Inheritance Tax UK: Thresholds, Rates, and Reliefs

Inheritance tax in the UK is charged at 40% on the value of an estate above £325,000, with an extra £175,000 allowance available when a main home passes to direct descendants. A single person can therefore pass on up to £500,000 tax-free, and a married couple or civil partnership up to £1 million between them. Both thresholds are frozen until April 2030, so estates that once sat safely below the line are steadily being pulled into the tax.¹

The Tax-Free Thresholds

Every individual has a nil-rate band of £325,000. Below that figure, no inheritance tax is due.² A second allowance, the residence nil-rate band, adds £175,000 when the main home passes to children, stepchildren, or grandchildren. Combined, a single person can shield £500,000.³

The residence nil-rate band tapers for larger estates. For every £2 of estate value above £2 million, £1 of the residence allowance is lost. Once an estate reaches £2.35 million, the residence nil-rate band disappears entirely.¹

Transferring Unused Allowances Between Spouses

Married couples and civil partners can pass any unused portion of both allowances to the surviving partner. If the first to die leaves everything to the survivor, the whole nil-rate band and residence nil-rate band travel across intact and can be claimed on the second death, taking the combined tax-free figure up to £1 million.³ The executor makes a formal claim to HMRC during probate on the second death, supported by records from the first estate.

Why the Freeze Matters

The nil-rate band has stood at £325,000 since 2009, and the residence nil-rate band at £175,000 since 2020. Both remain frozen until at least April 2030.¹ Property values and savings balances have climbed sharply over that period, so families whose estates once sat well below the threshold now find themselves inside the tax net.

The Rates: 40% Standard, 36% for Charitable Estates

The standard inheritance tax rate is 40%, charged only on the slice of the estate above the available thresholds.³ A single person dying with an estate worth £525,000, and the full £500,000 threshold available, pays tax on £25,000. The bill is £10,000.

A reduced rate of 36% applies when at least 10% of the estate’s net value (the total after debts) is left to registered charities in the will.³ For complex estates with multiple components, HMRC’s Schedule IHT430 works through the baseline calculation.

The Spouse and Civil Partner Exemption

Anything left to a spouse or civil partner who is a long-term UK resident passes free of inheritance tax, with no cap. This is the single most powerful exemption in the system and the reason most first deaths in a couple produce no tax at all. Homes, savings, investments, and personal belongings are all covered.³

Where the surviving spouse is not a long-term UK resident, the exemption is capped. Before April 2025 the ceiling was £325,000, matching the nil-rate band. From April 2025, HMRC replaced the older domicile-based test with a long-term UK residence test for inheritance tax.⁴ Cross-border situations of this kind reward early professional advice.

Lifetime Gifts and the Seven-Year Rule

Giving assets away during your lifetime is the most direct route to shrinking a future estate. A gift to another person becomes fully exempt if you survive seven years after making it. HMRC calls these potentially exempt transfers. Die within seven years and the gift is added back to your estate for tax purposes.⁵

Tax on gifts made between three and seven years before death is reduced on a sliding scale known as taper relief:

3 to 4 years before death: 32%
4 to 5 years: 24%
5 to 6 years: 16%
6 to 7 years: 8%
7 years or more: 0%

Taper relief only cuts the tax rate on the gift, not the value of the gift itself. That distinction catches people out.⁵

Annual and Small Gift Exemptions

Several allowances make smaller gifts immediately exempt, whatever happens next:

Annual exemption of £3,000 per tax year, which can be split among recipients. Any unused allowance carries forward for one year only, giving a possible £6,000.
Small gifts of up to £250 to as many different people as you like, provided you have not used another exemption on the same person.
Wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else.
Regular gifts from surplus income, with no cap, so long as you can still meet your normal living costs. Careful records are needed to prove the pattern to HMRC.

These can be combined on the same recipient, except that the small gift exemption cannot be stacked with another allowance for the same person.⁵

Business Property Relief and Agricultural Property Relief

Business Property Relief reduces the taxable value of qualifying business assets. Under the rules that applied before April 2026, a sole trader’s business and unquoted shares qualified for 100% relief, while minority holdings in listed companies and certain other business assets received 50%.⁶ Agricultural Property Relief works on similar lines for farmland and agricultural buildings.

What Changes on 6 April 2026

From 6 April 2026, a new £2.5 million allowance applies to the combined value of assets qualifying for 100% Business Property Relief and 100% Agricultural Property Relief. Everything within that allowance keeps full relief. Anything above it gets only 50% relief, producing an effective 20% inheritance tax rate on the excess.⁷

Any unused portion of the £2.5 million allowance can transfer to a surviving spouse or civil partner. Where the first spouse died before April 2026, the full £2.5 million is treated as available for transfer, giving couples a combined allowance of up to £5 million.⁷ Farming families and business owners with assets above the cap have good reason to review wills and succession plans now.

Pensions Come Into the Estate From April 2027

Most unused pension funds currently sit outside the estate for inheritance tax. That ends on 6 April 2027, when unused pension funds and death benefits will be brought within the estate’s value.⁸

Death-in-service lump sums from registered pension schemes and dependant’s pensions from defined benefit arrangements are excluded. Pension benefits passing to a surviving spouse or civil partner, or to a registered charity, also remain exempt.⁸ For everyone else, a pension pot previously invisible to inheritance tax may push an estate above the threshold. Anyone deliberately leaving a pension untouched as an inheritance vehicle should reconsider the strategy.

Reporting the Estate

If the estate owes inheritance tax or does not qualify as an “excepted estate,” the executor must complete Form IHT400 as part of probate.⁹ The form calls for detailed figures: bank balances, investment values, property valuations, life insurance payouts, debts, and funeral costs. Property normally needs a formal appraisal, and HMRC can challenge valuations it considers too low.

For simpler estates that qualify as excepted, the old Form IHT205 was retired in January 2022. The necessary estate information now goes in as part of the probate application itself and passes to HMRC automatically.

All liabilities come off the gross estate to reach the net figure. Mortgages, personal loans, credit card balances, unpaid bills, and reasonable funeral expenses all count. Every pound of debt reduces the taxable estate pound for pound.

Paying the Bill

Inheritance tax must be paid by the end of the sixth month after the person died. Death in January means a 31 July deadline.¹⁰ Miss it and HMRC charges interest at 7.75% on the outstanding balance.¹¹

The catch: at least some of the tax has to be paid before the court will issue a Grant of Representation (called “confirmation” in Scotland), and until that grant is in hand the executor cannot access most of the deceased’s assets to sell them.¹² HMRC’s Direct Payment Scheme bridges the gap by letting executors transfer money straight from the deceased’s bank, building society, or National Savings accounts to HMRC without waiting for probate. Some insurance and investment providers will also release funds directly to HMRC on request.

Paying by Instalments

Certain assets qualify for annual instalments spread over ten years, which helps when the estate’s value is locked up in illiquid property. Eligible assets include:

Residential property: 10% of the tax plus interest each year, provided the house is kept rather than sold.
Controlling shareholdings that gave the deceased more than 50% of a company.
Qualifying unlisted shares worth more than £20,000 that represent at least 10% of the company’s nominal share value.
The net value of a business run for profit, though not its individual assets.

You have to signal on Form IHT400 that instalments are wanted. Sell the asset and the remaining tax falls due immediately.¹³ Interest runs on the outstanding balance from the second instalment onwards, so the ten-year option is not free. For families who want to keep a home or a working business rather than sell everything to settle with HMRC in one go, it can still be the difference between holding on and letting go.

1
GOV.UK. Inheritance Tax Thresholds
2
HM Revenue & Customs. Inheritance Tax Thresholds and Interest Rates
3
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
4
GOV.UK. HMRC Inheritance Tax Manual – IHTM11033 – Spouse or Civil Partner Exemption
5
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Gifts
6
GOV.UK. Inheritance Tax Manual – Section 11: Relief for Business Property
7
GOV.UK. Agricultural Property Relief and Business Property Relief Changes
8
GOV.UK. Inheritance Tax on Unused Pension Funds and Death Benefits
9
HM Revenue & Customs. Inheritance Tax Account (IHT400)
10
GOV.UK. How to Value an Estate for Inheritance Tax and Report Its Value – Inheritance Tax to Pay
11
GOV.UK. HMRC Interest Rates for Late and Early Payments
12
GOV.UK. Apply to Postpone Payment of Inheritance Tax
13
GOV.UK. Pay Your Inheritance Tax Bill: In Yearly Instalments