What Is Inheritance Tax in the UK: Thresholds, Reliefs, and Gifts

Inheritance tax in the UK is charged at 40% on the value of a person’s estate above a £325,000 tax-free threshold, with additional allowances that often reduce or wipe out the bill entirely for married couples and families leaving a home to their children.¹ The tax is calculated and paid by the personal representative of the deceased (usually an executor named in the will, or an administrator appointed by the court if there is no will), not by the people inheriting.² They identify the assets, get valuations, file returns with HMRC, settle the tax, and only then distribute what is left.

Because the thresholds have been frozen since 2009 and will stay frozen through at least April 2028, rising property values have pulled far more ordinary estates into the tax than would once have been the case.³

The £325,000 Nil Rate Band

Every individual has a £325,000 tax-free allowance, known as the nil rate band. The estate pays nothing on the first £325,000 of value, and the 40% rate applies only to the amount above that.¹

A worked example makes the arithmetic obvious. An estate valued at £500,000 with no other reliefs is taxed on £175,000. That produces a bill of £70,000.

The Extra £175,000 for Leaving a Home to Descendants

A second allowance, the residence nil rate band, adds up to £175,000 of tax-free capacity on top of the £325,000 when you leave your home to direct descendants. That takes the individual tax-free threshold to £500,000.³

HMRC defines “direct descendant” broadly: children, grandchildren, stepchildren, adopted children, foster children, and the spouses or civil partners of any of those people all qualify.⁴ Leaving your home to a sibling, niece, nephew, or friend does not qualify for this extra allowance.

The £2 Million Taper

Larger estates lose the residence nil rate band gradually. For every £2 of estate value above £2 million, the allowance shrinks by £1. The full £175,000 is gone entirely once the estate reaches £2,350,000.⁴ The £2 million figure looks at the gross estate before reliefs and exemptions, though liabilities like a mortgage are deducted, so the taper catches more people than they expect.

Married Couples: Up to £1 Million Between You

Anything one spouse or civil partner leaves to the other is exempt from inheritance tax, with no upper limit.¹ This is the single most valuable exemption in the system and is why most couples pay no tax on the first death.

Neither allowance is wasted when everything goes to the survivor. The unused percentage of both the nil rate band and the residence nil rate band transfers to the surviving partner, who can then use it on their own death.⁵ A couple where the first to die used none of their allowances can pass on up to £1 million tax-free (£325,000 plus £175,000 for each partner), provided the residence conditions are met.

The transfer works as a percentage rather than a fixed amount. If the first spouse used 25% of their nil rate band, the survivor inherits the remaining 75%, applied to whatever the threshold is at the time of the second death. The claim must be made within two years of the surviving partner’s death.⁵ For the residence allowance, the surviving partner does not have to inherit the same property the couple lived in together; any home they owned and lived in at some point will qualify, provided it passes to direct descendants.⁶

One limit is worth flagging. If the surviving spouse is not based in the UK for tax purposes, the unlimited exemption is capped at £325,000, and anything above that is taxable.⁷ Couples in this situation should take professional advice, because the non-UK spouse can make an election that removes the cap.

Reducing the Bill With Lifetime Gifts

Giving assets away while you are alive is the most direct way to shrink the estate that will eventually be taxed. Several exemptions let you make gifts that are immediately outside inheritance tax, no matter how long you live afterwards.

Annual Exemptions

You can give away up to £3,000 in total each tax year with no inheritance tax consequences. If you did not use the previous year’s £3,000, you can carry it forward one year only, allowing a maximum of £6,000 in a single year. On top of that, you can give any number of small gifts of up to £250 per person per year, as long as the recipient has not already benefited from another exemption from you in the same year.⁸

Wedding and civil partnership gifts have their own allowance, separate from the £3,000: up to £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else.

Regular Gifts From Income

Gifts made from surplus income, rather than from capital, can be exempt with no cap on the amount. To qualify, the gift has to be part of a pattern of giving, come out of your income rather than your savings, and not reduce your usual standard of living.⁹ A grandparent paying school fees monthly from a pension can move substantial sums out of the estate this way. Records are essential, because HMRC scrutinises this exemption closely after death.

The Seven-Year Rule

Larger gifts that go beyond these exemptions are called potentially exempt transfers. They fall out of your estate for inheritance tax purposes if you live for seven years after making them.¹ Die within seven years and the gift is added back to your estate, but the tax rate on it is reduced on a sliding scale, known as taper relief, depending on how many years passed:

0 to 3 years: 100% of the full tax rate
3 to 4 years: 80% of the full rate
4 to 5 years: 60% of the full rate
5 to 6 years: 40% of the full rate
6 to 7 years: 20% of the full rate

A frequent misunderstanding is that taper relief reduces the value of the gift. It does not. It reduces the percentage of tax charged on that value, and only when the gift (combined with other gifts in the previous seven years) exceeds the nil rate band in the first place.¹⁰

Charity, Business, and Farm Reliefs

Leaving at least 10% of your net estate to a qualifying charity cuts the inheritance tax rate on the rest from 40% to 36%.¹¹ On a large estate the saving from the reduced rate can outweigh the cost of the charitable gift itself, which makes it worth modelling rather than dismissing.

Estates that include qualifying business interests or agricultural land get their own reliefs. From 6 April 2026, the first £2.5 million of combined business and agricultural property qualifies for 100% relief, meaning no inheritance tax is charged on it. Anything above £2.5 million receives 50% relief, producing an effective 20% rate on the excess.¹² Combined with the nil rate bands, two individuals (a married farming couple, for instance) can pass on up to £5.65 million tax-free between them. Shares listed on the Alternative Investment Market, which previously qualified for 100% relief, now receive only 50%.

Pensions Change From April 2027

Unused pension funds in defined contribution schemes currently sit outside the inheritance tax net. Draft legislation in the Finance Bill 2025–26 would pull most unused pension funds and lump-sum death benefits into the charge from 6 April 2027. The legislation is still subject to parliamentary approval, but anyone whose estate plan treated pensions as an inheritance-tax-free way to pass on wealth should be reviewing that assumption now.

Paying the Bill

Inheritance tax is due within six months of the end of the month in which the person died. Before paying, the personal representative needs a payment reference number from HMRC, and the application for that reference must go in at least three weeks before the intended payment date.¹³

Families run into an obvious problem here: probate is usually needed to unlock the deceased’s money, but the tax has to be paid before probate is granted. The Direct Payment Scheme is the way around this. It lets the personal representative instruct the deceased’s bank, building society, or investment provider to send money straight to HMRC using form IHT423, and the process can start before probate is issued.¹⁴ National Savings and Investments accounts, along with funds held by brokers and wealth managers, can be used in the same way.

Tax on assets that are hard to sell quickly, such as houses, land, and business interests, can be paid in 10 equal annual instalments rather than a single lump sum.¹⁵ Interest runs on the outstanding balance, so the total cost is higher, but it avoids forcing a rushed sale of a home or business to meet the six-month deadline.

Miss the deadline and HMRC charges interest on what is owed. The late payment rate on inheritance tax from 9 January 2026 is 7.75%.¹⁶ At that rate, delay gets expensive fast, which is why getting the reference number in early and using the Direct Payment Scheme matters. Probate will not be granted until either the tax is paid or HMRC has agreed a payment arrangement.¹³

1
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances
2
HM Revenue & Customs. HS282 Death, Personal Representatives and Legatees (2025)
3
HM Revenue & Customs. Inheritance Tax Nil-Rate Band and Residence Nil-Rate Band Thresholds From 6 April 2026 to 5 April 2028
4
HM Revenue & Customs. Work Out and Apply the Residence Nil Rate Band for Inheritance Tax
5
GOV.UK. Transferring Unused Basic Threshold for Inheritance Tax
6
GOV.UK. Transferring Unused Residence Nil Rate Band for Inheritance Tax
7
GOV.UK. IHTM11033 – Spouse or Civil Partner Exemption
8
GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Gifts
9
HM Revenue & Customs. Lifetime Transfers: Conditions for Normal Out of Income Exemption
10
HM Revenue & Customs. Lifetime Transfers: Specific Lifetime Reliefs: Taper Relief: Quantifying the Relief
11
GOV.UK. Inheritance Tax Reduced Rate Calculator
12
HM Revenue & Customs. Agricultural Property Relief and Business Property Relief Changes
13
GOV.UK. Application for an Inheritance Tax Reference
14
GOV.UK. Pay Your Inheritance Tax Bill: From the Deceased’s Bank, Savings or Investment Accounts
15
GOV.UK. Pay Your Inheritance Tax Bill: In Yearly Instalments
16
GOV.UK. Rates and Allowances: HMRC Interest Rates for Late and Early Payments