The Complete Guide to Inheritance Tax in the UK

Every person has a Nil-Rate Band of £325,000. Anything above that in your estate is taxed at 40%.

If you leave your main residence to direct descendants (children, grandchildren, stepchildren), an additional Residence Nil-Rate Band of £175,000 is available — so up to £500,000 per person, or £1 million for a married couple, can pass free of IHT.

The Residence Nil-Rate Band tapers away at £1 for every £2 the estate exceeds £2 million. Above roughly £2.35 million, it is gone entirely. This taper is the single biggest reason wealthier families pay far more IHT than they expected.

Assets left to a spouse or civil partner pass free of IHT. When the second spouse dies, any unused nil-rate band from the first death can be transferred, so most married couples effectively have £1 million of combined allowances if their estate qualifies.

Unmarried couples get no such exemption. This alone catches out a very large number of cohabiting families every year.

You can give away money and assets during your lifetime. Most gifts fall outside your estate for IHT purposes if you survive seven years from the date of the gift. This is the 'seven-year rule' or Potentially Exempt Transfer (PET).

Die within seven years, and the gift comes back into your estate, though a taper relief reduces the tax charge if you survive at least three years.

Smaller exemptions exist and are widely underused: £3,000 annual gift allowance, £250 small-gift exemption per person per year, wedding gifts, and — the most powerful of all — gifts out of surplus income, which are immediately exempt if properly documented.

From 6 April 2027, most unused defined-contribution pensions and death benefits will be brought inside the estate for Inheritance Tax purposes. For a generation of professionals who deliberately preserved their SIPP as a tax-efficient inheritance vehicle, this rewrites the plan.

The planning premise of 'leave the pension untouched' is being reversed. For many estates the correct answer is now to draw the pension earlier, gift the surplus, and use the seven-year rule while it still works.

This is covered in full on our pension changes 2027 problem page — read it before you make any pension decisions in the next 18 months.

Two reliefs can dramatically reduce IHT for qualifying assets:

Business Property Relief (BPR) can give 100% relief on shares in most unquoted trading companies, and 50% on certain other business assets.

Agricultural Property Relief (APR) can give 100% relief on the agricultural value of farmland and farm buildings owned and occupied for the required period.

Both reliefs are subject to a shared £1 million cap for the 100% rate from April 2026, with 50% relief above that. This is a significant change from decades of unlimited relief and it changes what a farm or family business is worth to leave to the next generation.

Trusts are not a magic wand and they are not a scam. They are a legal structure for holding assets so they pass outside of individual estates, with their own tax rules — including a 10-year 'periodic charge' at up to 6% and an entry charge above the nil-rate band on some types.

Used properly, trusts are essential for protecting a share of the family home from care fees, ring-fencing life cover pay-outs, and passing wealth across generations without repeated 40% charges. Used carelessly they create tax without benefit.

Most families try to fix Inheritance Tax by picking a product. That rarely works. The right order is: understand the estate, estimate the potential exposure and identify which areas need legal drafting, regulated advice, or tax input, decide who is meant to inherit what, then choose structures.

A proper plan usually includes a will that uses both nil-rate bands, life cover written into trust to fund the tax bill on death, a property trust to protect the first spouse's share, a gifting strategy, and (where relevant) restructuring of business or agricultural assets.