Tax Guide · 2025/26
Inheritance Tax UK: Complete 2025/26 Guide
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the £325,000 nil-rate band. With house prices and pension values rising while thresholds are frozen, more UK estates are becoming IHT-liable. This guide explains the rules, allowances, and key planning techniques.
The Two IHT Allowances
UK IHT works on a tiered allowance system. For 2025/26:
- Nil-Rate Band (NRB): £325,000 — the basic IHT-free threshold per person, unchanged since 2009 and frozen until April 2030[gov.uk]
- Residence Nil-Rate Band (RNRB): £175,000 — additional allowance when passing a main residence to direct descendants (children, grandchildren)[gov.uk]
A single person can pass up to £500,000 IHT-free (NRB + RNRB). A married couple or civil partners can combine allowances for up to £1,000,000 IHT-free, because the surviving spouse inherits unused NRB.
The RNRB tapers off for estates over £2 million (by £1 for every £2 of excess), fully withdrawn at £2.35 million estate value.
IHT Rate Examples
| Estate scenario | IHT bill |
|---|---|
| Single, £300k estate | £0 (below NRB) |
| Single, £500k estate, home to children | £0 (within NRB + RNRB) |
| Single, £700k estate, home to children | £80,000 (40% × £200k excess) |
| Couple, £1m estate, home to children | £0 (combined NRB + RNRB) |
| Couple, £1.5m estate, home to children | £200,000 (40% × £500k excess) |
| £2m estate, with 10% to charity | 36% reduced rate applies |
The 7-Year Rule on Gifts
Gifts made during your lifetime ("Potentially Exempt Transfers" or PETs) escape IHT if you survive 7 years. If you die within 7 years, the gift uses up your nil-rate band first. If the gift exceeds available NRB, “taper relief” reduces the IHT charge:
| Years between gift and death | Effective 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% (exempt) |
Important: taper relief only reduces the IHT on the gift itself, not the rest of the estate. And it only applies once the gift exceeds the available nil-rate band.
Exempt Gifts (No 7-Year Wait)
Some gifts are immediately and completely exempt from IHT:
- Annual exemption: £3,000 per tax year (can carry forward 1 unused year)
- Small gifts: up to £250 per person per year (unlimited recipients)
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
- Normal expenditure out of income: regular gifts from surplus income that don\'t affect standard of living
- Gifts to spouse / civil partner: completely exempt (UK domiciled)
- Gifts to charity or political parties
- Maintenance: for ex-spouse, dependent children, dependent relatives
Reliefs and Special Rules
- Business Property Relief (BPR): 100% relief on qualifying trading businesses, 50% on quoted shares in unquoted companies
- Agricultural Property Relief (APR): 100% on owner-occupied farms, 50% on let farms
- Charity reduction: 36% IHT rate (instead of 40%) if 10%+ of net estate goes to charity
- Quick succession relief: if you die within 5 years of someone who left you assets, IHT on those assets is reduced
- Deeds of variation: beneficiaries can rearrange a will within 2 years of death
Key Planning Techniques
- Use both spouses\' allowances — combined £1m IHT-free is the easiest IHT plan
- Make regular use of annual exemption — £3,000/year compounds over decades
- Gift early — start the 7-year clock; over 7 years, gifts are completely exempt
- Charity bequests — get 36% rate by giving 10%+ to charity
- Use trusts — but seek expert advice; rules are complex and changing
- Whole-of-life insurance in trust — pays out IHT bill without going through estate
- Spend it (within reason) — enjoy your money rather than the Treasury
FAQs
What is the UK Inheritance Tax threshold for 2025/26?
The nil-rate band is £325,000 per person, frozen until April 2030. An additional Residence Nil-Rate Band (RNRB) of £175,000 applies when passing a main residence to direct descendants. A married couple can pass up to £1 million completely IHT-free using both allowances.
What is the IHT rate?
IHT is charged at 40% on the value of the estate above the nil-rate band. A reduced rate of 36% applies if at least 10% of the net estate is left to charity. There's no IHT between spouses or civil partners — the surviving spouse inherits the deceased's unused nil-rate band.
What is the 7-year rule on gifts?
Gifts made more than 7 years before death are completely exempt from IHT. Gifts within 7 years use up the nil-rate band first. If they exceed it, "taper relief" reduces the IHT charge: 32% for gifts 3–4 years before death, 24% for 4–5 years, 16% for 5–6 years, 8% for 6–7 years.
Which gifts are exempt from IHT?
Annual exemption (£3,000 per year, can carry forward 1 year), wedding gifts (£5,000 to a child, £2,500 to grandchild, £1,000 others), small gifts (£250 per person per year), normal expenditure out of income (regular payments not affecting standard of living), gifts to spouse, gifts to charity, gifts to political parties.
Does my pension count toward IHT?
Generally no — pension pots fall outside the estate for IHT if you die before 75. After 75, withdrawals by beneficiaries are taxed as income. However, this is changing: from April 2027 the Labour Government is planning to bring pensions within IHT.
How is IHT paid?
IHT must be paid within 6 months of the end of the month of death, before probate is granted. For property, it can be paid in instalments over 10 years. Executors are personally liable for paying IHT — they often need to borrow or use a "direct payment scheme" with banks to pay before the estate is unfrozen.
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Disclaimer: IHT planning involves significant legal complexity. Always consult a STEP-qualified solicitor or chartered tax adviser for estate planning. This guide is for general information only.