Inheritance Tax Rules.

Inheritance Tax: Current Rules, Allowances and Recent Changes

Inheritance Tax is a tax that may be payable on a person's estate when they die. The estate can include their home, savings, investments, business interests, personal possessions and certain gifts made during their lifetime.

Inheritance Tax is not automatically charged on every estate. The amount payable depends on the value of the estate, who inherits it, the available allowances and whether any exemptions or reliefs apply.

What Is the Inheritance Tax Threshold?

The standard Inheritance Tax threshold, known as the nil-rate band, is £325,000.

Where the value of the taxable estate exceeds the available threshold, Inheritance Tax is normally charged at 40% on the excess.

For example, if a taxable estate is worth £500,000 and only the standard £325,000 nil-rate band is available, the potential taxable amount is £175,000.

The £325,000 threshold has remained unchanged since the 2009–2010 tax year and is currently scheduled to remain frozen until at least 5 April 2031.

Does a Couple Automatically Have a £650,000 Allowance?

Spouses and civil partners do not simply receive one joint £650,000 allowance during their lifetimes. Each person has their own £325,000 nil-rate band.

Transfers between spouses or civil partners are normally exempt from Inheritance Tax, subject to special rules where one person is not treated as long-term UK resident.

If the first spouse or civil partner to die does not use all of their nil-rate band, the unused percentage can normally be transferred to the survivor's estate.

This means the surviving spouse or civil partner's estate may have a standard nil-rate band of up to £650,000 when they later die.

The Residence Nil-Rate Band

An additional allowance may be available where a person leaves a qualifying home, or a share of one, to their direct descendants.

This is known as the residence nil-rate band. The maximum allowance is currently £175,000 per person.

Direct descendants can include:

• Children
• Grandchildren
• Stepchildren
• Adopted children
• Foster children in qualifying circumstances
• The spouse or civil partner of a direct descendant

The residence nil-rate band is not available simply because the estate contains a house. The qualifying residential interest must normally pass to eligible direct descendants.

Can a Couple Pass on £1 Million Tax Free?

A married couple or civil partners may potentially pass on up to £1 million without Inheritance Tax where all the relevant conditions are satisfied.

This can consist of:

• Two standard nil-rate bands totalling £650,000
• Two residence nil-rate bands totalling £350,000

The £1 million figure is not a general exemption available to every couple. It depends on unused allowances being transferable and a qualifying home passing to direct descendants.

Large Estates and the Residence Allowance

The residence nil-rate band is reduced where the net value of the estate exceeds £2 million.

It is withdrawn by £1 for every £2 by which the estate exceeds that threshold. As a result, sufficiently large estates may receive no residence nil-rate band.

This calculation is based on the value of the estate before deducting certain reliefs, which can produce unexpected results for estates containing businesses or farms.

Downsizing or Selling the Home

A residence nil-rate band may still be available where a person sold, downsized or gave up their home after 8 July 2015.

The rules are complex, but a downsizing addition may preserve some or all of the allowance where equivalent assets pass to direct descendants.

Spouse and Civil Partner Exemption

Property passing to a spouse or civil partner is normally exempt from Inheritance Tax.

This exemption can apply regardless of the amount transferred. It can therefore defer the Inheritance Tax liability until the death of the surviving spouse or civil partner.

The exemption does not generally apply to unmarried couples, regardless of how long they have lived together or whether they have children.

An unmarried partner may therefore inherit a home or other assets and face an Inheritance Tax liability that would not arise for a spouse or civil partner.

Gifts Made During Your Lifetime

Giving assets away during your lifetime can reduce the value of your estate, but gifts are subject to detailed rules.

The Seven-Year Rule

Most outright gifts to individuals are known as potentially exempt transfers.

If the person making the gift survives for seven years, the gift will normally fall outside their estate for Inheritance Tax purposes.

If they die within seven years, the gift may use some or all of their available nil-rate band. Tax may be payable where the total value of relevant gifts exceeds the available threshold.

Taper Relief

Taper relief can reduce the tax charged on a lifetime gift where the person survives for more than three years but less than seven years after making it.

Taper relief reduces the tax payable on the gift. It does not reduce the value of the gift when calculating how much of the nil-rate band has been used.

This means taper relief will usually matter only where lifetime gifts exceed the available nil-rate band.

Annual Gift Exemption

A person can normally give away up to £3,000 in each tax year using the annual exemption.

If the previous tax year's exemption was not used, it can usually be carried forward for one tax year only.

Small Gifts

Small gifts of up to £250 can normally be made to any number of people each tax year, provided another exemption has not been used for the same person.

Wedding and Civil Partnership Gifts

Additional exemptions can apply to gifts made in connection with a wedding or civil partnership.

The exempt amount depends on the relationship between the donor and the recipient.

Regular Gifts from Income

Regular gifts may be exempt where they are made from surplus income rather than capital.

To qualify, the gifts must normally:

• Form part of the person's normal expenditure
• Be made from income
• Leave the person able to maintain their usual standard of living

This exemption can be valuable, but detailed records should be retained showing income, expenditure and the pattern of gifts.

Gifts with Reservation of Benefit

A gift may remain part of a person's estate where they continue to benefit from the asset after giving it away.

For example, a parent may transfer their home to a child but continue living there rent-free. Although legal ownership has changed, the property may still be treated as part of the parent's estate for Inheritance Tax.

Giving away an asset while continuing to use or control it is therefore not necessarily effective Inheritance Tax planning.

These arrangements may also create Capital Gains Tax, care-fee, benefit and family-dispute risks.

Leaving Money to Charity

Gifts left to qualifying charities are normally exempt from Inheritance Tax.

The rate of Inheritance Tax on part of an estate can also be reduced from 40% to 36% where at least 10% of the relevant net estate is left to charity.

The calculation can be complicated where an estate is divided into different components, so professional advice may be needed when preparing the will.

Pensions and Inheritance Tax

The Current Position

At present, many discretionary pension death benefits and unused defined-contribution pension funds can pass outside the deceased's estate for Inheritance Tax purposes.

The Income Tax treatment of inherited pension benefits depends on matters including the deceased's age, the type of payment and when the benefits are paid.

Pensions should not be assumed to be entirely tax-free. Income Tax and other pension rules may still apply even where no Inheritance Tax is payable.

Changes from 6 April 2027

For deaths occurring on or after 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of the deceased's estate for Inheritance Tax purposes.

The changes will apply even where pension trustees or scheme administrators have discretion over who receives the benefit.

The deceased's personal representatives will generally be responsible for reporting the pension value and paying any Inheritance Tax due as part of the administration of the estate.

Death-in-service benefits payable from registered pension schemes will be excluded from the new Inheritance Tax rules.

Could Pension Benefits Face Two Taxes?

In some circumstances, inherited pension funds could be affected by both Inheritance Tax and Income Tax.

This may occur where the pension is included in the deceased's estate for Inheritance Tax and the beneficiary is also liable to Income Tax when withdrawing the funds.

The exact treatment will depend on the deceased's age, the form of the death benefit, the beneficiary's tax position and the detailed rules applying from April 2027.

Reviewing Pension Nominations

People with significant pension savings should review:

• Their expression-of-wish or beneficiary nomination
• The value and type of each pension
• Who is intended to receive the benefits
• The potential effect on the total estate
• Whether the residence nil-rate band could be reduced
• The interaction between the will and pension arrangements

A pension nomination does not replace a will, and a will does not always control the distribution of pension death benefits.

Business Property Relief

Business Property Relief can reduce the taxable value of qualifying business assets.

Assets that may qualify can include:

• A business or interest in a business
• Shares in certain unlisted companies
• Some controlling shareholdings
• Land, buildings or machinery used by a qualifying business

Relief is not available for every business. Businesses primarily engaged in investments, securities, land, or buildings may be excluded.

Changes from 6 April 2026

For deaths on or after 6 April 2026, the combined value of qualifying agricultural and business property receiving 100% relief is limited to £2.5 million per person.

< p> A qualifying value above the available £2.5 million allowance generally receives relief at 50%, creating an effective Inheritance Tax rate of up to 20% on that excess.

The allowance is shared between qualifying agricultural and business property rather than providing a separate £2.5 million allowance for each.

Special rules apply to trusts, lifetime transfers and the allocation of the allowance between different assets.

AIM Shares

Shares designated as not listed on the markets of recognised stock exchanges, including many shares traded on AIM, generally qualify for Business Property Relief at 50% rather than 100%, provided the other qualifying conditions are met.

Investment risk and tax treatment should both be considered before purchasing shares for Inheritance Tax planning.

Agricultural Property Relief

Agricultural Property Relief can reduce the agricultural value of qualifying farmland, buildings and farmhouses.

The property must meet the detailed ownership, occupation and agricultural-use conditions.

The relief normally applies to agricultural value rather than development or hope value.

Changes from 6 April 2026

Agricultural Property Relief now shares the £2.5 million allowance for 100% relief with Business Property Relief.

Qualifying agricultural and business property above the available allowance normally receives 50% relief.

Inheritance Tax due on qualifying agricultural and business property can generally be paid in equal annual instalments over ten years without interest under the revised rules.

Farm and business owners should review succession plans, ownership structures, partnerships, wills and insurance arrangements in light of these changes.

Property, Joint Ownership and Inheritance Tax

How a property is owned can affect what passes under a will and how the estate is administered.

Joint Tenants

Where property is owned as joint tenants, the deceased person's interest normally passes automatically to the surviving owner by survivorship.

It does not usually pass under the will, but its value can still be relevant for Inheritance Tax.

Tenants in Common

Where property is owned as tenants in common, the deceased person's share normally passes under their will or the intestacy rules.

This form of ownership is sometimes used in estate planning, but changing ownership alone does not automatically reduce Inheritance Tax.

Debts and Funeral Expenses

Genuine debts and liabilities can normally be deducted when calculating the value of an estate.

These may include:

• Mortgages
• Loans
• Credit-card balances
• Unpaid household bills
• Reasonable funeral expenses

Restrictions may apply where a debt was used to acquire excluded property, fund gifts or obtain assets qualifying for a relief.

Who Pays Inheritance Tax?

The executors or administrators are usually responsible for valuing the estate, reporting it to HM Revenue and Customs and paying the tax from estate funds.

Beneficiaries do not normally pay Inheritance Tax personally on assets inherited from the estate.

However, recipients of taxable lifetime gifts may sometimes become responsible for tax attributable to those gifts.

When Must Inheritance Tax Be Paid?

Inheritance Tax is normally due by the end of the sixth month after the month in which the person died.

Interest can be charged on tax paid after the deadline.

Some Inheritance Tax normally has to be paid before the grant of probate can be issued, which can cause difficulty where most of the estate consists of property or other assets that cannot immediately be sold.

Banks may release money directly to HMRC under the Direct Payment Scheme. Executors may also need to arrange lending or pay from personal funds and recover the money from the estate.

Payment by Instalments

Inheritance Tax attributable to certain assets, including some property, businesses and shares, may be paid in annual instalments.

Interest can normally arise on outstanding instalments, although different rules apply to qualifying agricultural and business property under the reforms introduced in April 2026.

Valuing and Reporting the Estate

The personal representatives must identify and value the deceased's:

• Property
• Bank and building society accounts
• Investments and shares
• Business interests
• Personal possessions
• Trust interests
• Foreign assets
• Relevant lifetime gifts
• Pension benefits where applicable

Debts, exemptions and reliefs must also be considered.

Where a full Inheritance Tax account is required, it will usually be submitted using form IHT400 and the relevant supporting schedules.

The estate must generally be reported within 12 months of the death, although the payment deadline may arise much earlier.

Long-Term Residence and Overseas Assets

The rules governing overseas assets changed from 6 April 2025.

Liability for Inheritance Tax is now based mainly on long-term UK residence rather than the previous domicile-based system.

A person may be treated as a long-term UK resident where they have been UK resident for the required number of tax years.

Depending on their residence history, overseas assets may remain within the UK Inheritance Tax net for a period after they leave the UK.

People with international assets, foreign pensions, overseas homes or plans to move abroad should obtain specialist tax advice.

Common Inheritance Tax Misunderstandings

"My Estate Is Under £1 Million, So There Is No Tax"

The £1 million figure applies only in particular circumstances, usually involving transferred allowances and a qualifying home passing to direct descendants.

"I Gave My House to My Children, So It Is Outside My Estate"

The property may remain within the estate where the person continues living in it or benefiting from it without paying a full market rent.

That may be correct under the present rules, but most unused pension funds and pension death benefits are due to enter estates from 6 April 2027.

< "4 "“My Partner Will Inherit Tax-Free"

The spouse exemption does not normally apply to an unmarried partner.

Taper relief may reduce tax on a taxable gift, but it does not reduce the value of the gift or restore the nil-rate band.

Reviewing Your Will and Estate

Inheritance Tax planning should not be considered in isolation. Giving away too much can leave a person without sufficient funds or control over their home and investments.

A will and estate plan should be reviewed following:

• Marriage, civil partnership or divorce
• The death of a spouse, partner or beneficiary
• The birth of children or grandchildren
• A significant change in property or investment values
• The sale or purchase of a business
• Retirement or a substantial increase in pension savings
• Moving into or out of the UK
• Changes to tax legislation

The forthcoming pension changes mean that people who previously treated pensions as outside their estate should reconsider their overall position before April 2027.

Speak to a Wills and Probate Solicitor

Inheritance Tax rules are complex and the correct planning will depend on your assets, family circumstances, health, residence history and long-term financial needs.

A wills and probate solicitor, working where necessary with a regulated tax or financial adviser, can help with:

• Preparing or updating a will
• Calculating available allowances
• Lifetime gifting
• Pension and death-benefit planning
• Business and agricultural succession
• Trusts
• Residence nil-rate band planning
• Administering a taxable estate

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