How does Inheritance Tax work in the UK?

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Inheritance Tax (IHT) is the tax on the estate (property, money, and possessions) of someone who has died. It is paid by the estate before assets are distributed to beneficiaries. **2026/27 IHT thresholds:** | Allowance | Amount | |---|---| | Nil Rate Band (NRB) | **£325,000** | | Residence Nil Rate Band (RNRB) | **£175,000** | | Combined NRB + RNRB | **£500,000** | | Married couple combined maximum | **£1,000,000** | **IHT rate: 40%** on the value above these thresholds (36% if 10%+ of net estate is left to charity). **RNRB conditions:** The Residence Nil Rate Band applies when a qualifying residence is passed to a **direct descendant** (child, stepchild, grandchild). It tapers away for estates above £2M (loses £1 for every £2 above). **Transfers between spouses:** Transfers between spouses or civil partners are completely IHT-free. When the second spouse dies, their estate inherits any unused NRB from the first — potentially doubling the nil-rate band. **7-year rule on gifts (PETs):** - Gifts to individuals (Potentially Exempt Transfers) become fully IHT-free if you survive **7 years** after making them - Taper relief reduces the IHT charge on gifts made 3–7 years before death - Annual gift exemption: **£3,000/year** is immediately IHT-free **Pensions and IHT from April 2027:** From **April 2027**, unused pension funds (DC pots left unspent) will be brought into scope for IHT. This is a major change — pension drawdown strategies will need to factor in estate planning. **IHT planning strategies:** - Make use of annual gift exemptions - Consider whole-of-life insurance in trust to cover the IHT bill - Charitable giving - Business Property Relief (100% on qualifying business assets)

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