Inheritance Tax in 2026/27: How the £325k and £500k Thresholds Actually Work

What is inheritance tax and who pays it?

Inheritance tax (IHT) is charged on the estate — property, money and possessions — of someone who has died. The tax is paid by the estate before beneficiaries receive anything. In 2026/27 the headline rate is 40% on the value of the estate above the available thresholds.

Around 4–5% of UK deaths result in an IHT charge, but that percentage rises steeply for estates with property in high-value areas. With house prices where they are, IHT is no longer just a concern for the wealthy.

Crucially, transfers between spouses and civil partners are exempt from IHT with no cap — so the tax is typically only an issue on the second death.

The nil-rate band (NRB): £325,000

Everyone who dies in 2026/27 has a nil-rate band of £325,000. The estate pays no IHT on the first £325,000 of value. This threshold has been frozen since 2009 and will remain at £325,000 until at least 2030 under current government plans. Over that period, rising house prices have dragged more and more estates into the IHT net.

Transferring the nil-rate band between spouses

When a spouse or civil partner dies and leaves everything to their surviving partner, their nil-rate band is unused. That unused allowance can be transferred to the surviving spouse and used on the second death.

If the first spouse used none of their NRB, the survivor gets a full 100% transfer — so the second estate has £650,000 of NRB available. If the first spouse used part of their NRB (e.g. left £100,000 to children), only the unused 69.2% (£225,000) transfers.

The residence nil-rate band (RNRB): £175,000

The residence nil-rate band is an additional IHT threshold available when a main residential property is passed to direct descendants — children, grandchildren, step-children, adopted children or their descendants.

In 2026/27 the RNRB is £175,000 per person. Like the NRB, unused RNRB from the first spouse can be transferred to the survivor — so a couple can access up to £350,000 of RNRB on the second death.

The £2M taper

The RNRB is progressively withdrawn for large estates. For every £2 the net estate exceeds £2,000,000, the RNRB is reduced by £1. So:

For a couple, the effective taper point starts at £2,000,000 on the second death and the combined RNRB is entirely lost at around £2,700,000.

Downsizing rules

If you sold or downsized your home after 8 July 2015 and no longer own a property worth £175,000+, the RNRB is not simply lost. HMRC applies downsizing additions — broadly preserving the RNRB you would have had, provided the remaining estate is left to direct descendants.

The £1M couples' threshold: how it adds up

Combining all available allowances for a married couple where both NRBs and RNRBs are fully available:

This only works if:

1. The first spouse's NRB and RNRB were not used on the first death.
2. The main residence is left to direct descendants.
3. The estate is below the £2M taper threshold.

IHT rates: 40% and the charity discount

Above the available thresholds, IHT is charged at a flat 40%.

There is one rate reduction: if you leave 10% or more of the net estate to qualifying charities, the IHT rate on the taxable portion drops to 36%. The saving is 4 percentage points — for a £200,000 taxable estate that is a £8,000 saving. The charity also receives its bequest, so the overall outcome for non-charity beneficiaries needs to be modelled carefully.

The 7-year rule and taper relief on gifts

One of the most effective ways to reduce IHT is to give assets away during your lifetime. Gifts made more than 7 years before death are entirely exempt from IHT — they fall outside the estate completely.

Gifts made within 7 years of death are called potentially exempt transfers (PETs). If you die within 7 years, they are added back to the estate and IHT is assessed. Taper relief reduces the effective IHT rate on gifts made between 3 and 7 years before death:

Note: taper relief only helps if the total of PETs exceeds the NRB. Gifts below the NRB attract no IHT regardless of timing.

Annual exemptions and small gift rules

You can give away certain amounts each year completely free of IHT with no 7-year clock:

• £3,000 annual exemption per person (unused portion can carry forward one year only — maximum £6,000 in year 2).
• £250 small gifts to any number of individuals per tax year (cannot combine with the £3,000 exemption for the same person).
• Marriage/civil partnership gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
• Regular gifts from surplus income — entirely exempt with no annual limit, provided they are regular, come from income (not capital) and do not reduce the donor's standard of living.
• Gifts to charity — fully exempt.
• Gifts to political parties — exempt up to certain conditions.

The regular gifts from income exemption is often overlooked and can be powerful for those with pension income they do not need.

Pensions and IHT from April 2027

This is the most significant IHT planning change in a generation. Currently, defined contribution (DC) pension pots sit outside the estate for IHT purposes and can be passed to named beneficiaries entirely free of IHT. For many families, this made pensions the most IHT-efficient asset to preserve.

From April 2027, unspent DC pension pots will be counted as part of the estate for IHT. The pension administrator will become responsible for calculating and paying IHT on lump-sum death benefits.

What this means in practice: If you are currently planning to spend other assets first and leave your pension pot to children, that strategy needs revisiting. Pension contributions made before death will now potentially face both income tax (on withdrawal by beneficiaries) and IHT on the pot itself — a significant double tax hit.

The rules are still being finalised by HMRC, and the implementation detail for how the pension administrator interacts with the estate's IHT calculation will matter a great deal.

Worked example 1: Margaret (widow, estate under £1M)

Margaret's husband passed away 5 years ago, leaving everything to her. His full NRB and RNRB were unused and transferred to Margaret.

Margaret's estate:

• Main home: £450,000 (leaving to her son, James)
• Savings and investments: £280,000
• Total estate: £730,000

Available IHT allowances:

• NRB (her own): £325,000
• Transferred NRB from husband: £325,000
• RNRB (home to son): £175,000
• Transferred RNRB from husband: £175,000
• Total IHT-free: £1,000,000

IHT calculation: £730,000 estate is well below the £1,000,000 combined threshold.

IHT due: £0.

James inherits the house and savings without any IHT. Margaret's estate was modest enough that even with only partial allowances this would likely have been £0 — but many families are not so fortunate.

Worked example 2: Richard (single, £1.5M estate)

Richard is widowed and has never remarried. He dies leaving everything to his three adult children. His wife pre-deceased him but had used £100,000 of her NRB on legacies to the children (so 69.2% of her NRB transfers = £225,000).

Richard's estate:

• Family home: £700,000 (passing to children)
• Investment portfolio: £500,000
• Cash and savings: £300,000
• Total estate: £1,500,000

Available IHT allowances:

• Richard's own NRB: £325,000
• Transferred NRB from wife: £225,000
• Richard's own RNRB: £175,000
• Transferred RNRB from wife: £175,000 (100% transferred as she had no property to pass to descendants)
• Total IHT-free: £900,000

Taxable estate: £1,500,000 − £900,000 = £600,000

IHT due: £600,000 × 40% = £240,000

The children will receive £1,260,000 between them. The £240,000 IHT must be paid to HMRC before probate is granted — often meaning the executors must arrange bridging finance if the estate is illiquid.

Practical planning steps

1. Write a will — without a will, intestacy rules may not pass assets to the right people, potentially wasting NRB and RNRB.
2. Check your nil-rate band position — use the inheritance tax calculator to model your estate.
3. Consider lifetime gifting — using annual exemptions and the 7-year clock strategically.
4. Review pension nominations — before April 2027 changes take effect, nomination forms should reflect the new IHT landscape.
5. Explore trusts — assets in certain trusts can be outside the estate, but trust taxation is complex and specialist advice is essential.
6. Business and agricultural relief — qualifying business assets and farmland can attract 100% or 50% IHT relief, effectively zero tax.

Sources

• HMRC: Inheritance Tax thresholds, rates and reliefs
• HMRC: Residence nil-rate band
• gov.uk: Gifts and Inheritance Tax
• HM Treasury: Autumn Budget 2024 — pensions and IHT
• Money Helper: Inheritance Tax