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Inheritance Tax Explained (UK 2026/27)

A Plain English Guide to Understanding, Calculating and Legally Reducing Inheritance Tax

Most people think Inheritance Tax (IHT) only affects the very wealthy.

In reality, rising property prices and increasing investment values mean many ordinary families are now affected. A house worth £900,000 in London, combined with pensions, savings and investments, can easily create an estate worth well over £1 million.

The good news is that paying Inheritance Tax isn’t inevitable.

With sensible planning, many families can significantly reduce their tax bill—and in some cases eliminate it altogether.

The problem is that Inheritance Tax is one of the most misunderstood areas of the UK tax system. There are countless myths surrounding the so-called “seven-year rule”, giving away your house, trusts and gifting money to your children.

Some of these myths can cost families hundreds of thousands of pounds.

This guide explains how Inheritance Tax really works, what allowances are available and, most importantly, what planning actually works.

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What Is Inheritance Tax?

Inheritance Tax is a tax charged on the value of a person’s estate when they die.

Your estate includes almost everything you own, including:

• Your home

• Other properties

• Savings

• Investments

• Shares

• Premium Bonds

• Valuable possessions

• Business interests (although these may qualify for relief)

• Certain lifetime gifts

Once debts and allowable liabilities have been deducted, HMRC calculates whether any Inheritance Tax is payable.

The standard rate of Inheritance Tax is 40%.

However, this doesn’t mean 40% of everything you own is taxed.

Instead, tax is normally charged only on the value of your estate that exceeds the available tax-free allowances.

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How Much Can You Leave Tax Free?

Every individual currently has a Nil Rate Band of:

£325,000

This has remained frozen for several years.

If your estate is worth less than £325,000, there is generally no Inheritance Tax to pay.

If it is worth more, only the excess is potentially taxable.

Example

Suppose your estate is worth:

• House: £500,000

• Savings: £150,000

• Investments: £100,000

Total estate:

£750,000

Less Nil Rate Band:

£325,000

Potentially taxable:

£425,000

Inheritance Tax:

40% × £425,000 = £170,000

Fortunately, for many families there are additional allowances that can reduce this considerably.

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The Residence Nil Rate Band

One of the most valuable Inheritance Tax reliefs is the Residence Nil Rate Band (RNRB).

This provides an additional tax-free allowance of up to:

£175,000

It applies where:

• you own (or have owned) a qualifying home,

• the property passes to direct descendants,

• and the estate meets the qualifying conditions.

Direct descendants include:

• children

• stepchildren

• adopted children

• foster children

• grandchildren

If available, this increases your total personal allowance from:

£325,000

to

£500,000

Example

Estate:

Home: £450,000

Savings: £100,000

Total estate:

£550,000

Available allowances:

Nil Rate Band

£325,000

Residence Nil Rate Band

£175,000

Total allowances

£500,000

Taxable estate

£50,000

Inheritance Tax

£20,000

Without the Residence Nil Rate Band, the tax bill would have been £90,000, so the relief saves £70,000.

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Married Couples and Civil Partners

This is one area where many online articles get things wrong.

Anything left to a spouse or civil partner is generally exempt from Inheritance Tax.

More importantly…

If the first spouse doesn’t use all of their Nil Rate Band, the unused percentage can usually be transferred to the surviving spouse.

The same principle generally applies to the Residence Nil Rate Band.

This means that many married couples can potentially pass on assets worth up to:

£1 million

before any Inheritance Tax becomes payable.

This is made up of:

Allowance	Amount
First Nil Rate Band	£325,000
Second Nil Rate Band	£325,000
First Residence Nil Rate Band	£175,000
Second Residence Nil Rate Band	£175,000
Total	£1,000,000

This is one of the reasons why properly drafted wills are so important.

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The £2 Million Rule That Many People Miss

The Residence Nil Rate Band is not available in full for everyone.

If your estate exceeds £2 million, the Residence Nil Rate Band starts to reduce.

The reduction is:

£1 lost for every £2 your estate exceeds £2 million.

Example

Estate value:

£2.2 million

Estate exceeds the threshold by:

£200,000

Residence Nil Rate Band reduction:

£100,000

Instead of receiving £175,000, the available Residence Nil Rate Band falls to:

£75,000.

For estates above approximately £2.35 million, the Residence Nil Rate Band can disappear completely.

For larger estates, careful lifetime planning can therefore be particularly valuable.

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Who Actually Pays the Tax?

People often ask:

“Will my children have to pay the tax?”

Technically, no.

The tax is paid by the executors of your estate before assets are distributed.

However, in practical terms your beneficiaries receive less because the tax is deducted before they inherit.

Where an estate contains valuable property but little cash, executors may even have to sell assets in order to pay HMRC.

This is one reason why good estate planning should begin well before it becomes necessary.

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What Doesn’t Count Towards Inheritance Tax?

Several important exemptions exist.

These include:

Gifts to your spouse or civil partner

Transfers between UK-domiciled spouses or civil partners are generally exempt from Inheritance Tax.

Gifts to charities

Charitable gifts are generally exempt.

In addition, where at least 10% of your net estate is left to charity, the rate of Inheritance Tax on the remainder of the taxable estate may reduce from 40% to 36%, subject to the statutory conditions.

Business Relief

Certain qualifying business assets may attract Business Relief, potentially reducing their value for Inheritance Tax purposes by up to 100%.

The rules are complex and relief is not available for every business.

Agricultural Relief

Certain agricultural property may also qualify for relief, although detailed conditions apply.

Annual Gift Exemption

Every individual can usually give away:

£3,000 each tax year

without it counting towards their estate.

If unused, one year’s exemption may normally be carried forward, allowing up to £6,000 to be given in certain circumstances.

Although relatively modest, using this exemption consistently over many years can remove a significant amount from an estate.

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Next Up

In Part 2 we’ll cover:

Inheritance Tax Guide Part 2

• The Seven-Year Rule

• Potentially Exempt Transfers (PETs)

• Taper Relief (properly explained)

• Gift With Reservation of Benefit (the trap that catches thousands of families)

• Why giving your house to your children often doesn’t save any Inheritance Tax

• Real-life planning examples