Inheritance Tax UK: Complete Guide to IHT in 2026

Inheritance tax affects more families than ever before. With property values rising faster than the tax thresholds, many ordinary families now face IHT bills they never expected. The good news is that with proper planning, inheritance tax can often be reduced or even eliminated entirely.

I've spent years helping families understand and navigate inheritance tax. In this guide, I'll explain exactly how it works, when it applies, and the legitimate strategies you can use to minimise it.

What is Inheritance Tax?

Inheritance tax (IHT) is a tax on the estate of someone who has died. It's charged at 40% on the value of an estate above certain thresholds.

The key points:

• It's paid from the estate, not by individual beneficiaries
• It's based on everything you own minus everything you owe
• Most estates pay no inheritance tax at all
• With planning, many more estates can legitimately avoid it

In the 2022-23 tax year, only about 4% of deaths resulted in an IHT charge. But that percentage is growing as property values increase while thresholds remain frozen.

Current IHT Thresholds (2026)

There are two main thresholds that determine when inheritance tax applies:

Nil-Rate Band: £325,000

This is the basic threshold. The first £325,000 of your estate passes tax-free. Anything above this is taxed at 40%.

This threshold has been frozen since 2009 and is confirmed to remain frozen until at least 2028. Meanwhile, house prices have roughly doubled, dragging many more estates into the IHT net.

Residence Nil-Rate Band: £175,000

This is an additional allowance available when you leave your home to direct descendants (children, grandchildren, stepchildren). Combined with the basic nil-rate band, an individual can pass on £500,000 tax-free if they're leaving a property to their children.

The residence nil-rate band is reduced by £1 for every £2 that your estate exceeds £2 million. If your estate is worth £2.35 million or more, you lose this allowance entirely.

Transferable allowances for married couples

When the first spouse dies, any unused nil-rate band can transfer to the surviving spouse. This means a married couple can potentially pass on up to £1 million tax-free (£325,000 + £175,000 x 2).

What Counts Towards Your Estate?

Your estate for IHT purposes includes:

• Your home (minus any mortgage)
• Bank accounts and savings
• Investments, shares, and ISAs
• Personal possessions (car, jewellery, furniture)
• Business interests
• Money owed to you
• Death-in-service benefits and some life insurance payouts
• Gifts made in the 7 years before death
• Gifts where you retained a benefit (like giving away your house but continuing to live in it)

What doesn't typically count:

• Most pensions (if they have death benefits to nominated beneficiaries)
• Life insurance written in trust
• Business assets qualifying for Business Relief
• Agricultural property qualifying for Agricultural Relief

Key Exemptions

The Spouse Exemption

Everything you leave to your spouse or civil partner is exempt from inheritance tax, regardless of value. This is the most valuable exemption and applies to:

• Gifts during your lifetime
• Everything passing to them in your will

However, this just defers the tax to when the surviving spouse dies. Good planning considers what happens at the second death, not just the first.

Note: If your spouse is not UK-domiciled, there's a limit of £325,000 on what can pass tax-free to them.

Annual Gift Exemptions

You can make certain gifts tax-free every year:

Annual exemption: £3,000

Each person can give away £3,000 per year, completely free of IHT. You can carry forward one year's unused exemption, so potentially £6,000 in one year if you didn't use last year's allowance.

Small gifts: £250 per person

You can give up to £250 to as many people as you like (but not the same people who received your £3,000 annual exemption).

Wedding gifts:

• Parents can give £5,000
• Grandparents can give £2,500
• Anyone else can give £1,000

Regular gifts from income:

If you make regular gifts from your income (not capital) that don't affect your standard of living, these are exempt regardless of amount. This is a powerful exemption for people with good pensions or investment income.

The 7-Year Rule

Gifts that don't fall within the exemptions above are called 'potentially exempt transfers' (PETs). They become fully exempt if you survive 7 years after making them.

If you die within 7 years:

• 0-3 years: 40% tax (full rate)
• 3-4 years: 32% tax
• 4-5 years: 24% tax
• 5-6 years: 16% tax
• 6-7 years: 8% tax
• 7+ years: 0% (fully exempt)

This is why estate planning is best done early. The sooner you make gifts, the more likely they'll be fully exempt.

Ways to Reduce Inheritance Tax

1. Use your exemptions

Make full use of annual gift exemptions (£3,000 each year). Over time, this adds up significantly.

2. Make gifts from income

Regular gifts from surplus income are immediately exempt. If your pension covers your expenses with room to spare, giving that surplus to family is tax-efficient.

3. Give to charity

Gifts to charity are exempt from IHT. If you leave at least 10% of your net estate to charity, the IHT rate on the rest drops from 40% to 36%.

4. Use trusts

Trusts can be useful for IHT planning, though the rules are complex. Common uses include:

• Life insurance trusts (keeping payouts out of your estate)
• Discretionary trusts for grandchildren
• Interest in possession trusts

5. Business Property Relief

Qualifying business assets can be exempt from IHT. This includes shares in unquoted trading companies, businesses you own, and certain AIM shares.

6. Agricultural Property Relief

Agricultural land and property used for farming can qualify for relief, potentially reducing or eliminating IHT on farms.

7. Make larger gifts (and survive 7 years)

If you're in good health and can afford it, giving away assets can significantly reduce your estate. But you must actually give them up – no "giving away your house and continuing to live in it rent-free."

When is IHT Paid?

Inheritance tax must normally be paid within 6 months of death. If it's paid late, interest is charged.

The challenge is that you often can't access the deceased's assets until probate is granted, but probate isn't usually granted until at least some IHT is paid. To solve this:

• Banks can release funds directly to HMRC
• You can borrow against the estate
• You can pay from your own funds (and be repaid from the estate)

Tax on property can be paid in instalments over 10 years, which helps when the estate is asset-rich but cash-poor.

Common IHT Mistakes

Assuming your spouse will handle it

Leaving everything to your spouse is tax-free, but it just pushes the problem to their death. Plan for both deaths, not just the first.

Gifts with reservation

You can't give away an asset and continue benefiting from it. Giving your house to your children but living in it rent-free doesn't work – the house stays in your estate.

Not keeping records of gifts

Your executors will need to know about any gifts you made in the 7 years before death. Keep records of what you gave, when, and to whom.

Forgetting about joint assets

Assets owned jointly may pass automatically to the survivor, but they still count for IHT purposes at the second death.

Not reviewing plans when rules change

IHT rules change. Arrangements that worked years ago may no longer be optimal. Regular reviews are essential.

DIY planning

Inheritance tax planning can be complex. Getting it wrong can cost far more than professional fees. For significant estates, proper advice is essential.

Inheritance tax planning is best started early and reviewed regularly. The earlier you act, the more options you have and the more tax you can legitimately save. Don't wait until you're elderly to start thinking about it.