Inheritance Tax UK
Threshold 2025 Explained
Inheritance Tax (IHT) is charged at 40% on the value of your estate above the nil-rate band threshold. With the threshold frozen at £325,000 since 2009 and house prices rising dramatically, more UK families than ever are being pulled into the IHT net. HMRC collected a record £8.7 billion in IHT in 2025/26. Understanding the thresholds and planning ahead could save your family tens or even hundreds of thousands of pounds.
What is Inheritance Tax?
Inheritance Tax is charged on the estate of someone who has died. The estate includes everything the person owned — property, savings, investments, business interests, and personal possessions — minus any outstanding debts and liabilities.
The standard rate of Inheritance Tax is 40%, applied only to the portion of the estate that exceeds the available tax-free thresholds (nil-rate bands). Assets left to a spouse or civil partner are completely exempt, as are gifts to registered charities.
IHT Thresholds for 2025/26
There are two nil-rate bands that work together to create your total IHT-free threshold:
| Nil-Rate Band Type | Amount 2025/26 | Condition | Frozen Until |
|---|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Available to everyone | April 2030 |
| Residence Nil-Rate Band (RNRB) | £175,000 | Home passed to children/grandchildren | April 2030 |
| Combined (individual) | £500,000 | With qualifying home to direct descendants | April 2030 |
| Combined (married couple) | £1,000,000 | Full transfer of unused bands on death | April 2030 |
The nil-rate band has been stuck at £325,000 since 2009. With UK house prices up over 70% since then, many families who wouldn’t consider themselves wealthy now face significant IHT bills simply because of rising property values. HMRC expects IHT receipts to grow substantially through to 2030.
Understanding the Residence Nil-Rate Band
The Residence Nil-Rate Band (RNRB) was introduced in 2017 to protect the family home from excessive IHT. It provides an additional £175,000 of tax-free threshold — but only if specific conditions are met:
- The deceased must have owned a home (or share of a home)
- The home must be passed to a direct descendant — children (biological, adopted, foster, step), grandchildren, or their spouses
- The RNRB is tapered away at £1 for every £2 the net estate exceeds £2 million
- If your estate exceeds £2.35 million, the full RNRB is lost
If you sell or downsize your home after 8 July 2015, you can still claim the RNRB providing you leave assets of equivalent value to your direct descendants. Keep records of any house sales to ensure your estate can claim this relief.
Worked Example
Let’s look at two scenarios to illustrate how IHT is calculated:
The 7-Year Gifting Rule
One of the most powerful IHT planning tools is making gifts during your lifetime. Gifts made more than 7 years before death are completely exempt from IHT. Gifts made within 7 years are called Potentially Exempt Transfers (PETs) and may be subject to IHT on a sliding scale:
Full IHT applies — 40%
Gift is fully included in your estate if you die within 3 years of making it.
32% (Taper Relief applies)
IHT on the gift is reduced by 20%.
24% (Taper Relief 40% reduction)
IHT on the gift is reduced by 40%.
16% (Taper Relief 60% reduction)
IHT on the gift is reduced by 60%.
8% (Taper Relief 80% reduction)
IHT on the gift is reduced by 80%.
0% — Fully Exempt!
The gift falls completely outside your estate and is not subject to IHT.
Annual Gift Exemptions
Certain gifts are exempt from IHT regardless of the 7-year rule:
- Annual exemption: £3,000 per year (unused allowance can be carried forward one year)
- Small gifts: Up to £250 per person per year (cannot combine with annual exemption)
- Wedding gifts: £5,000 from a parent, £2,500 from grandparent, £1,000 from anyone else
- Normal expenditure from income: Regular gifts from surplus income that don’t affect your standard of living
- Gifts to charity: Fully exempt at any time
IHT Planning Strategies
Proactive estate planning can significantly reduce the IHT your family faces. Here are the key strategies to consider:
🎁 Start Gifting Early
Begin making gifts to children and grandchildren now. The 7-year clock starts immediately. Even small annual gifts of £3,000 per year add up over time.
📋 Write a Will
Without a will, intestacy rules apply and may not distribute your estate tax-efficiently. A well-drafted will ensures maximum use of both nil-rate bands.
🏛️ Trust Structures
Placing assets in certain trust structures can remove them from your estate after 7 years while still allowing controlled benefit to family members.
💼 Business Relief
Qualifying business assets and AIM-listed shares may attract 50% or 100% Business Property Relief (BPR), reducing IHT on those assets significantly.
🏠 Pension Planning
Pension funds are currently outside your estate for IHT purposes (changing from April 2027). Consider leaving other assets and living from pension income first.
💝 Charity Giving
Leaving 10% or more of your estate to charity reduces the IHT rate on the remainder from 40% to 36% — a meaningful saving on larger estates.
The October 2024 Budget announced that unused pension pots will be brought into scope for IHT from April 2027. If you were relying on a pension as an IHT-free inheritance vehicle, this requires urgent review of your estate plan.
How and When is IHT Paid?
IHT must generally be paid within 6 months of the end of the month in which the person died. For example, if someone dies in January 2026, IHT is due by 31 July 2026.
Crucially, probate (and therefore the ability to administer the estate) cannot normally be obtained until at least some IHT has been paid — creating a cash-flow challenge since the assets are frozen. HMRC allows IHT on property to be paid in 10 annual instalments. Banks will often release funds directly to HMRC before probate to help with this.
Frequently Asked Questions
What is the inheritance tax threshold in 2025/26?
The standard nil-rate band is £325,000. If you leave your home to direct descendants (children or grandchildren), you also get a Residence Nil-Rate Band of £175,000 — making a total of £500,000 per person, or £1 million for a married couple.
Do spouses pay inheritance tax?
No. Assets passed between spouses and civil partners on death are completely exempt from IHT regardless of the value. The surviving spouse also inherits any unused nil-rate band from the first death, potentially doubling their threshold.
When does the 7-year rule start?
The 7-year clock starts from the date the gift is made. The gift must be a genuine transfer with no strings attached — you cannot continue to benefit from the asset (for example, continuing to live rent-free in a gifted property).
What happens to pensions and IHT?
Currently, most defined contribution pension pots sit outside your estate for IHT purposes. However, from April 2027 this will change — inherited pension funds will become subject to IHT. This is a major planning area to address before then.