Inheritance Tax (IHT) is charged at 40% on the value of an estate above the nil-rate band when someone dies. Despite the high rate, only a small percentage of estates actually pay IHT — most fall below the thresholds or benefit from exemptions. Understanding the allowances and reliefs available can significantly reduce or eliminate the liability.
The Nil-Rate Band (NRB)
Every individual has a nil-rate band (NRB) of £325,000. This is the amount of your estate that can be passed on tax-free. This threshold has been frozen since 2009 and is currently scheduled to remain at £325,000 until at least April 2030.
Any portion of the estate above the NRB is taxed at 40%.
The Residence Nil-Rate Band (RNRB)
Since April 2017, an additional allowance — the Residence Nil-Rate Band — applies when a main residence is passed to direct descendants (children, stepchildren, grandchildren). The RNRB is £175,000 for 2025/26.
Combined with the NRB, a single person can pass on up to £500,000 tax-free (£325,000 + £175,000) when their home goes to direct descendants.
Taper on the RNRB
If the total estate exceeds £2,000,000, the RNRB is reduced by £1 for every £2 over £2M. This means the RNRB is fully removed for estates worth £2,350,000 or more.
Transferable Allowances Between Spouses
Assets passing between married couples or civil partners are exempt from IHT (the spouse exemption). When the first spouse dies and does not use their full NRB and RNRB, the unused proportion transfers to the surviving spouse’s estate.
This means a married couple can potentially pass on up to £1,000,000 tax-free (2 x £325,000 NRB + 2 x £175,000 RNRB) — provided the family home goes to direct descendants and the estate is below the £2M taper threshold.
The 7-Year Rule for Gifts
Gifts made during your lifetime are classified as Potentially Exempt Transfers (PETs). If you survive for 7 years after making the gift, it falls outside your estate entirely. If you die within 7 years, the gift is added back to your estate for IHT purposes, but taper relief reduces the tax rate:
| Years Before Death | IHT Rate |
|---|---|
| 0 – 3 years | 40% |
| 3 – 4 years | 32% |
| 4 – 5 years | 24% |
| 5 – 6 years | 16% |
| 6 – 7 years | 8% |
| 7+ years | 0% |
Annual Exemptions
Certain gifts are immediately exempt, regardless of the 7-year rule:
- Annual exemption: £3,000 per tax year (unused allowance carries forward one year)
- Small gifts: £250 per person per year (unlimited recipients)
- Wedding gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else
- Gifts out of normal expenditure: Regular gifts from surplus income (not capital) are exempt with no monetary limit
The Charity Rate
If you leave at least 10% of your net estate (the amount above the nil-rate bands) to charity, the IHT rate on the remainder reduces from 40% to 36%. This means that in some cases, leaving more to charity can actually increase the amount received by other beneficiaries because the reduced rate more than compensates for the charitable gift.
Business and Agricultural Relief
Business Property Relief (BPR) and Agricultural Property Relief (APR) provide relief on qualifying assets — trading businesses, unlisted shares, farmland and farm buildings, and AIM-listed shares. The Finance Act 2026 (s65 / sch 12) significantly reformed this regime with effect from 6 April 2026:
- Combined £2.5M allowance per person at 100% relief covering BPR and APR together
- Any qualifying property above the allowance drops to 50% relief (effective 20% IHT rate)
- AIM-listed shares capped at 50% relief regardless of the allowance
- The £2.5M allowance is fully transferable between spouses and civil partners — couples can shelter up to £5M of qualifying property at 100%
For estates below £2.5M of qualifying property, 100% relief still applies and nothing effectively changes. For estates above the cap, the excess faces an effective 20% IHT rate. Use the BPR & APR calculator to model your exact position for 2026-27 vs the legacy regime.
Key Takeaway
IHT planning is primarily about understanding and using the available allowances: the NRB, RNRB, spouse exemption, 7-year gift rule, and charity rate. Most estates can be structured to significantly reduce or eliminate IHT liability. Use our inheritance tax calculator to estimate your estate’s exposure.