Inheritance Tax UK 2025/26: Thresholds, Reliefs and the Pension Change

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Quick answer

UK Inheritance Tax (IHT) applies when an estate's value exceeds the available nil-rate bands. For 2025/26:

Above the available allowances: 40% IHT on the excess (36% if 10%+ of the estate goes to charity).

Most estates don't pay IHT — only the top ~4% of UK estates are taxable each year. But this proportion is rising due to frozen thresholds + rising house prices, and is forecast to double by 2030.

How the nil-rate band works

Nil-Rate Band (£325,000)

Every person has a £325,000 NRB. The band has been frozen at this level since April 2009 and is currently confirmed frozen until at least April 2030.

Residence Nil-Rate Band (£175,000)

An additional £175,000 applies if:

• You leave your main home (or share of it) to direct descendants (children, grandchildren, including step- and adopted).
• Your total estate is under £2 million. Above £2m, the RNRB tapers — losing £1 of RNRB for every £2 of estate above £2m. Disappears entirely at £2.35m.

The RNRB has also been frozen at £175,000 since April 2020.

Combining bands

A single person leaving a £500,000 estate including a £400,000 home to their children:

• £325,000 NRB + £175,000 RNRB = £500,000 covered.
• No IHT due.

A single person leaving a £700,000 estate including a £400,000 home to children:

• £500,000 covered.
• £200,000 taxed at 40% = £80,000 IHT.

Spouse / civil partner exemption

Transfers between spouses are completely exempt from IHT. There's also a "transferable nil-rate band" — if your spouse dies without using all of their NRB, you inherit the unused portion.

So a married couple where the first spouse leaves everything to the second:

• First death: nothing used. Full NRB + RNRB carry to survivor.
• Second death: survivor has £325k + £325k = £650k NRB, plus £175k + £175k = £350k RNRB.
• Combined £1m available for the second estate.

This is why "married couples have a £1m IHT allowance" is a commonly cited rule. It assumes both deaths under current rates.

Worked example — Robert's estate

Robert, widower aged 78, dies leaving a £900,000 estate:

• Main home: £500,000 (left to his daughter).
• ISAs and savings: £250,000.
• Other investments: £150,000.

His wife predeceased him 5 years ago, leaving everything to Robert (no IHT due, no nil-rate bands used).

Robert's available bands:

• His own NRB: £325,000.
• His wife's unused NRB transferred: £325,000.
• His own RNRB: £175,000 (home to direct descendant).
• His wife's unused RNRB transferred: £175,000.
• Total: £1,000,000.

Taxable estate: £900,000 - £1,000,000 = -£100,000.

No IHT due. The full £900,000 passes to his daughter tax-free.

The seven-year rule on gifts

Gifts made during your lifetime are subject to IHT if you die within 7 years of making them:

But this "taper relief" only applies to the portion of the gift above the available NRB. Below the NRB, the gift uses up some of the £325,000 threshold and isn't reduced by tapering.

Worked example — £400,000 gift, donor dies 5 years later

A £400,000 gift made 5 years before death:

• £325,000 absorbed by the NRB (no taper relief applies).
• £75,000 above NRB taxed at 40%, then taper reduced by 60% (because we're in years 5-6) → 16% on £75,000 = £12,000.

But the £325,000 NRB used is now not available to the rest of the estate, so the rest of the estate doesn't get any NRB at all — taxed at 40% from £0.

This is why large gifts within 7 years can be more painful than the headline "8 percentage points per year" suggests.

Annual gift allowances

Some gifts are immediately exempt from IHT regardless of 7-year rule:

£3,000 annual exemption

Per donor, per tax year. Can be carried forward 1 year if unused. So a couple can gift £6,000/year each (£12,000 total), or up to £24,000 with 1 year of carry-forward (£3k × 2 × 2 people × 2 years).

Small gifts (£250 per person, per year)

Up to £250 to any individual, in any tax year. Doesn't use the £3,000 annual exemption.

Wedding/civil partnership gifts

• £5,000 to a child.
• £2,500 to a grandchild/great-grandchild.
• £1,000 to anyone else.

Gifts out of normal income

This is the most powerful but least-used exemption. Regular gifts made from surplus income (not capital) are immediately exempt from IHT — no 7-year rule. The conditions:

• Gifts must be regular (e.g. monthly or annual).
• Funded from income, not capital.
• Must leave the donor with enough income to maintain their normal lifestyle.

Wealthy retirees with pension income exceeding their spending can give the surplus away. Documentation matters — keep records of income, spending and gifts.

Charity gifts

Gifts to UK registered charities are immediately exempt from IHT, in life or by will. If 10%+ of an estate is left to charity, the IHT rate on the rest reduces from 40% to 36%.

Business and agricultural reliefs

Two major reliefs eliminate IHT on qualifying business assets:

Business Relief (BR)

• 100% relief on shares in unquoted trading companies (AIM-listed shares historically qualified — but major change from April 2026).
• 100% relief on a business or interest in a business.
• 50% relief on land/buildings/plant used by the business.

April 2026 change: Business Relief on AIM-listed shares reduces from 100% to 50%. This affects many IHT-planning portfolios that hold AIM stocks specifically for IHT relief. Material reform.

Agricultural Property Relief (APR)

• 100% relief on agricultural land owned and farmed (or let on certain tenancies).
• Similar April 2026 reform — APR plus Business Relief combined cap of £1m of qualifying assets at 100%, then 50% above £1m. This is a major change for farming families.

The April 2026 reforms have been politically contentious — significant for family farms and small-business succession.

The big change — April 2027 pensions

Currently, pension pots are outside the IHT estate:

• Die before 75: pension inherited tax-free.
• Die after 75: pension taxed as income to the beneficiary as they draw it.

From 6 April 2027, pension pots will be included in the IHT estate:

• Test applies to the £325,000 NRB.
• IHT at 40% on the portion above available bands.
• Beneficiaries still face income tax on the underlying pension when drawn (post-75 rules).
• "Double taxation" effect: IHT + income tax combined can take 50-67% of inherited pensions.

This is one of the biggest IHT changes in a decade and affects roughly 150,000 estates per year that currently use pension wrappers as inheritance vehicles.

Pre-April 2027 strategies:

1. Spend pension first in retirement, leaving ISA/other assets for IHT-protected inheritance.
2. Crystallise the 25% tax-free lump sum before April 2027 if helpful.
3. Consider whole-of-life insurance in trust to cover the new IHT liability.
4. Pension drawdown sustainability planning — old "preserve pension for inheritance" advice flips.

Consult a financial adviser if you have substantial pension wealth. The change is fundamental.

Common IHT-saving strategies

1. Use both spouses' allowances — fully transferable on first death.
2. Pass the family home to direct descendants to access RNRB.
3. Use annual £3,000 gift allowance consistently.
4. Set up "gifts out of income" if you have surplus pension/dividend income.
5. Charity bequest of 10%+ drops IHT rate to 36%.
6. Term life insurance in trust — pays out tax-free outside the estate, covering predicted IHT bill.
7. Business Relief eligible investments — historically AIM shares (but post-April 2026 reform reduces impact).
8. EIS / VCT investments offer additional reliefs but with higher risk.

When IHT is paid

• Deadline: 6 months after the end of the month of death.
• Paid by: the executor of the estate (usually from estate funds before distribution).
• Interest accrues at 7.5% on late payments.
• Property-heavy estates can pay in 10 annual instalments to avoid forced sale of the property.

The executor file form IHT400 for taxable estates. For estates well under the threshold, the simpler IHT205 may suffice.

Try the numbers

Sources

• HMRC: Inheritance Tax
• HMRC: Inheritance Tax: nil rate band
• HMRC: Inheritance Tax: residence nil rate band
• HMRC: Business Relief
• HM Treasury: Autumn Budget 2024 — pension IHT reform (April 2027 effective)
• HM Treasury: Autumn Budget 2024 — Business Relief / APR caps (April 2026 effective)