Inheritance Tax UK 2025/26: Complete Guide

Inheritance tax (IHT) is a 40% tax on estates above certain thresholds when someone dies. Most estates don't pay it, but if yours does, the bill can be substantial. This guide explains everything executors and beneficiaries need to know about UK inheritance tax in 2025/26.

What is inheritance tax?

Inheritance tax is a tax on the estate (property, money, and possessions) of someone who's died. It's charged at 40% on the value of the estate above the tax-free threshold.

The good news: only about 4% of UK estates actually pay inheritance tax. This is because most estates fall below the tax-free thresholds, especially when you factor in exemptions and allowances for married couples.

The bad news: if your estate does exceed the threshold, the tax bill can be significant—40p for every pound over the limit.

IHT thresholds 2025/26

There are two main tax-free allowances (also called nil-rate bands):

1. Standard nil-rate band: £325,000

Everyone gets a personal allowance of £325,000. No inheritance tax is charged on estates worth up to this amount.

This threshold has been frozen since 2009 and is set to remain at £325,000 until at least April 2030. With house prices rising, more estates are being caught by IHT each year—a phenomenon called "fiscal drag".

2. Residence nil-rate band: up to £175,000

If you leave your home to your children or grandchildren (direct descendants), you may get an additional allowance called the residence nil-rate band (RNRB).

For 2025/26, the RNRB is:

• £175,000 maximum
• Tapered down if your estate is worth over £2 million
• Reduced by £1 for every £2 above the £2m threshold
• Disappears entirely for estates over £2.35 million

Combined threshold example

For a single person leaving their home to children:

• Standard nil-rate band: £325,000
• Residence nil-rate band: £175,000
• Total tax-free: £500,000

Residence nil-rate band (RNRB) explained

The RNRB is more complicated than the standard allowance. Here's what you need to know:

Who qualifies?

To claim the RNRB, all of these must be true:

• The deceased died on or after 6 April 2017
• Their estate includes a residence (house or flat)
• That residence is left to direct descendants (children, grandchildren, step-children, adopted children)
• The total estate is under £2 million (or taper applies)

What counts as a residence?

• A property the deceased lived in at some point
• Doesn't have to be their main home when they died
• If they downsized or moved into care, a "downsizing relief" may still apply

What if there's no property?

If someone sold their home and moved into rented accommodation or a care home, they may still qualify for RNRB through downsizing relief—but this is complex and requires careful calculation.

Transferable allowances for married couples

Here's where married couples get a big advantage:

Spouse exemption (unlimited)

Anything you leave to your spouse or civil partner is completely tax-free, regardless of value. This means:

• No IHT when the first partner dies
• The surviving spouse can inherit everything without triggering tax
• This applies to UK-domiciled couples

Transferring unused allowances

When the first spouse dies and leaves everything to the surviving spouse, their nil-rate bands aren't lost—they're transferred to the surviving spouse.

Example:

• John dies in 2020, leaving everything to his wife Sarah (£0 IHT)
• John didn't use his £325,000 nil-rate band or his £175,000 RNRB
• These allowances transfer to Sarah
• When Sarah dies in 2025, her estate can use:
• Her own £325,000 + John's £325,000 = £650,000
• Her own £175,000 RNRB + John's £175,000 = £350,000
• Total tax-free: £1 million

This is why married couples can often pass on estates worth up to £1 million without any inheritance tax.

The 7-year gifting rule

If you give money or assets away during your lifetime, these gifts can affect your inheritance tax bill—depending on how long you live after making the gift.

How it works

If you survive for 7 years after making a gift, it falls completely outside your estate for IHT purposes. No tax is charged.

If you die within 7 years, the gift is added back to your estate and may be taxed—but the amount of tax reduces the longer you survive. This is called taper relief.

Taper relief rates

Important points about gifts

• The 7-year clock starts from the date of the gift, not the date of death
• If you give away assets but continue to benefit from them (like giving your house away but still living in it rent-free), this is a "gift with reservation" and stays in your estate
• Keep detailed records of all gifts—executors will need these for the IHT400 form

Gifts and exemptions that don't count

Some gifts are completely exempt from IHT and don't count towards the 7-year rule:

1. Gifts to spouses

Unlimited. You can give your spouse or civil partner as much as you like, tax-free (if both UK-domiciled).

2. Gifts to charities

Unlimited. Gifts to UK registered charities are completely exempt.

Bonus: if you leave 10% or more of your estate to charity, the IHT rate on the rest drops from 40% to 36%.

3. Annual exemption

You can give away £3,000 per year, tax-free. You can also carry forward one year's unused exemption, giving a maximum of £6,000 in one year if you didn't use last year's allowance.

4. Small gifts exemption

You can give £250 to as many people as you like, each year, tax-free. You can't combine this with the annual exemption for the same person.

5. Wedding gifts

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to anyone else

6. Regular gifts from income

If you make regular gifts out of your normal income (not savings) that don't affect your standard of living, these are exempt. For example:

• Paying £500/month into your grandchild's savings account
• Paying someone's rent or bills from your pension income regularly

This exemption is powerful but poorly understood. Keep detailed records to prove the gifts were regular and from income.

How to calculate inheritance tax

Here's the step-by-step process:

Step 1: Value the estate

Add up everything the person owned:

• Property (use professional valuation or recent sale prices for comparable homes)
• Savings and investments
• Pensions (some types)
• Vehicles
• Personal possessions (jewellery, art, etc.)
• Business interests
• Gifts made in the last 7 years

Step 2: Deduct what you can

Subtract:

• Debts (mortgage, loans, credit cards)
• Funeral costs (up to a reasonable amount)
• Gifts to spouse or charity (exempt)

Step 3: Apply the allowances

Subtract:

• Nil-rate band: £325,000 (plus any transferred from spouse)
• Residence nil-rate band: up to £175,000 (if applicable, plus any transferred)

Step 4: Calculate the tax

Whatever's left is taxed at 40% (or 36% if 10%+ goes to charity).

Example calculation

When is inheritance tax due?

Inheritance tax must be paid within 6 months of the end of the month in which the person died.

Examples:

• Death on 15 March → IHT due by 30 September
• Death on 28 November → IHT due by 31 May

If you pay late:

• Interest is charged on the outstanding amount
• Interest rates are set by HMRC (currently around 7-8% as of 2025)
• Interest can add thousands to large tax bills

The IHT400 form: what you need to know

The IHT400 is HMRC's inheritance tax account form. It's required for estates that owe IHT or exceed certain thresholds.

When you need to submit IHT400

You must complete IHT400 if:

• The estate is worth over £325,000 and not all left to spouse
• The estate includes gifts made in the last 7 years
• The estate claims transferable nil-rate band from a deceased spouse

What's involved

The IHT400 is 17 pages long and has 8 supplementary schedules covering:

• UK property and land
• Quoted stocks and shares
• Bank and building society accounts
• Household and personal goods
• Gifts and other transfers
• Debts owed by the deceased
• And more...

This isn't a form you fill in over a cup of tea. It requires:

• Professional valuations for property and significant assets
• Detailed records of all bank accounts and investments
• 7 years of gift history
• Complex calculations for RNRB and transferable allowances

How to pay inheritance tax

You can pay IHT:

1. From estate funds

If the deceased had accessible cash (bank accounts), some banks will release funds directly to HMRC before probate—but not all will.

2. Inheritance tax loan

Some banks offer specific IHT loans to executors. These are repaid once probate is granted and estate funds are accessible.

3. Pay in instalments

If the estate includes property, land, or a business, you can pay the tax in 10 annual instalments. Interest is charged on the outstanding balance.

4. From your own funds

Executors can pay the tax personally and reclaim it from the estate once probate is granted.

Ways to reduce inheritance tax

If you're still alive and planning your estate, here are legitimate ways to reduce IHT:

1. Use your annual exemptions

Give away £3,000 per year. Over 10 years, that's £30,000 out of your estate tax-free.

2. Make regular gifts from income

Set up regular payments from your income (not capital) that don't affect your living standards. Potentially unlimited tax relief.

3. Leave money to charity

Completely tax-free, and if you leave 10%+ to charity, the tax rate on the rest drops to 36%.

4. Life insurance in trust

Take out life insurance written in trust. The payout goes directly to beneficiaries outside your estate, so no IHT is charged on it.

5. Spend it!

You can't be taxed on money you've already spent. Enjoy your wealth while you can.

6. Business relief

Business assets and qualifying shares can qualify for 100% relief from IHT—but this is complex and requires professional advice.

7. Agricultural relief

Farms and agricultural land may qualify for up to 100% relief, though recent changes (2025) have tightened this significantly.