Inheritance and Estate Tax in United Kingdom

UK Inheritance Tax (IHT) is levied under the Inheritance Tax Act 1984 (IHTA 1984) on the value of a deceased person's estate above a tax-free threshold. The standard rate is 40% on the portion that exceeds the available nil-rate band. A reduced rate of 36% applies where at least 10% of the net estate passes to qualifying charities under IHTA 1984 s.7. IHT affects around 4-5% of UK deaths in a typical year, but its reach expands as property values rise against a frozen threshold [SC1].

What is the nil-rate band and how much can be passed tax-free?

Every individual has a nil-rate band (NRB) of GBP 325,000. This threshold has been fixed since the 2009/10 tax year and remains frozen at GBP 325,000 through the 2029/30 tax year, after which the government intends to resume indexation with the Consumer Prices Index [SC1]. The NRB is the portion of the estate on which no IHT is charged; the excess is taxed at 40%.

Where a main residence passes to direct descendants (children, stepchildren, adopted or foster children, grandchildren, or their spouses and civil partners), an additional residence nil-rate band (RNRB) of GBP 175,000 applies per individual. The RNRB is also frozen at this level through 2029/30 [SC2]. Combined, a single person passing a qualifying home to direct descendants has GBP 500,000 of tax-free cover. For married couples and civil partners the combined cover can reach GBP 1,000,000 because both the NRB and the RNRB are transferable to the surviving partner (see below).

The RNRB tapers for larger estates: it reduces by GBP 1 for every GBP 2 that the net estate exceeds GBP 2,000,000, disappearing entirely at GBP 2,350,000 [SC2].

How does the spouse and civil partner exemption work?

Transfers between spouses or civil partners are fully exempt from IHT under IHTA 1984 s.18, with no upper limit. This applies both to lifetime gifts and to bequests on death. The effect is that a couple can defer the IHT charge until the second death.

On the first death, any unused NRB or RNRB does not disappear. Under the transferable nil-rate band rules, the unused percentage of the NRB is added to the surviving spouse's own NRB when they die. The same applies to the RNRB. A couple where the first death used none of the NRB can therefore pass on up to GBP 1,000,000 (GBP 650,000 NRB plus GBP 350,000 RNRB) to their direct descendants free of IHT on the second death [SC1].

One important limit applies where one spouse is not a long-term UK resident (a category that replaced the former domicile test from 6 April 2025 under Finance Act 2025): the s.18 exemption for transfers from a UK-resident spouse to a non-resident spouse is capped at the NRB (GBP 325,000) unless the recipient makes an election to be treated as UK-resident for IHT purposes [SC3].

What is the 7-year rule on lifetime gifts?

Gifts made by an individual during their lifetime to other individuals (or to certain bare trusts) are called Potentially Exempt Transfers (PETs). A PET becomes fully exempt from IHT if the donor survives for 7 years after making the gift. If the donor dies within 7 years, the PET becomes chargeable and is included in the estate calculation [SC4].

To prevent sharp cliff-edges, taper relief under IHTA 1984 s.7(4) reduces the IHT due on a PET made between 3 and 7 years before death. The table below shows the tax percentage payable:

Taper relief reduces the tax rate, not the value of the gift. PETs are stacked against the NRB in chronological order, so earlier gifts consume the NRB first.

Several annual exemptions reduce or eliminate the charge on smaller gifts: GBP 3,000 per tax year per donor (with one year carry-forward if unused); GBP 250 per donee per year in small gifts; wedding or civil partnership gifts of up to GBP 5,000 from a parent; and gifts from surplus income that form part of normal expenditure. Anti-avoidance provisions in IHTA 1984 s.102 (Gifts with Reservation of Benefit) treat a gift as still belonging to the donor at death where the donor continues to benefit from the asset, regardless of the 7-year clock [SC4].

What changes did the government make to business and agricultural property relief in April 2026?

Business Property Relief (BPR) under IHTA 1984 ss.103-114 and Agricultural Property Relief (APR) under ss.115-124 previously provided 100% IHT relief on qualifying business and farmland assets with no monetary cap. This made them among the most generous reliefs in the UK tax system.

From 6 April 2026, a combined allowance of GBP 2,500,000 per individual applies to BPR and APR assets claiming 100% relief. Qualifying property above that combined threshold receives only 50% relief, resulting in an effective IHT rate of 20% on the excess rather than 0% [SC5]. Any unused portion of the GBP 2,500,000 allowance transfers to a surviving spouse or civil partner, giving couples up to GBP 5,000,000 of combined 100% relief.

For shares quoted on recognised stock exchanges that are classified as "not listed" (including AIM-quoted shares), BPR is capped at 50% in all circumstances regardless of value. The option to pay IHT on qualifying agricultural or business property by 10 equal annual interest-free instalments is extended to all such property under the reformed regime [SC5].

The GBP 2,500,000 figure represents a revision upward from the GBP 1,000,000 cap originally announced at Autumn Budget 2024 -- the government raised the threshold in December 2025 following consultation feedback from farming and business owner groups.

What happens to unused pension funds under the April 2027 changes?

Prior to 6 April 2027, unused pension funds generally fell outside a deceased person's estate for IHT purposes because they passed under the discretion of pension trustees rather than through the estate directly. This made defined contribution pension pots a significant wealth-transfer vehicle.

From 6 April 2027, most unused pension funds and pension death benefits become part of the deceased's estate for IHT [SC6]. The change covers defined contribution uncrystallised funds, flexi-access drawdown funds, and certain defined benefit death benefits. Death-in-service lump sum benefits from registered pension schemes remain excluded. Payments to surviving spouses or civil partners (who are long-term UK residents) are also exempt via the spouse exemption.

Personal representatives become responsible for reporting the value of the pension to HMRC and for paying any IHT due. Pension scheme administrators must provide benefit valuations within 4 weeks of notification. The practical effect is that pensions will no longer function as automatic IHT-free inheritance vehicles, and individuals with large pension pots should seek independent guidance from a qualified solicitor or pension specialist on how this interacts with their estate.

For the wider UK tax picture, including the residence-based long-term resident test that replaced the domicile regime in April 2025, see the United Kingdom country overview. For the interaction between IHT and capital gains tax on death (the base-cost uplift at date of death), see the UK capital gains tax crossover.

The figures above assume the RNRB is not tapered (estate under GBP 2,000,000) and that the couple passes a qualifying main residence to direct descendants. Estates above GBP 2,000,000 lose GBP 1 of RNRB for every GBP 2 above that threshold.

For personalised analysis of how these thresholds interact with a specific estate -- including the effect of lifetime gifts, trust structures, pension pots, and agricultural or business property -- consulting a qualified tax professional or solicitor who holds relevant STEP or ATT/CIOT accreditation is the appropriate next step.