IHT thresholds for 2025/26

Inheritance Tax is charged at 40% on the portion of an estate above the available thresholds. A reduced rate of 36% applies if at least 10% of the net estate is left to charity. Both the nil-rate band and the residence nil-rate band have been frozen since 2021 and will remain frozen until at least April 2028, meaning more estates fall into the IHT net each year as property and asset values rise.

AllowanceAmountConditions
Nil-rate band (NRB)£325,000Available to all estates
Residence nil-rate band (RNRB)£175,000Home left to direct descendants; tapered above £2m estate
Transferred NRB (from late spouse)Up to £325,000Unused % from deceased spouse/civil partner
Transferred RNRBUp to £175,000Unused % from deceased spouse/civil partner
Combined max (married couple)£1,000,000Both NRBs + both RNRBs, home to children, estate ≤ £2m

The residence nil-rate band — and how RNRB tapering works

The RNRB is an additional £175,000 allowance available when a qualifying home is left to direct descendants — children, stepchildren, adopted children, foster children, grandchildren, and their spouses. It does not apply to nieces, nephews, siblings, or friends.

Crucially, the RNRB is tapered away for larger estates: for every £2 the net estate exceeds £2,000,000, the RNRB is reduced by £1. The RNRB is completely lost for single estates above £2,350,000, and for couples using both allowances above £2,700,000. This taper catches many people who consider themselves “not that wealthy” — a London property plus savings can easily push an estate over £2m.

Example — RNRB tapering

Margaret’s estate totals £2,200,000 net. She leaves her home (worth £400,000) to her children and the rest to them too. Her NRB is £325,000 and she has a transferred NRB of £325,000 from her late husband. The RNRB should be £175,000, but her estate exceeds £2m by £200,000, so the RNRB is reduced by £100,000 (£200,000 ÷ 2). Her available RNRB is only £75,000 — not the full £175,000.

Total tax-free threshold: £325,000 + £325,000 + £75,000 = £725,000. Taxable estate: £1,475,000. IHT at 40%: £590,000.

Gifts and the 7-year rule

Gifts made more than 7 years before death are fully exempt from IHT. Gifts made within 7 years are Potentially Exempt Transfers (PETs) — they become chargeable if the donor dies within 7 years, but the tax rate is reduced by taper relief depending on how many years before death the gift was made.

The taper relief percentages apply to the tax on the gift, not the gift value itself. More importantly, gifts made within 7 years use up nil-rate band first — so a large gift can reduce the NRB available to the estate even if taper means little direct tax is owed on the gift itself.

Years before deathTaper relief on taxEffective IHT rate
0–3 years0%40%
3–4 years20%32%
4–5 years40%24%
5–6 years60%16%
6–7 years80%8%
Over 7 years—Fully exempt

IHT-exempt gifts — what you can give away tax-free

Not every gift is a PET. The following gifts are exempt from IHT regardless of when they are made:

  • Annual exemption: £3,000 per tax year (plus one year’s carry-forward if unused)
  • Small gifts: Up to £250 per person per year (cannot combine with annual exemption for the same person)
  • Marriage gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else
  • Normal expenditure out of income: Regular gifts made from surplus income — not capital — that do not reduce your standard of living. These must be documented carefully.
  • Gifts to charities, political parties, and housing associations are fully exempt.
  • Gifts between spouses and civil partners are fully exempt (with restrictions if one spouse is non-UK domiciled).

How to reduce an inheritance tax bill

IHT planning is a long game. The most effective strategies require action well before death:

  • Make gifts early — the 7-year clock only starts running when you make the gift, so the sooner you start, the sooner gifts become fully exempt.
  • Use annual exemptions — £3,000 per year sounds modest but over 10 years a couple can give £60,000 free of IHT.
  • Write life insurance in trust — a policy written in trust pays out outside the estate, providing cash for beneficiaries to pay the IHT bill without forcing a sale of assets.
  • Pension planning — unused pension pots currently fall outside the estate for IHT, though from April 2027 the government has proposed including defined contribution pension pots in estates. This is worth monitoring closely.
  • Leave 10% to charity — if your estate is above the threshold anyway, leaving 10% to charity reduces the rate from 40% to 36% on the whole taxable estate, which can actually benefit family beneficiaries.
  • Business and agricultural reliefs — qualifying business assets and farmland may be 50% or 100% exempt. Rules are complex and being reformed from April 2026.
Important — April 2026 changes

The Autumn 2024 Budget announced that Business Property Relief and Agricultural Property Relief will be capped at 100% relief on the first £1 million of qualifying assets from April 2026, with a 50% rate on the excess. This represents a significant change for farmers and business owners. Unused pension pots will also be brought into IHT from April 2027. These changes mean estate planning that worked in 2024 may need to be revisited.

Frequently asked questions

When does IHT have to be paid?
IHT must generally be paid within 6 months of the end of the month in which the person died. For deaths in January 2025, for example, the deadline is 31 July 2025. Interest is charged on late payment. Probate cannot normally be obtained (and therefore the estate cannot be administered) until at least some of the IHT has been paid — which creates a cash-flow problem since the assets are frozen. HMRC allows IHT on some assets, particularly property, to be paid in 10 annual instalments.
Does the RNRB apply to rented property or a downsized home?
The RNRB only applies to a property the deceased actually lived in as their home — a buy-to-let property they never lived in does not qualify. However, there is a downsizing addition: if the deceased sold or downsized their home on or after 8 July 2015 and left assets of equivalent value to direct descendants, the estate can still claim RNRB on the value of the original home, up to the maximum RNRB. This prevents people losing the allowance simply because they moved into a care home or smaller property in later life.
Can IHT be avoided by giving away the family home but continuing to live in it?
No — this is specifically blocked by the “gift with reservation of benefit” rules. If you give away your home but continue to live in it rent-free (or at below market rent), the gift is ineffective for IHT purposes and the property remains in your estate at its full value on death. To make a genuine gift, you must either move out completely or pay market rent to the new owner. This is a common misconception and the cause of painful surprises for many families.
Do I owe IHT if I inherit money from a parent?
No — IHT is paid by the estate before you receive your inheritance. As a beneficiary, you receive what’s left after IHT has been settled. You may owe Income Tax if inherited assets (such as a pension) generate income, or CGT when you eventually sell inherited assets, but the IHT itself is the estate’s liability, not yours. You should receive a clear statement from the executor showing the estate’s IHT position.
What happens if the estate can’t pay the IHT bill?
The estate cannot be fully administered until IHT is paid. If assets are illiquid (property, business assets), executors can apply to pay IHT in 10 annual instalments on those specific assets. Banks will often release funds to pay IHT directly to HMRC before probate is granted — so keeping some liquid assets in the estate is sensible planning. Life insurance written in trust can provide an immediate, outside-the-estate payment to cover the bill. If the estate genuinely cannot pay, HMRC has powers to collect from beneficiaries who have already received assets.
Is a gift to my children’s ISA exempt from IHT?
Potentially, yes. Cash gifts to children count as PETs, so they become fully exempt if you survive 7 years. If the gift is within your annual £3,000 exemption it’s immediately exempt. What your children then do with the money — including putting it in an ISA — is irrelevant for IHT purposes. The gift itself is what matters. Money already in your own ISA remains part of your estate for IHT purposes (the ISA only shelters income tax and CGT, not IHT).