How does UK Inheritance Tax work in 2026/27?
UK Inheritance Tax (IHT) is charged at 40% on the net value of an estate above statutory tax-free allowances. Every individual has a £325,000 Nil-Rate Band, plus an additional £175,000 Residence Nil-Rate Band when leaving a main home to direct descendants. Married couples and civil partners can combine unused allowances, passing on up to £1,000,000 completely tax-free. Under confirmed legislation, unused pension funds are brought into IHT from 6 April 2027.
Key Statutory IHT Facts & Thresholds (2026/27)
- Standard Nil-Rate Band (NRB): £325,000 per individual (frozen until 5 April 2030).
- Residence Nil-Rate Band (RNRB): Up to £175,000 when leaving a family residence to children or grandchildren.
- Married Couple Combined Threshold: Up to £1,000,000 tax-free on second death using 100% transferable allowances.
- Headline IHT Tax Rate: 40% on net estate assets above available nil-rate bands.
- Reduced Charitable Rate: 36% if 10% or more of net estate is gifted to registered UK charities.
- Annual Gifting Exemption: £3,000 per tax year with 1-year carry forward (up to £6,000 total).
- Confirmed April 2027 Law: Unused defined contribution pension funds and death benefits included in taxable estates.
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Launch Free Inheritance Tax Calculator →What is Inheritance Tax and How Does It Work in 2026/27?
UK Inheritance Tax is a statutory levy assessed on the worldwide estate of an individual upon their death, encompassing residential property, cash deposits, stock investments, business assets, vehicles, and personal possessions. Before any tax liability arises, your estate benefits from statutory nil-rate bands that shield up to £500,000 for single individuals or £1,000,000 for married couples, with any taxable remainder charged at a flat rate of 40%.
When an individual passes away in the United Kingdom, their appointed estate executors or personal representatives must complete a formal inventory of all assets held at the date of death. From this gross asset valuation, allowable liabilities are deducted, including outstanding mortgage balances, personal loans, unpaid credit card balances, and reasonable funeral expenses. The resulting figure constitutes the net taxable estate. If the net estate sits below your available statutory allowances, zero tax is due. If it exceeds your allowances, your executors must settle the 40% tax charge directly from estate funds before proceeds can be distributed to beneficiaries named in your will.
Inheritance Tax is administered by HM Revenue and Customs (HMRC) under the Inheritance Tax Act 1984. While headline headlines often portray IHT as an unavoidable burden, official HMRC statistics confirm that only around 4% to 5% of UK estates incur an IHT charge each year. This is primarily because married couples benefit from unlimited inter-spousal exemptions and transferable allowances that protect seven-figure family estates when structured correctly.
Inheritance Tax Thresholds and Allowances (2026/27)
The UK Inheritance Tax allowance structure is built on two statutory pillars: the £325,000 basic Nil-Rate Band (NRB) and the £175,000 Residence Nil-Rate Band (RNRB). Both thresholds are currently frozen by Treasury statute until 5 April 2030, meaning fiscal drag continues to draw more rising property values and investment portfolios into the 40% tax net each year.
| Statutory Allowance Category | Single Individual | Married Couple / Civil Partners | Qualifying Conditions & Statutory Notes |
|---|---|---|---|
| Basic Nil-Rate Band (NRB) | £325,000 | £650,000 | Applies to all estate assets (property, cash, shares). Frozen to April 2030. |
| Residence Nil-Rate Band (RNRB) | £175,000 | £350,000 | Requires main home left to direct descendants (children, grandchildren). |
| Total Maximum Tax-Free Allowance | £500,000 | £1,000,000 | Combines both standard NRB and full RNRB allowances. |
| RNRB Taper Threshold | £2,000,000 | £2,000,000 | RNRB reduces by £1 for every £2 the net estate exceeds £2,000,000. |
| Standard IHT Rate Above Threshold | 40% | 40% | Charged on net value exceeding available allowances. |
| Reduced Rate for Charitable Wills | 36% | 36% | Applies if 10% or more of net estate is bequeathed to registered UK charities. |
The Residence Nil-Rate Band (RNRB) Explained
Introduced to prevent family homes from being forcibly sold to settle death duties, the Residence Nil-Rate Band grants an extra £175,000 allowance on top of the £325,000 basic allowance. However, strict statutory conditions govern its availability:
- Direct Descendants Requirement: The residential property must be inherited by direct lineal descendants. This includes natural children, grandchildren, great-grandchildren, stepchildren, adopted children, foster children, and their spouses or civil partners. Leaving your home to siblings, nieces, nephews, or friends disqualifies your estate from the RNRB.
- Qualifying Residential Interest: The deceased must have lived in the property as a residence at some point during their ownership. Pure commercial property or buy-to-let properties never occupied by the deceased do not qualify.
- The £2 Million Estate Taper: For estates with a net value exceeding £2,000,000, the RNRB tapers away at a rate of £1 for every £2 of excess value. For a single individual, the £175,000 allowance is completely eliminated when the estate reaches £2,350,000. For a married couple with a transferred £350,000 allowance, it tapers to zero at £2,700,000.
- Downsizing Relief: If you downsize to a smaller property or sell your home to move into assisted living after 8 July 2015, your executors can claim a Downsizing Addition to preserve the equivalent value of the lost RNRB, provided the replacement assets pass to direct descendants.
How Much Inheritance Tax Will You Pay? Worked Examples
To determine your exact Inheritance Tax bill, executors aggregate all qualifying assets at open-market value, subtract allowable debts and funeral expenses, apply available nil-rate bands in statutory order, and calculate 40% on the remaining taxable balance. Taking proactive steps such as gifting to charity or structuring spousal wills can substantially reduce the effective tax rate.
Example 1: Single Homeowner Passing Property to Children (£650,000 Estate)
Consider a widowed or unmarried individual who leaves a family home worth £450,000 and savings of £200,000 to their two children:
- Total Gross Estate: £650,000.
- Basic Nil-Rate Band (NRB): £325,000 applied first.
- Residence Nil-Rate Band (RNRB): Full £175,000 applied because the home passes to direct descendants.
- Total Tax-Free Allowances: £325,000 + £175,000 = £500,000.
- Taxable Estate Balance: £650,000 − £500,000 = £150,000.
- Inheritance Tax at 40%: £150,000 × 40% = £60,000.00.
- Effective Tax Rate: 9.23% across the whole £650,000 estate.
Example 2: Married Couple with Transferred Allowances (£1,400,000 Estate)
Consider a surviving spouse who passes away with an estate of £1,400,000, including a £900,000 family home left to their children. On the first spouse’s death, all assets passed to the surviving spouse under the 100% spouse exemption, leaving 100% of the first spouse’s allowances unused:
- Total Net Estate: £1,400,000.
- Transferred Basic Nil-Rate Band: £325,000 (survivor) + £325,000 (deceased spouse) = £650,000.
- Transferred Residence Nil-Rate Band: £175,000 (survivor) + £175,000 (deceased spouse) = £350,000.
- Combined Tax-Free Threshold: £650,000 + £350,000 = £1,000,000.00.
- Taxable Estate Balance: £1,400,000 − £1,000,000 = £400,000.
- Inheritance Tax at 40%: £400,000 × 40% = £160,000.00.
- Effective Tax Rate: 11.43% across the full £1.4m estate.
Example 3: The 36% Reduced Charitable Rate (£800,000 Estate)
If an estate donates 10% or more of its net baseline value (after deducting nil-rate bands) to registered UK charities, the headline rate of IHT on the remainder falls from 40% to 36%. For a single person with an £800,000 estate and £325,000 basic allowance, donating 10% of the £475,000 net baseline (£47,500) cuts the tax on the remaining £427,500 from £171,000 to £153,900, delivering substantial support to good causes while reducing the HMRC liability.
The 7-Year Gifting Rule and Taper Relief Explained
Under the UK 7-year gifting rule, outright lifetime gifts made to other individuals are classified as Potentially Exempt Transfers (PETs) that drop entirely out of your taxable estate if you live for seven full years after giving them. If death occurs within the seven-year window, sliding taper relief reduces the tax liability, but only on cumulative gifts that exceed the £325,000 Nil-Rate Band.
Every UK taxpayer can take advantage of statutory annual gifting exemptions that are immediately 100% exempt from IHT without needing to satisfy the seven-year survival rule. Read our dedicated guide on how much you can give tax-free in the UK for complete details on the £3,000 annual exemption, small gift allowances of £250, and regular gifts out of surplus income.
| Years Between Gift and Death | Statutory Taper Relief | Effective Tax Rate on Gift | HMRC Tax Treatment |
|---|---|---|---|
| 0 to 3 Years | 0% (Nil) | 40% | Full standard IHT rate payable on gifts exceeding £325k. |
| 3 to 4 Years | 20% Reduction | 32% | Tax liability reduced by one-fifth. |
| 4 to 5 Years | 40% Reduction | 24% | Tax liability reduced by two-fifths. |
| 5 to 6 Years | 60% Reduction | 16% | Tax liability reduced by three-fifths. |
| 6 to 7 Years | 80% Reduction | 8% | Tax liability reduced by four-fifths. |
| 7 or More Years | 100% (Full Relief) | 0% | Gift falls out of the estate completely tax-free. |
The Nil-Rate Band Trap: Why Taper Relief Often Confuses Families
A widespread misconception is that taper relief reduces the tax on any gift made between three and seven years before death. Under HMRC statutory rules, lifetime gifts absorb your £325,000 Nil-Rate Band in strict chronological order. Because gifts within the £325,000 allowance are taxed at 0%, taper relief applied to 0% is still 0%. Taper relief only provides a financial saving on cumulative gifts made in the seven years before death that exceed £325,000.
Confirmed Law: Unspent Pensions in Inheritance Tax from April 2027
Under primary legislation confirmed in the Autumn Statement and Finance Act schedules, the UK government will bring most unused defined contribution pension funds and death benefits into the scope of Inheritance Tax from 6 April 2027. This major reform ends the longstanding statutory exemption that allowed pension savings held in discretionary trusts to pass to heirs completely free of death duties.
Historically, wealth advisers recommended retaining pension pots untouched as tax-sheltered inheritance vehicles, drawing down other savings and ISAs first. From 6 April 2027, pension scheme administrators will be legally required to report remaining pension balances to HMRC upon the member’s death and deduct IHT alongside the estate executors. Crucially, if a pension pot passes to a non-spouse beneficiary when the deceased was aged 75 or older, the fund may face both 40% Inheritance Tax and the beneficiary’s marginal rate of Income Tax upon withdrawal, creating combined marginal effective tax rates of over 60%.
Families with substantial defined contribution pensions should model their projected post-2027 position using our interactive Budget 2026 Calculator to assess the combined impact of pension IHT reforms alongside savings and dividend tax changes.
Rumoured Measures: Autumn Budget 2026 Speculation
Ahead of the upcoming Autumn Budget on 28 October 2026, HM Treasury has placed capital taxes under close review. While the April 2027 pension reform is already confirmed law, several additional IHT measures have been widely discussed by tax commentators and industry bodies:
Pre-Budget Speculation (Autumn Budget 28 October 2026)
The following proposals represent pre-Budget rumours only. None of these measures constitute statutory law for the 2026/27 tax year:
- Agricultural Property Relief (APR) & Business Property Relief (BPR) Capping: Proposals to restrict 100% relief on working farms and trading business shares to a £500,000 or £1,000,000 lifetime cap, with excess assets facing 20% or 40% IHT.
- Extension of the 7-Year Gifting Rule: Speculation that the PET survival window could be lengthened to 10 years to align with other European gift tax regimes.
- Scrapping the Capital Gains Tax Upreach on Death: Closing the rule where assets receive a free market-value step-up for Capital Gains Tax upon death alongside IHT exemptions.
Our team will monitor the Chancellor’s speech live on 28 October 2026 and deploy a surgical statutory update on 29 October to reflect any newly confirmed legislation.
Frequently Asked Questions (2026/27)
How much inheritance tax will I pay on £1 million in the UK?
On a £1,000,000 estate, the Inheritance Tax liability depends entirely on your marital status and whether you leave a family home to direct descendants. For a single individual leaving a home to children, £500,000 of allowances apply (£325,000 basic nil-rate band plus £175,000 residence nil-rate band), leaving £500,000 taxable at 40%, which equals £200,000 in tax (an effective rate of 20%). For a married couple or civil partners with transferred allowances, the entire £1,000,000 estate can pass 100% tax-free, resulting in £0 tax.
Does the 7-year rule really make lifetime gifts tax-free?
Yes, outright gifts to individuals become 100% tax-free if you survive for seven full years after making the gift. These are classified by HMRC as Potentially Exempt Transfers (PETs). However, if you die within seven years, gifts are added back into your estate. A crucial rule often misunderstood is that sliding taper relief only reduces the tax on gifts that exceed the £325,000 Nil-Rate Band; gifts within the first £325,000 simply use up your nil-rate band at the full rate.
Can I gift my home to my children and still live in it?
You cannot simply sign over your home to your children and continue living there rent-free without triggering the Gift with Reservation of Benefit rules. If you retain any benefit or occupation without paying full market rent, HMRC treats the entire property as remaining within your taxable estate upon death. To make the gift effective for IHT, you must either move out permanently or pay your children full commercial market rent (evidenced by independent valuations) and pay all tenant-side utility bills.
What happens to the £175,000 residence nil-rate band if I downsize?
If you downsize to a less valuable home or sell your home to move into residential care, you do not lose the Residence Nil-Rate Band (RNRB). Under HMRC Downsizing Addition rules, your estate executors can claim downsizing relief provided you sold or downsized after 8 July 2015 and leave assets of equivalent value to direct descendants (children or grandchildren). This preserves the full £175,000 relief (or £350,000 for couples).
Do I pay tax on money my parents give me?
In the UK, recipients never pay Income Tax or Capital Gains Tax on cash gifts received from parents. Inheritance Tax is a tax on the donor’s estate, not the recipient. If your parents survive for seven years after making the gift, no tax is owed by anyone. If a parent passes away within seven years and their lifetime gifts exceed their £325,000 allowance, HMRC may contact the recipient for any outstanding taper relief tax, but the gift itself is never treated as taxable income.
Will my pension count towards my estate for inheritance tax from 2027?
Yes. Under confirmed primary legislation enacted in the Autumn Budget, most unused defined contribution pension pots and lump-sum death benefits will be brought into the scope of UK Inheritance Tax from 6 April 2027. Previously, pension savings held within discretionary trust wrappers passed entirely free of IHT. From April 2027, pension administrators will report and deduct IHT alongside executors, making early estate planning vital.