Inheritance Tax explained

Thresholds and rates

Unused NRB and RNRB pass to a surviving spouse or civil partner, so a couple can leave up to £1 million tax-free if a home goes to children or grandchildren.

Worked examples

• Single person, estate £800,000 including a £400,000 home left to children: thresholds £500,000; IHT = £300,000 x 40% = £120,000.
• Widow, estate £900,000 including £500,000 home to children, full transfer of husband's unused bands: thresholds £1,000,000; no IHT.
• Estate of £2.1 million: RNRB reduced by (£100,000 / 2) = £50,000, to £125,000.

Gifts and the 7-year rule

Most gifts to individuals are potentially exempt transfers: no IHT if you live 7 years. If you die within 7 years, the gift uses up your nil-rate band first; any tax on gifts above the NRB is reduced by taper relief once 3 years have passed. Gifts into most trusts are chargeable immediately at 20% above the NRB.

Exempt gifts

Example: a £425,000 gift to a son, with death 4.5 years later. The first £325,000 uses the NRB; tax on £100,000 at the tapered 24% = £24,000, payable by the son. The NRB is then unavailable for the rest of the estate.

• £3,000 annual exemption (one unused year can be carried forward).
• Small gifts up to £250 per person per year (not to someone who received the £3,000).
• Wedding gifts: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else.
• Regular gifts out of surplus income that do not reduce your standard of living, with good records.
• Gifts to charities and political parties.

Pensions in the estate from April 2027

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits will be included in the estate for IHT. Death-in-service benefits from registered schemes are excluded, and pensions left to a spouse or civil partner remain exempt. Personal representatives will be responsible for reporting and paying the IHT. Income Tax can still apply when beneficiaries draw a pension if the person died at 75 or over, so the combined charge can be high for larger pots.

Business and agricultural relief from April 2026

From 6 April 2026, 100% Business Property Relief and Agricultural Property Relief apply to the first £2.5 million of combined qualifying property per individual. Above that, relief is 50% (an effective 20% IHT rate). Unused allowance can be transferred to a surviving spouse or civil partner. Shares designated as not listed on a recognised stock exchange, such as AIM shares, get 50% relief in all cases. IHT on qualifying property can be paid in 10 interest-free annual instalments.

Valuing and reporting an estate: the steps

• Value everything the person owned at the date of death: property, accounts, investments, possessions, and from April 2027 most unused pensions. Include gifts made in the previous 7 years.
• Deduct debts and funeral costs.
• Apply exemptions (spouse, charity) and reliefs (business and agricultural property relief).
• Deduct the nil-rate band and, if a home passes to direct descendants, the residence nil-rate band, including any amounts transferred from a late spouse.
• Report to HMRC. Many estates with no tax to pay are "excepted estates" with simpler reporting. Others need a full IHT400 account.
• Pay any tax by the end of the sixth month after death. A payment is usually needed before the grant of probate is issued.

Paying the bill

Inheritance Tax is due by the end of the sixth month after the death. Interest is charged after that, even if probate has not been granted.

Executors can ask banks to pay directly from the deceased's accounts. Tax on property, land and some business assets can be paid in 10 equal annual instalments, although interest is added to the instalments on most property. Selling a house quickly to pay the tax is not always necessary.

Example: an estate of £900,000, including a £450,000 home left to children, with no transferred allowances. The nil-rate band of £325,000 and residence band of £175,000 leave £400,000 taxable, a bill of £160,000. If the tax on the home is paid in instalments, roughly a tenth is due each year.

The 36% charity rate: does it pay?

If at least 10% of the net estate (after the nil-rate band) goes to charity, the rest is taxed at 36% instead of 40%.

A £1,000,000 estate with no residence band pays £270,000. Leaving £70,000 to charity, just over 10% of the £675,000 above the nil-rate band, cuts the bill to £217,800. The family receives £17,800 less, and the charity receives £70,000. The gift costs the heirs far less than its face value.

Gifts that do not work

• Giving away your home but still living in it rent-free is a gift with reservation of benefit. The home stays in your estate however long you live.
• Giving away a holiday home or caravan but still using it free, or a painting that stays on your wall, works the same way.
• Life insurance written in trust pays out outside the estate. A policy not in trust adds to the estate and can create a tax bill of its own.