Inheritance tax in the UK 2026/27: thresholds, allowances, gifts and pension changes

Inheritance tax (IHT) is a tax on the estate of someone who has died, charged at 40% on the value above the available tax-free allowance. In the UK that allowance is £325,000 for most people and up to £500,000 when a home passes to children or grandchildren. The £325,000 nil rate band has not risen since 2009, and both bands are fixed until 5 April 2031, so rising property values keep pulling more families into scope.

Two recent changes matter for 2026/27 planning. Business and farm relief has been capped since 6 April 2026, and under the pension changes most unused pensions will count towards the estate for deaths on or after 6 April 2027. This guide explains the rules in plain English.

Key points

• The standard IHT rate is 40%, or 36% where at least 10% of the net estate goes to charity.
• Transfers to a spouse or civil partner are generally exempt, with a £325,000 cap where the giver is a long-term UK resident and the spouse is not, and qualifying charitable gifts are exempt.
• Gifts to individuals are free of IHT if the donor lives for seven years, and some gifts are exempt from day one.
• From 6 April 2026, 100% business and farm relief is limited to £2.5 million per person, and shares quoted on AIM get 50% relief.
• For deaths from 6 April 2027, most unused pension funds and death benefits count as part of the estate.
• Executors report and pay the tax, so records and early planning make estate administration easier.

How does inheritance tax work in the UK?

Inheritance tax is a tax on the estate of someone who has died: their property, money and possessions, plus certain gifts made in the previous seven years. There is normally nothing to pay if the estate is below the £325,000 threshold, or if everything above it passes to a spouse, civil partner, charity or community amateur sports club (GOV.UK).

Where tax is due, it is charged at 40% on the value above the threshold. For example, an estate worth £500,000 with a £325,000 threshold pays 40% of £175,000, which is £70,000.

The rules are set out in the Inheritance Tax Act 1984, and HMRC administers the tax.

Who pays the tax?

The estate pays, and the executor or administrator handles it. Beneficiaries do not normally pay tax on what they inherit. The exception is gifts: if someone gave away more than £325,000 in the seven years before death, the people who received those gifts may have to pay the tax on them.

When do you pay inheritance tax?

IHT on an estate is due by the end of the sixth month after the date of death, and interest runs on late payment (HMRC technical note). Whether an estate must be reported to HMRC depends on the excepted-estate rules, not solely on its value. Even where no tax is due, the estate’s value usually has to be reported when applying for probate (GOV.UK).

What if the person lived abroad?

Since 6 April 2025, inheritance tax on overseas assets has depended on long-term UK residence rather than domicile. Broadly, someone who has been UK resident for at least 10 of the previous 20 tax years is a long-term UK resident, and their worldwide assets can be taxed. Someone who has lived in the UK for less than 10 of the last 20 years is treated as based abroad, and only their UK assets are taxed (GOV.UK).

Long-term UK resident status continues for three to ten tax years after someone leaves the UK, depending on how many of the previous 20 years they were resident (HMRC Inheritance Tax Manual, IHTM47020). Transitional rules may apply. The Statutory Residence Test decides whether someone is UK resident in a tax year, but it is not the complete IHT test. If you are considering a move overseas, see our guide to moving abroad and the UK Statutory Residence Test.

Does inheritance tax apply in Scotland, Wales and Northern Ireland?

Yes. Inheritance tax is a UK-wide tax, so the same thresholds and rates apply in Scotland, Wales and Northern Ireland as in England (GOV.UK). What differs is the estate paperwork. In Scotland, executors obtain confirmation rather than a grant of probate, and HMRC’s guidance notes that Scotland and Northern Ireland each have their own rules for who may act as personal representative (HMRC technical note).

What are the inheritance tax threshold and allowances in the UK for 2026/27?

Each person has a nil rate band of £325,000 and, if they leave their home to direct descendants, a residence nil rate band of £175,000. Both are fixed at these levels until 5 April 2031, and the £2 million point where the residence band starts to taper is fixed too (GOV.UK Budget 2025 policy paper).

Allowance or rule	Amount	Condition
Nil rate band	£325,000 per person	Applies to every estate
Residence nil rate band	£175,000 per person	Home left to children, stepchildren, adopted or foster children, or grandchildren
Residence band taper	£1 lost for every £2 above £2 million	Estates worth more than £2 million
Spouse or civil partner exemption	Unlimited	Legally married or in a civil partnership. Capped at £325,000 where the giver is a long-term UK resident and the spouse is not, unless the spouse elects to be treated as long-term UK resident
Charity exemption	Unlimited	Gift passes to a qualifying UK charity or community amateur sports club
Reduced rate	36% instead of 40%	At least 10% of the net estate goes to charity

The allowances, exemptions and 36% rate are set out in GOV.UK’s guide to how Inheritance Tax works, and the taper is explained on the Tax Confident page.

Are there inheritance tax bands?

Not in the way income tax has bands. An estate has a tax-free slice, made up of the nil rate band and, where it applies, the residence nil rate band. Above that slice there is one main rate of 40%, or 36% where the charity condition is met. Lifetime gifts that fall into the seven-year rule are taxed on the sliding taper relief scale shown in the gifts section, and transfers into trusts have their own charges.

How much is inheritance tax? Worked examples

The tax is 40% of the amount by which the estate exceeds the available allowances. These illustrations assume no gifts in the last seven years, no other reliefs and, where stated, that the home qualifies for the residence nil rate band.

Situation	Estate value	Allowances	Taxable amount	Tax at 40%
Single person, home not left to direct descendants	£450,000	£325,000	£125,000	£50,000
Single person, home left to children	£600,000	£500,000	£100,000	£40,000
Surviving spouse with the first partner’s unused allowances transferred	£1,200,000	£1,000,000	£200,000	£80,000
Single person, home left to children, estate above the taper	£2,400,000	£325,000 (residence band tapered to nil)	£2,075,000	£830,000

The last row shows the taper effect: at £2.4 million the £175,000 residence band is reduced by £200,000, so it disappears. A full calculation also depends on gifts, reliefs, the charity rate and debts. GOV.UK has a reduced rate calculator for estates that leave at least 10% to charity.

Can a married couple combine their allowances?

Yes. If the first partner to die does not use all of their nil rate band, for example because they left everything to the survivor, the unused part can generally be claimed on the survivor’s death (GOV.UK). A couple who both qualify for the residence band can therefore pass on up to £1 million between them without IHT.

How the residence nil rate band works in practice

The residence band depends on the home. It applies when you own a home, or a share in one, and leave it to direct descendants. On a single £175,000 allowance, the band is lost entirely once the estate reaches £2.35 million. Leaving a home to nieces, nephews or friends does not qualify.

GOV.UK has guidance to check if you can get the additional threshold.

How do gifts affect inheritance tax and what is the seven-year rule?

A gift to an individual is free of IHT if the person making it lives for seven years afterwards, and several gifts are exempt from the day they are made (GOV.UK). Gifts into trusts follow different rules, covered below.

Which gifts are exempt straight away?

Exemption	Limit	Condition
Annual exemption	£3,000 per tax year	One unused year can be carried forward, and only for one year
Small gifts	£250 per person per year	Cannot be used on someone who has had another allowance that year
Wedding or civil partnership gifts	£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else	Can be combined with other allowances, except the small gift allowance
Normal expenditure out of income	No limit	Paid from regular income, with usual living costs still affordable
Gifts to a spouse or civil partner	No limit	Capped at £325,000 where the giver is a long-term UK resident and the spouse is not, unless the spouse elects to be treated as long-term UK resident
Gifts to charities or political parties	No limit	The recipient must be a qualifying charity or political party

What happens if the donor dies within seven years?

Other gifts are potentially exempt transfers. Gifts made within seven years of death are taken into account when calculating IHT, and they first use up the donor’s available nil rate band, so a gift does not automatically trigger tax. Any amount above the nil rate band is taxed at 40% if the gift was made in the three years before death, or at the lower taper relief rates if it was made between three and seven years before death.

Years between gift and death	Rate of tax on the gift
Under 3	40%
3 to 4	32%
4 to 5	24%
5 to 6	16%
6 to 7	8%
7 or more	0%

Taper relief reduces the tax on the gift, not the tax on the rest of the estate. GOV.UK’s worked example has a £100,000 gift made three years before death. The recipient pays 32%, which is £32,000, because the donor’s £325,000 threshold was already used by an earlier gift.

Common gifting mistakes

• Gifts with reservation. Giving away a home but continuing to live there rent-free keeps it in the estate, and the seven-year rule does not apply. A donor who stays needs to pay market rent and their share of the bills.
• Selling below market value. The shortfall counts as a gift.
• No records. Executors have to identify gifts from the previous seven years, so keep a note of what was given, to whom, its value and the date. For regular gifts from income, keep evidence that the donor’s usual standard of living was unaffected.

What changed for business and farm property relief in April 2026?

Since 6 April 2026, 100% relief on qualifying business and agricultural property is limited to £2.5 million per person, and value above that gets 50% relief, an effective 20% IHT rate on the excess (GOV.UK tax information and impact note). Before that date, qualifying property could receive 100% relief without a cap.

The key takeaways are:

• One combined allowance. The £2.5 million covers business property relief and agricultural property relief together, not each separately.
• Transferable between spouses. Any unused part of the allowance can pass to a surviving spouse or civil partner.
• AIM shares. Shares admitted to trading on markets designated as “not listed” for this purpose, which includes AIM, now receive 50% relief in all circumstances. HMRC’s manual confirms that these shares are not counted against the £2.5 million allowance (HMRC Shares and Assets Valuation Manual).
• Paying over ten years. The option to pay IHT in equal annual instalments over ten years, interest-free, now extends to all property that qualifies for either relief.
• Trusts. A separate £2.5 million allowance applies to relievable business and agricultural property held in trusts.

What this means for a family company

Take a private trading company worth £4 million, owned by one person who has no unused allowance from a late spouse. The first £2.5 million is relieved in full. The remaining £1.5 million is relieved at 50%, so £750,000 is taxable at 40%, which is £300,000. If the full £325,000 nil rate band is also available and nothing else uses it, the taxable amount falls to £425,000 and the tax to £170,000. This is an illustration using the published rates. It ignores other reliefs and gifts, and the qualifying conditions for business relief must still be met.

For owner-managed businesses, the practical steps are a current valuation, a check that the company still qualifies as a trading business, and a plan for how any tax would be paid, including whether the ten-year instalment option helps. Inheritance tax is only one part of passing on a business. Our article on employee ownership trusts covers one succession route, and our transaction services team advises on sales and restructures.

Pension changes: will my pension count towards inheritance tax from April 2027?

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be treated as part of the estate for IHT. This is already law under the Finance Act 2026, which received Royal Assent on 18 March 2026. If a member dies before 6 April 2027, the current rules apply, even if the benefits are paid out later (HMRC technical note).

What is included and what is left out?

• Included: unused money in defined contribution pensions, including drawdown funds, and most lump sum death benefits. HMRC calls this “notional pension property”.
• Left out: death in service benefits paid from the member’s current employment, and dependants’ scheme pensions. Payments to a surviving spouse or civil partner are exempt in the usual way.
• Unchanged: the normal expenditure out of income exemption still applies to lifetime gifts made from pension withdrawals, if the exemption’s conditions are met.
• No business relief: neither business property relief nor agricultural property relief applies to pension funds.

Who reports and pays the tax?

Personal representatives are responsible for reporting the tax and are liable for paying it. Once pension benefits are allocated to a beneficiary, that beneficiary becomes jointly liable for the tax on their share. The scheme administrator is normally not liable, unless it fails to act on a valid withholding or payment notice.

Two mechanisms help executors fund the bill:

• Withholding. A personal representative who believes tax may be due can ask a scheme to hold back up to 50% of a beneficiary’s benefits. The notice can be given up to 15 months after the end of the month of death. HMRC says it is not meant for routine or precautionary use.
• Pensions Direct Payment Scheme. Executors or beneficiaries can instruct a scheme to pay the IHT straight to HMRC, which the scheme must do within 35 days of a valid notice for at least £1,000.

What should executors expect?

Executors will need to find every pension the person held, ask each scheme for a date-of-death value, and report the figures to HMRC. Schemes have 28 days to provide a valuation once asked. HMRC’s technical note says schemes should accept evidence of an executor’s authority before probate is granted.

HMRC’s first technical note says it does not reflect changes in Budget 2026, and a second note was published on 27 August 2026 (GOV.UK). More guidance is due before April 2027, so check GOV.UK for the latest position before acting.

How are trusts taxed for inheritance tax purposes?

Most property held in trust is “relevant property”, and IHT can arise when assets go into the trust, at each ten-year anniversary, and when assets leave it (GOV.UK). HMRC describes the design as a charge broadly comparable to 40% once a generation (HMRC Inheritance Tax Manual).

Charge point	Rate	Who pays
Entry charge, when someone transfers value into the trust	20% of the value above their available nil rate band	The person making the transfer, or the trustees
Ten-year anniversary	Up to 6% of the trust’s value above the threshold	Trustees
Exit charge, when capital leaves the trust	Up to 6%, based on time since the last ten-year charge	Trustees

The rates are summarised in HMRC’s consultation on property settled into trust. The calculations are complicated, and many family trusts that hold assets within the nil rate band pay little or nothing. Trustees should check the position for each trust. For the effect of the 2025 residence reforms on offshore trusts, see our article on excluded property trusts and the 2025 inheritance tax reform.

What is proposed for trust debts from 28 October 2026?

HMRC published draft legislation at the Autumn Budget 2026 that would change how liabilities are taken into account when valuing settled property. It would stop liabilities arising from avoidance arrangements from reducing IHT charges, and would set rules for how liabilities properly incurred by trustees are treated (GOV.UK). The draft would apply to transfers of value made, and occasions when tax is chargeable, on or after 28 October 2026 (draft legislation).

It is draft legislation and may change before it is enacted. Trustees, settlors and anyone whose estate plan involves loans or debts connected with a trust should review those arrangements once the final legislation is settled.

Do the business relief changes apply to trusts?

Yes. A £2.5 million allowance for 100% relief applies to relievable business and agricultural property held in trusts, as set out in the GOV.UK tax information and impact note.

What does the Autumn Budget 2026 mean for inheritance tax?

One IHT measure published with the 28 October 2026 Budget concerns trust liabilities. The headline thresholds are fixed until April 2031, and the April 2026 business relief rules are in force. Finance Bill 2026-27 was published as Bill 173 on 4 November 2026, and the Bill and its explanatory notes are on the UK Parliament website. It is still going through Parliament, so details can change. For the wider tax context, see our Autumn Budget 2026 overview.

IHT item	Position now	Source
Nil rate band, residence nil rate band and £2 million taper point	Fixed until 5 April 2031	GOV.UK
£2.5 million business and farm relief allowance	In force from 6 April 2026	GOV.UK
Unused pensions in the estate	Law under the Finance Act 2026, for deaths from 6 April 2027	HMRC
Liabilities relating to trust property	Draft legislation published 28 October 2026, proposed to apply to chargeable events from that date	GOV.UK
Two-year rule on tax-free pension death benefits (an income tax rule)	Being removed	GOV.UK

The two-year rule change is not an IHT measure, but it affects the same families. Tax-free pension death benefits will no longer become taxable just because the scheme pays them more than two years after learning of the member’s death, where the member died under 75. Removing that deadline does not remove the new IHT charge on the same pension funds.

How can you plan for inheritance tax?

The most useful steps are practical ones: know what the estate contains, use the exemptions that are available, and make sure the people who will deal with the estate can find what they need. These points are general information, not advice for any individual.

People often search for how to avoid inheritance tax. The lawful route is to use the exemptions, allowances and reliefs that the law provides, and to keep records. The Government targets arrangements it regards as avoidance: the October 2026 trust liability measure, for example, is designed to stop liabilities arising from avoidance arrangements from reducing IHT charges (GOV.UK). Take advice before relying on any arrangement sold as a way to cut an IHT bill.

1. List everything that could count. Include the home, savings, investments, business interests, gifts from the last seven years and, for deaths from 6 April 2027, pension funds.
2. Check the will and any pension nominations. Most pension schemes let trustees decide who receives death benefits after considering the member’s expression of wishes, so keep it up to date.
3. Use the regular exemptions. The £3,000 annual exemption, small gifts and gifts from surplus income all sit outside the seven-year rule. Keep dated records.
4. Confirm the home conditions for the residence nil rate band. The home must pass to direct descendants, and the band tapers away for estates above £2 million.
5. Claim unused allowances on the second death. Executors should claim the unused nil rate band and, where available, the unused residence band.
6. Value any business and check it still qualifies. Owners with qualifying business or farm assets above £2.5 million, or AIM shares, should model the tax and how it would be paid, including the ten-year instalment option.
7. Keep a list of pensions. HMRC suggests members keep an up-to-date record of all their pension arrangements, because executors will need to contact each scheme for a valuation.
8. Plan for cash. If executors ask a scheme to withhold up to 50% of benefits, beneficiaries may wait up to 15 months for the rest.
9. Review trusts that involve loans. The draft trust liability rules would apply from 28 October 2026.
10. Consider the charity rate. Leaving at least 10% of the net estate to charity can reduce the rate to 36%. GOV.UK has a reduced rate calculator.

Mistakes that cost families money

• Giving away a home but continuing to live in it without paying a market rent.
• Assuming taper relief reduces the tax on the whole estate rather than on the gift.
• Assuming that no reporting is required simply because the estate is below the threshold; check the excepted-estate rules.
• Treating a pension as outside the estate for a death on or after 6 April 2027.
• Leaving gift records until after the donor has died.

HMRC’s helpline can answer questions about the rules but cannot advise on how to pay less tax, so complex estates benefit from a qualified adviser (GOV.UK).

Inheritance tax FAQs

This article gives general information based on the law and published guidance at 13 November 2026. It is not personal tax or legal advice, and Finance Bill 2026-27 may change before it becomes law. Our tax advisers can help you review your own position: see our tax services.