Inheritance Tax Guide UK 2026/27 · Nil Rate Band, RNRB & Gifting Rules

Inheritance Tax (IHT) is one of the most emotive taxes in the UK · paid on the estate of someone who has died when its value exceeds the available tax-free thresholds. While only around 4% of estates currently trigger an IHT bill, rising property prices and frozen thresholds mean that proportion is growing year on year. This guide explains everything you need to know about IHT for 2026/27, from the nil rate band and residence nil rate band through to gifting rules, exempt transfers and practical strategies for reducing your estate's exposure.

1. What is Inheritance Tax?

Inheritance Tax is a tax on the estate · the total value of property, money and possessions · of a person who has died. In the UK, IHT is charged at a flat rate of 40% on the portion of an estate that exceeds the available tax-free thresholds.

The personal representative (usually the executor named in the will) is responsible for valuing the estate, completing the IHT return and paying any tax due · generally within six months of the end of the month in which the person died. HMRC can charge interest on late payment.

Despite the political controversy surrounding it, only approximately 4% of deaths each year result in an IHT charge. However, because both the nil rate band and the residence nil rate band have been frozen until at least 2030, and because house prices continue to rise, more families are being drawn into scope every year · a phenomenon sometimes called fiscal drag.

It is worth understanding the thresholds and reliefs available, even if your estate currently sits well below the limit. Good planning can make a significant difference to what your beneficiaries ultimately receive. You can explore your own position using our Inheritance Tax Calculator.

2. The Nil Rate Band (NRB)

The nil rate band (NRB) is the amount of an estate that can pass free of IHT. For 2026/27 the NRB stands at £325,000 · the same figure it has been since 2009. The government has confirmed this will remain frozen until at least April 2030.

Any estate value above the NRB (after deducting debts, funeral costs and any applicable reliefs) is charged at 40%.

Transferable nil rate band between spouses and civil partners · When a married person or civil partner dies and leaves everything to their surviving spouse, no IHT is payable on the first death regardless of the estate's value. Importantly, any unused NRB can be transferred to the surviving spouse. This means a couple can potentially shelter up to £650,000 (two full NRBs of £325,000 each) from IHT.

The transfer is claimed by the executor of the surviving spouse's estate · it is not automatic and does require a claim to be made on the IHT return. Where a spouse died many years ago and their NRB was a different figure, HMRC calculates the proportion of NRB unused at the first death and applies that proportion to the NRB at the second death.

3. The Residence Nil Rate Band (RNRB)

The residence nil rate band (RNRB) provides an additional tax-free allowance where a home is passed to direct descendants · children, grandchildren, step-children and similar. For 2026/27 the RNRB is £175,000 per person, also frozen until at least 2030.

When combined with the standard NRB, each individual can pass up to £500,000 free of IHT (£325,000 NRB + £175,000 RNRB) provided they own a qualifying residential property that is left to direct descendants. A couple who meet the conditions can therefore pass up to £1,000,000 to their children without any IHT liability.

Key conditions and points to note:

• The property must have been the deceased's residence at some point · it does not have to be their main home at the date of death, but it must have been a home at some point.
• The RNRB applies to one property only. If you own more than one residential property, the executor can nominate which one to use.
• The RNRB is also transferable between spouses and civil partners, in the same way as the NRB.
• Tapering for larger estates · For estates valued above £2,000,000 the RNRB is reduced by £1 for every £2 by which the net estate exceeds £2m. This means that for a single person with an estate above £2,350,000, the RNRB is tapered away entirely. For a couple the taper threshold is effectively £2,700,000.
• If you downsize or sell your home, a downsizing addition may apply, protecting some or all of the RNRB that would otherwise be lost.

4. The Seven-Year Rule and Gifting

One of the most important tools for IHT planning is giving away assets during your lifetime. The core principle is straightforward · gifts made more than seven years before death are generally exempt from IHT. Gifts made within seven years of death may be subject to IHT as potentially exempt transfers (PETs).

How potentially exempt transfers work · When you make a gift to another individual it is treated as a PET. If you survive for seven years from the date of the gift, the PET becomes fully exempt and falls entirely outside your estate. If you die within seven years, the gift is brought back into your estate for IHT purposes.

Taper relief · Where you die between three and seven years after making a gift, taper relief reduces the IHT payable on that gift according to how long ago it was made:

• 0 to 3 years before death · 40% IHT (no taper)
• 3 to 4 years · 32% IHT (20% reduction)
• 4 to 5 years · 24% IHT (40% reduction)
• 5 to 6 years · 16% IHT (60% reduction)
• 6 to 7 years · 8% IHT (80% reduction)
• Over 7 years · 0% IHT (fully exempt)

Taper relief only applies where the cumulative value of gifts in the seven years before death exceeds the available NRB. In many cases the NRB absorbs the gifts and taper relief is irrelevant.

Annual gifting exemption · Each tax year you can give away up to £3,000 free of IHT entirely (not just as a PET). This is known as the annual exemption. If you did not use your annual exemption in the previous tax year, you can carry it forward and give up to £6,000 in a single year · but only for one year back.

Small gifts exemption · You can give up to £250 to any number of individuals in a single tax year, free of IHT. You cannot combine this with the £3,000 annual exemption for the same person.

Wedding and civil partnership gifts · Gifts on the occasion of a marriage or civil partnership are exempt up to certain limits: £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else.

Regular gifts from normal expenditure out of income · This is a valuable but often overlooked exemption. If you can demonstrate that gifts form part of your normal expenditure, are made out of income (not capital), and that after making the gifts you are left with sufficient income to maintain your usual standard of living, those gifts are exempt from IHT with no seven-year clock. This can be very powerful for those with surplus pension or investment income.

5. Exempt Transfers

Certain transfers are wholly exempt from IHT regardless of their size or timing:

• Gifts between spouses and civil partners · transfers to a UK-domiciled spouse or civil partner are fully exempt, both during life and on death. There is no limit on the value. (Note: if your spouse is not UK-domiciled, the exempt amount is currently limited to £325,000, though specialist advice should be sought.)
• Gifts to UK charities · any gift to a qualifying UK charity is exempt from IHT. This applies both to lifetime gifts and to legacies in a will.
• Gifts to political parties · gifts to qualifying political parties are also exempt.
• Gifts to housing associations and national institutions · gifts to registered housing associations, national museums, universities and similar bodies are exempt.

The 10% charitable legacy reduction · If you leave at least 10% of your net estate to charity, the IHT rate on the chargeable portion of your estate is reduced from 40% to 36%. For larger estates this can represent a meaningful saving, and in some cases donating slightly more to charity can actually leave more to non-charitable beneficiaries once the tax saving is factored in.

See our Capital Gains Tax Calculator if you are also considering the CGT implications of gifting assets · particularly shares or property · during your lifetime. Our Capital Gains Tax Guide explains how gifts of assets are treated for CGT purposes.

6. Business Property Relief and Agricultural Relief

Business Property Relief (BPR) provides relief from IHT on qualifying business assets at either 100% or 50%. The key categories attracting 100% BPR are:

• A business or interest in a business (including a sole trader or partnership share)
• Unquoted shares in a qualifying company · including shares listed on AIM (the Alternative Investment Market), which is treated as unquoted for BPR purposes
• Certain unquoted securities giving control of a company

Shares in quoted companies and land or buildings used by the business attract 50% relief. The asset must generally have been owned for at least two years before death to qualify.

BPR on AIM shares has made AIM-focused investment portfolios popular as an IHT planning tool · though the investments carry market risk and the rules may change. The government has signalled reforms to BPR in recent years and investors should keep up to date with any legislative changes.

Agricultural Property Relief (APR) provides similar relief · generally 100% · on the agricultural value of qualifying farmland and farm buildings, subject to ownership and occupation conditions. Where the market value of agricultural property exceeds its agricultural value (for example where there is development potential), BPR may be available on the excess.

7. Pensions and IHT

Defined contribution pension pots · including SIPPs and workplace money purchase arrangements · are currently held outside the estate for IHT purposes. This makes pensions an extremely tax-efficient way to pass wealth to the next generation · unused pension funds pass to nominated beneficiaries free of IHT, and if the member dies before age 75, benefits can often be taken free of income tax too.

Many people with significant pension savings deliberately draw on other assets first in retirement, preserving the pension pot as a vehicle for IHT-efficient wealth transfer.

Important change from April 2027 · The government announced in the Autumn Budget 2024 that from April 2027, unused defined contribution pension pots will be brought within scope of IHT. This is a significant change and will affect the planning strategies of many families. Pension trustees will become liable for reporting unused pension funds and paying IHT where applicable. The detail of how this will interact with income tax on pension withdrawals by beneficiaries is still being worked through by HMRC, but the direction of travel is clear.

If you have a large pension, now is a good time to review your nomination of beneficiaries and consider specialist financial advice. Use our Pension Calculator to model your retirement pot, and read our Pension Guide for broader context.

8. How to Reduce Your IHT Bill

There is no single answer · reducing IHT involves a combination of strategies tailored to your personal circumstances. The following are the most commonly used approaches:

1. Start gifting early · The earlier you begin making gifts, the more likely they are to fall outside your estate. Make full use of the £3,000 annual exemption each year, and consider larger PETs if you have surplus assets and can genuinely afford to give them away.
2. Gifts from surplus income · If your income exceeds your spending, establishing a regular pattern of gifts from income (documented carefully) can remove significant sums from your estate over time without any seven-year clock.
3. Put life insurance in trust · If you have a life insurance policy, placing it in trust means the payout does not form part of your estate on death and is therefore outside IHT. Premiums paid on a policy written in trust can often also qualify as gifts from income. The trust also ensures the payout reaches beneficiaries quickly, without waiting for probate.
4. Consider trusts · Discretionary trusts, loan trusts and discounted gift trusts are specialist IHT planning vehicles that allow you to transfer assets out of your estate (or crystallise a discount) while retaining some access or benefit. These structures require specialist legal and financial advice.
5. Charitable giving · Leaving 10% or more of your net estate to charity reduces the IHT rate to 36%, and the charitable gift itself is exempt. If you have charitable intentions, structuring your will to hit the 10% threshold can be tax-efficient.
6. Review your pension nominations · Keep nomination of beneficiary forms up to date on all pension arrangements. Until April 2027 pensions remain outside the estate, so ensuring nominations reflect your wishes is important.
7. Maximise ISA allowances during your lifetime · ISAs do not have an IHT exemption (unlike pensions) · see the FAQ below · but they do provide tax-efficient growth and income during your lifetime, freeing up other assets for gifting. See our ISA Calculator to model your ISA savings.
8. BPR-qualifying investments · AIM shares and other BPR-qualifying assets become exempt from IHT after two years of ownership. These carry investment risk and are not suitable for everyone, but for those with a long time horizon they can be a tax-efficient way to hold investments.
9. Downsizing · Selling a large family home and using some of the proceeds for gifting (as PETs, or using annual exemptions) can reduce the estate while freeing up capital for your retirement.

9. Worked Example · Couple With Home and Savings: No IHT to Pay

In this case the couple's combined allowances of £1,000,000 fully shelter the estate. Even if property prices rise, the couple would need an estate above £1,000,000 before any IHT became payable · assuming both the home passes to direct descendants and the full RNRB is available.

10. Worked Example · £1.8m Estate With IHT to Pay

This example illustrates how significant an IHT bill can be for a larger estate. Had Margaret made use of annual gifting, placed life insurance in trust, or made charitable legacies to bring the charitable proportion to 10% of the net estate, the bill could have been reduced. Use our IHT Calculator to model the impact of different planning strategies on an estate of this size.

For further reading, our Capital Gains Tax Guide explains the CGT position when assets are gifted, and our Pension Guide covers the upcoming IHT changes to pension pots in detail.