Inheritance Tax UK: Rules, 2026 Thresholds and the 7-Year Gifting Rule
Direct Answer: Inheritance Tax (IHT) is a UK tax charged at 40% on the value of a deceased person's estate exceeding tax-free allowances. Every individual has a £325,000 Nil-Rate Band plus an optional £175,000 Residence Nil-Rate Band, allowing married couples to pass on up to £1,000,000 completely tax-free.
Inheritance Tax is frequently cited as Britain’s most emotive levy. While roughly 4% to 5% of estates formally pay the tax each year, sustained freezes on statutory tax thresholds combined with long-term property inflation have pushed tens of thousands of middle-income families into HMRC's tax net.
Understanding the statutory mechanics behind the £325,000 standard allowance, the £175,000 residence band, and the 7-year gifting rules is essential for protecting family savings and avoiding unexpected probate bills.
How Does Inheritance Tax Work in the UK? (The Core Mechanism)
Inheritance tax is charged on the net value of an estate upon death. Your estate encompasses all real estate, bank deposits, stock portfolios, cars, fine art, and personal possessions, minus liabilities including outstanding mortgages, debts, and reasonable funeral costs.
Once executors calculate net estate value, they deduct available tax-free allowances known as nil-rate bands. Any surplus above these statutory bands is taxed at the headline rate of 40%.
The Standard Nil-Rate Band (£325,000)
Every individual in the UK receives a standard Nil-Rate Band (NRB) of £325,000. Estates below this valuation pay zero tax.
This allowance has been frozen at £325,000 since April 2009. Under current legislation, this freeze is locked in place until at least 5 April 2031, steadily pulling more estates across the threshold through fiscal drag.
The Residence Nil-Rate Band (£175,000) and Direct Descendants
The Residence Nil-Rate Band (RNRB) provides an extra allowance of up to £175,000 when passing down a family residence. However, two statutory conditions must be satisfied:
- Property Ownership: The deceased must have owned and lived in the residential property at some point during their ownership.
- Direct Descendants: The home (or proceeds from downsizing) must be left directly to "lineal descendants"—defined by HMRC as children, grandchildren, step-children, adopted children, or foster children. Leaving property to siblings, nieces, or friends does not qualify.
The £1 Million Married Couple Allowance Explained
Under the UK Spousal Exemption, assets passing between legally married spouses or civil partners are 100% exempt from inheritance tax, regardless of the amount.
When the first spouse passes away leaving their estate to the survivor, 100% of their unused £325,000 standard allowance and £175,000 residence allowance is preserved. Upon the second spouse's death, both sets of allowances combine:
- 2x Standard Nil-Rate Bands: £325,000 + £325,000 = £650,000
- 2x Residence Nil-Rate Bands: £175,000 + £175,000 = £350,000
- Total Combined Tax-Free Allowance: £1,000,000
The £2 Million Taper Threshold on Primary Homes
For estates valued over £2,000,000, the Residence Nil-Rate Band is tapered away at a rate of £1 for every £2 of value above £2m. For a single individual, the RNRB is completely lost once the estate reaches £2,350,000. Note that the standard £325,000 allowance is never tapered.
The 7-Year Rule for Gifting: How Taper Relief Works
Giving cash or assets to loved ones while alive is a proven estate planning tool, but transfers to individuals are classified as Potentially Exempt Transfers (PETs).
If you survive for 7 full years after making the gift, the transfer is entirely free from inheritance tax. If you die within 7 years, the gift is added back into your estate calculation, with sliding taper relief applied to gifts between 3 and 7 years old:
| Years Between Gift and Death | Tax Liability Reduction | Effective Tax Rate on Excess Gift |
|---|---|---|
| 0 to 3 Years | 0% (No reduction) | 40% |
| 3 to 4 Years | 20% | 32% |
| 4 to 5 Years | 40% | 24% |
| 5 to 6 Years | 60% | 16% |
| 6 to 7 Years | 80% | 8% |
| 7+ Years | 100% (Fully exempt) | 0% (Tax-Free) |
Statutory Tax-Free Gift Exemptions You Can Use Every Year
HMRC allows several specific gifts that bypass the 7-year clock entirely:
- The £3,000 Annual Exemption: Gift up to £3,000 per tax year without any IHT liability. Unused allowance carries forward for exactly one year (up to £6,000).
- Small Gifts (£250): Gift up to £250 per individual per tax year to as many people as you choose.
- Wedding Gifts: Parents can gift up to £5,000 tax-free; grandparents up to £2,500; others up to £1,000.
- Normal Expenditure Out of Surplus Income: Regular gifts made from verifiable surplus income that do not reduce your normal standard of living (Section 21 IHTA 1984) are completely tax-exempt from day one.
- Charitable Gifts: Gifts to registered charities are tax-free. Leaving 10% or more of your net estate to charity drops your overall tax rate from 40% to 36%.
How to Calculate Inheritance Tax: 3 Real-World UK Scenarios
| Estate Scenario | Gross Value | Allowances Applied | Net Taxable Amount | Total IHT Due | Effective Tax Rate |
|---|---|---|---|---|---|
| Single Homeowner | £600,000 | £325,000 NRB + £175,000 RNRB (£500k) | £100,000 | £40,000 | 6.67% |
| Married Couple (to Children) | £950,000 | 2x NRB (£650k) + £300,000 Home RNRB (£950k) | £0 | £0 | 0.00% |
| High Net Worth Estate | £1,600,000 | 2x NRB (£650k) + 2x RNRB (£350k) (£1,000,000) | £600,000 | £240,000 | 15.00% |
When and How Is Inheritance Tax Paid? (HMRC Deadlines and Probate)
Inheritance tax must be paid to HMRC by the end of the sixth month following the date of death. If someone dies in January, payment is legally due by 31 July.
Executors face a common hurdle: the probate registry generally requires proof of tax payment before issuing the Grant of Probate, but assets remain frozen until probate is granted. Most families resolve this through the HMRC Direct Payment Scheme, where banks release funds directly from the deceased's accounts to HMRC before probate.
Important 2027 Policy Reform Notice: Under major reforms announced in the UK Autumn Budget, unspent defined contribution pension pots will be brought into the scope of Inheritance Tax starting on 6 April 2027. Previously, pensions were sheltered outside the taxable estate. If you hold significant pension wealth, review your estate plan with a qualified financial advisor.
Frequently Asked Questions About UK Inheritance Tax
What is the tax-free inheritance tax threshold in the UK in 2026?
Every individual in the UK has a standard tax-free Nil-Rate Band of £325,000. If you leave your primary residence to your direct descendants, you can claim an additional Residence Nil-Rate Band of £175,000, bringing your total individual tax-free threshold to £500,000.
How much inheritance tax do married couples pay?
Married couples and civil partners pay zero inheritance tax when leaving assets to each other. Furthermore, any unused percentage of their £325,000 Nil-Rate Band and £175,000 Residence Nil-Rate Band transfers to the surviving spouse, allowing a couple to pass on up to £1,000,000 completely tax-free to their children.
How does the 7-year rule work for cash gifts?
Under the 7-year rule, outright gifts given to individuals during your lifetime are Potentially Exempt Transfers (PETs). If you survive for 7 full years after giving the gift, it is 100% exempt from inheritance tax. If you die within 7 years, the gift is added back into your estate calculation, though gifts between 3 and 7 years qualify for sliding taper relief.
How much can I give away each year tax-free in the UK?
You can gift up to £3,000 each tax year without it counting toward inheritance tax under the Annual Exemption. You can also carry forward any unused portion of the £3,000 allowance for one single tax year, allowing up to £6,000 in a single year.
Who is legally responsible for paying inheritance tax?
Inheritance tax is paid out of the deceased's estate by the executor of the will or the administrator if there is no will. Beneficiaries do not usually pay the tax directly from their personal funds, except in cases where a lifetime gift made within 7 years exceeds the £325,000 nil-rate band.
When must inheritance tax be paid to HMRC?
Inheritance tax must be paid to HMRC by the end of the sixth month following the date of death. If the person died in January, the tax is due by 31 July. If payment is delayed past this deadline, HMRC charges statutory interest on the outstanding balance.
Can you pay inheritance tax on a house in instalments?
Yes. If the estate includes property or land that takes time to sell, executors can elect to pay the inheritance tax attributable to that property in 10 equal annual instalments. However, HMRC charges interest on the remaining unpaid instalments until the balance is cleared.
Are private pensions subject to inheritance tax in 2026?
Currently in 2026, most defined contribution and personal pension pots remain outside your estate and pass free of inheritance tax. However, under major government tax reforms announced in the Autumn Budget, unspent pension pots will be brought into the scope of inheritance tax starting on 6 April 2027.
What qualifies as a direct descendant for the £175,000 property allowance?
To claim the £175,000 Residence Nil-Rate Band, the home must be left to direct lineal descendants, which HMRC defines as children, grandchildren, great-grandchildren, step-children, adopted children, foster children, and their spouses or civil partners. Leaving your home to siblings, nieces, or nephews does not qualify.
Can you give your house to your children to avoid inheritance tax?
Giving your home to your children triggers the 7-year clock, but only if you move out. If you continue living in the property without paying full commercial market rent to your children, HMRC classifies it as a Gift with Reservation of Benefit, meaning the full value of the house remains in your estate for inheritance tax.