), £5,000 to a child getting married, £2,500 to a grandchild getting married, regular gifts out of surplus income (unlimited if from genuine income surplus, not capital), and unlimited gifts between UK-domiciled spouses. Beyond these, larger gifts are "Potentially Exempt Transfers" — they fall outside your estate after seven years.

If you die within seven years of making a substantial gift (above the annual exemptions), the gift can be pulled back into your estate for IHT purposes. Taper relief reduces the effective tax rate: gifts within 3 years of death taxed at 40%, 3-4 years at 32%, 4-5 years at 24%, 5-6 years at 16%, 6-7 years at 8%, and beyond 7 years completely outside the estate. Note: taper relief only applies if cumulative gifts exceed the £325,000 nil-rate band in those seven years.

Whether IHT is payable depends on the total value of the estate, not just the house. If your parents\u2019 combined estate (house + savings + investments + minus mortgages and debts) is below £1,000,000 and they qualify for both nil-rate bands and the residence nil-rate band, no IHT is due. Above £1,000,000, IHT is charged at 40% on the excess. The IHT bill is paid by the estate (often by selling assets) before anything is distributed to beneficiaries — so children inheriting a house above the threshold may need to sell it to pay the tax, or take out a loan to do so.

Currently most defined contribution pensions are outside the estate for IHT — meaning pension pots can be passed to beneficiaries with no IHT charge. This is one of the most significant IHT planning advantages of pensions. However, the Autumn 2024 Budget announced that from April 2027, unused pension pots will be brought into scope for IHT, ending this tax planning approach. The detail of the new rules is being consulted on in 2025. For now (2026) most pension assets remain outside the estate, but the change is coming and people with large pensions should review their estate planning.

The most effective legitimate strategies: 1) Use both spouses\u2019 allowances by leaving everything to your spouse on first death (transfers nil-rate bands). 2) Make full use of annual gifting (£3,000 exemption, £250 small gifts, regular gifts from income). 3) Survive seven years after making larger gifts. 4) Set up a life insurance policy written in trust to pay the IHT bill so the estate is not forced to sell property. 5) Leave 10% or more to charity to reduce the IHT rate from 40% to 36%. 6) Use Business or Agricultural Property Relief on qualifying assets (subject to 2026 reforms). 7) Use trusts carefully — they have their own tax regime so only worthwhile in specific circumstances. Always speak to a STEP-qualified solicitor or chartered tax adviser before significant planning.

IHT is normally due six months after the end of the month in which the person died. Interest accrues on any unpaid tax from that date. The executors (or administrators if there is no will) must complete an IHT400 form and submit it to HMRC, who then issue a clearance certificate. Probate cannot be granted until the IHT bill is paid (or arrangements are in place for it to be paid). For estates that include property or other illiquid assets, IHT on those assets can be paid in 10 annual instalments — but interest is charged on the unpaid balance.