Inheritance Tax Threshold UK 2026: What You Need to Know

The Nil-Rate Band: The Basic IHT Threshold

• •Every individual has a nil-rate band of £325,000. This means the first £325,000 of your estate is tax-free.
• •Anything above the nil-rate band is taxed at 40%. So if your estate is worth £500,000, the IHT bill would be 40% of £175,000 = £70,000.
• •If you leave 10% or more of your net estate to charity, the IHT rate on the remainder drops to 36%.
• •The nil-rate band has been frozen since 2009. In real terms (adjusted for inflation), it's worth significantly less than it was — equivalent to roughly £220,000 in 2009 prices.
• •Because house prices have risen dramatically since 2009 while the threshold hasn't moved, many more ordinary families now face IHT liabilities, particularly in London and the South East.
• •The freeze until 2028 means this situation will continue to worsen as asset values grow.

The Residence Nil-Rate Band (RNRB)

• •The RNRB applies when you leave your main residence to direct descendants — your children, grandchildren, or stepchildren.
• •Combined with the standard NRB, this gives each individual an effective IHT-free allowance of up to £500,000 (£325,000 + £175,000).
• •For married couples and civil partners, the combined allowance can reach £1,000,000 if both allowances are used and transferred on the second death.
• •The RNRB is tapered for estates worth over £2 million. It's reduced by £1 for every £2 over the threshold. This means estates worth £2.35 million or more lose the RNRB entirely.
• •Downsizing protection: If you sell your home or move to a smaller property after July 2015, you may still qualify for the RNRB, provided you leave assets of equivalent value to direct descendants.
• •The RNRB does not apply if you leave your home to siblings, nieces, nephews, or friends — only direct descendants qualify.

Key IHT Exemptions and Reliefs

• •Spouse/civil partner exemption: Everything you leave to your spouse or civil partner is completely IHT-free, regardless of value. Any unused nil-rate band can also be transferred to the surviving spouse, effectively doubling their allowance.
• •Annual gift exemption: You can give away £3,000 per year IHT-free (£6,000 if you carry forward unused allowance from the previous year). This is per donor, not per recipient.
• •Small gifts exemption: Gifts of up to £250 per person per year to any number of individuals, provided they haven't already received part of the £3,000 annual exemption.
• •Wedding gifts: You can give up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else on their marriage or civil partnership, free of IHT.
• •Gifts from surplus income: Regular gifts made from your normal expenditure, out of income (not capital), are exempt from IHT with no upper limit. This is a powerful relief but requires careful documentation.
• •Potentially exempt transfers (PETs): Gifts of any value become IHT-free if you survive for 7 years after making them. If you die within 7 years, taper relief reduces the IHT due on a sliding scale.
• •Business Property Relief (BPR): Business assets, including shares in unlisted companies and some AIM-listed shares, can qualify for 50-100% relief from IHT.
• •Agricultural Property Relief (APR): Agricultural land and property used for farming can qualify for 50-100% IHT relief.

Practical Strategies to Reduce IHT

• •Use your annual gift exemptions every year. A couple giving £3,000 each per year can pass on £42,000 over 7 years completely free of IHT.
• •Make gifts from surplus income. If your income exceeds your living expenses, regular gifts to family (e.g., paying school fees, regular contributions to savings accounts) can be IHT-exempt with no limit.
• •Consider a whole-of-life insurance policy written in trust. This doesn't reduce IHT, but it provides a lump sum outside your estate to pay the IHT bill, ensuring your beneficiaries don't have to sell the family home.
• •Write your pension nominations carefully. Most pensions (including SIPPs and workplace pensions) are outside your estate for IHT purposes if nominated to beneficiaries. Draw from ISAs and savings before your pension to maximise this benefit.
• •Use trusts for larger gifts. Discretionary trusts, bare trusts, and other trust structures can help pass wealth to the next generation while managing IHT. Professional advice is essential here.
• •Consider leaving at least 10% of your estate to charity — this reduces the IHT rate from 40% to 36% on the taxable portion, which can actually save money in some cases.
• •Spend and enjoy your money. This isn't said flippantly — many people could reduce their estate by spending on experiences, travel, and quality of life rather than accumulating assets that will be taxed at 40%.

IHT Changes Announced and Upcoming

• •The nil-rate band and residence nil-rate band are confirmed frozen until April 2028 at £325,000 and £175,000 respectively. This fiscal drag continues to pull more estates into IHT.
• •From April 2027, most unused pension pots will be included in the estate for IHT purposes. This is a significant change that will affect many families who planned on pensions being IHT-free.
• •Agricultural Property Relief and Business Property Relief are being reformed from April 2026, with 100% relief limited to the first £1 million of combined agricultural and business assets, with 50% relief on amounts above this.
• •These changes mean that estate planning strategies need to be reviewed. What worked in 2024 may not be optimal in 2027.
• •If you have a significant estate (over £500,000 as an individual or £1 million as a couple), professional advice from an IFA or estate planning solicitor is strongly recommended.

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