Inheritance tax is charged at 40% on the part of an estate above the tax-free thresholds — £325,000 for everyone, plus up to £175,000 more where a home passes to children or grandchildren, with both amounts transferable between spouses. For couples leaving the home to children or grandchildren, with estates below the £2 million taper, that can shelter up to £1 million between them — and most estates pay nothing: HMRC's latest statistics (2023/24 liabilities) show about 4.7% of deaths producing an IHT bill. But the thresholds are frozen until April 2031 while asset values grow, pensions join the estate from April 2027, and the share of families caught rises every year — which is why the rules below are worth knowing before they apply to you.
The thresholds, and how couples get to £1 million
Everyone has a nil rate band of £325,000 — unchanged since 2009. On top, the residence nil rate band adds up to £175,000 where a home (or the proceeds of a downsized one) passes to direct descendants, tapering away £1 for every £2 an estate exceeds £2 million.
Anything left to a spouse or civil partner is exempt without limit (with a cap where the recipient is not a long-term UK resident), and whatever allowances the first to die does not use transfer to the survivor. The standard family outcome: everything to the surviving spouse tax-free, then both sets of allowances — up to £1 million — against the second estate. Charity gifts are also fully exempt, and leaving at least 10% of the statutory baseline net estate to charity cuts the rate on the rest from 40% to 36%, which for charitably-minded estates can cost the family remarkably little.
Gifts: the seven-year rule and the exemptions nobody uses
Lifetime giving remains the core of IHT planning. An outright gift to a person is a potentially exempt transfer: survive seven years and it is gone from your estate; die sooner and it comes back into account, with taper relief reducing the tax (not the value) on gifts above the nil rate band from year three.
Alongside the seven-year clock sit exemptions that add up quietly: £3,000 a year (plus one year's carry-forward), £250 small gifts per recipient, wedding gifts of up to £5,000 to a child — and the underused champion, normal expenditure out of income: regular gifts made from surplus income, leaving your standard of living intact, are exempt without limit and without waiting seven years. Grandparents funding school fees from pension income use this; the requirement is a pattern and records, which is exactly what most families lack when the executor needs to prove it.
The rule that polices all of this: give something away and keep enjoying it — the house you still live in, the painting still on your wall — and it is a gift with reservation, still in your estate regardless of the deed. Our gifting property guide covers that trap in detail.
What changed recently — three dates that matter
- April 2026: business and agricultural property relief now give 100% relief only within a £2.5 million per-person allowance (transferable, refreshing every seven years), with 50% relief above — the biggest change to business estates in decades; the full mechanics are in our business property relief guide;
- April 2027: most unused pension funds and death benefits enter the IHT estate (death-in-service benefits and some dependants' pensions stay outside) — now law. The old strategy of leaving pensions untouched as an inheritance vehicle has inverted, and estates that looked comfortably under the thresholds need re-counting with pensions in;
- April 2031: the earliest the frozen bands can now move, after the freeze was extended again at the last Budget.
Paying the tax: the part that surprises executors
IHT is due by the end of the sixth month after the month of death, and — the structural annoyance — normally before probate is granted, because HMRC's receipt unlocks the probate application. The system's answer to "the money is locked in the estate" is twofold. The Direct Payment Scheme lets banks pay HMRC straight from the deceased's accounts before probate, on form IHT423. And tax on land, the home, business interests and certain shares can be paid in ten annual instalments — with, since April 2026, no interest on instalments for assets qualifying for business or agricultural relief. Sell the asset and the balance falls due.
Whether a full IHT400 account is needed depends on the estate: taxable estates always; even non-taxable ones where there were large lifetime gifts, foreign assets over £100,000, certain trusts, or values above £3 million. Simpler "excepted estates" report values within the probate application itself.
A worked example
Estate: house £600,000 to the children, savings and investments £500,000, total £1.1 million; widower whose wife left everything to him. Allowances: two nil rate bands (£650,000) plus two residence bands (£350,000) = £1 million. Taxable: £100,000. Tax at 40%: £40,000 — around 3.6% of the estate. Add an untouched £400,000 pension from April 2027 and the taxable slice becomes £500,000 and the bill £200,000: the same family, five times the tax, purely from the pension change. That is the calculation every retired couple should run this year.
What planning actually looks like
Effective IHT planning is rarely exotic: wills that use both spouses' allowances and keep the estate under the £2 million RNRB taper where possible; a gifting programme that starts earlier rather than larger; the income exemption documented properly; life cover written in trust to fund the bill rather than avoid it; and — for business owners and the pension-rich — the 2026 and 2027 changes modelled while there is still time to respond. Trusts remain the control tool where outright gifts are unwise; our estate planning trusts guide weighs that choice.
Our inheritance tax and estate planning team runs the modelling and the structuring, with probate handling the executor's side when the rules stop being theoretical. The uncomfortable truth of this tax is that almost everything works better done five years early — and almost nothing works done five months late.