What is the current inheritance tax rate in the UK?

The standard IHT rate is 40% on the value of your estate above the nil-rate band (GBP 325,000). If you leave 10% or more of your net estate to charity, the rate drops to 36%. The nil-rate band has been frozen at GBP 325,000 since 2009 and is set to remain frozen until at least 2030.

What is the nil-rate band and how does it work?

The nil-rate band (NRB) is the threshold below which no inheritance tax is payable. It is currently GBP 325,000 per person. Married couples and civil partners can transfer any unused NRB to the surviving spouse, potentially giving a combined NRB of GBP 650,000. This transfer happens automatically on the second death.

What is the Residence Nil-Rate Band (RNRB)?

The RNRB provides an additional GBP 175,000 allowance per person when you pass a qualifying residential property to direct descendants (children, grandchildren). Combined with the standard NRB, a married couple can potentially pass on GBP 1,000,000 tax-free. The RNRB tapers by GBP 1 for every GBP 2 the estate exceeds GBP 2,000,000.

How do the April 2026 Business Property Relief changes affect me?

From April 2026, Business Property Relief (BPR) will have a new GBP 2,500,000 allowance at 100% relief. Assets above this threshold receive only 50% relief, meaning an effective 20% IHT rate applies. AIM-listed shares will receive only 50% relief regardless of value. Previously, qualifying business assets received unlimited 100% relief.

What are the April 2027 pension inheritance tax changes?

From April 2027, unused pension funds will be included in your estate for IHT purposes. Currently, pensions sit outside your estate entirely, making them the single most effective IHT shelter. After April 2027, beneficiaries may face double taxation: IHT on the pension value within the estate, plus income tax when they draw down the inherited pension.

Can I give money away to reduce my estate for IHT?

Yes. Gifts made more than 7 years before death are fully exempt from IHT. You also have an annual exemption of GBP 3,000 per tax year (which can be carried forward one year), small gifts of up to GBP 250 per recipient, and gifts on marriage (up to GBP 5,000 from a parent). Gifts from surplus income that form a regular pattern and do not affect your standard of living are also exempt with no upper limit.

What is the surplus income exemption?

The surplus income exemption (also called the normal expenditure out of income exemption) allows you to make gifts from your after-tax income without any IHT implications, provided: (1) the gifts form a regular pattern, (2) they come from income rather than capital, and (3) they do not reduce your standard of living. There is no upper limit. This is one of the most underused IHT reliefs.

Do I need to worry about IHT if my estate is under GBP 325,000?

If your total estate (property, savings, investments, possessions, life insurance not in trust) is below GBP 325,000, no IHT is due. However, property values alone push many estates above this threshold. The average UK house price is approximately GBP 290,000 (2025), meaning most homeowners need to consider IHT planning.

What is a Family Investment Company (FIC)?

A Family Investment Company is a private company used to hold and manage family wealth. Parents typically hold voting/control shares while children hold growth shares. It allows you to pass wealth to the next generation while retaining control, and can be more tax-efficient than trusts for some families. Corporation tax rates apply to investment income within the FIC (25% on profits over GBP 250,000).

Are life insurance payouts subject to inheritance tax?

Life insurance payouts are included in your estate for IHT purposes unless the policy is written in trust. Writing a policy in trust is straightforward and ensures the payout goes directly to beneficiaries without being subject to IHT or probate delays. If you have life insurance that is not in trust, this should be reviewed as a priority.

How much does inheritance tax raise for the UK government?

IHT receipts were GBP 8.2 billion in 2024/25. The OBR forecasts this will rise to approximately GBP 14.5 billion by 2030/31 - a 76% increase over five years. This growth is driven by frozen thresholds, rising property values, and the inclusion of pensions in estates from April 2027. Approximately 40,000 estates paid IHT in 2023/24, expected to exceed 50,000 by 2030.

What is a Deed of Variation and when should I use one?

A Deed of Variation allows beneficiaries to redirect their inheritance within two years of a death. It is treated as if the deceased had made the change in their will. This can be used to reduce the IHT bill on the estate, redirect assets to a more tax-efficient structure, or pass assets to the next generation. All affected beneficiaries must agree, and nobody can receive payment for agreeing to the variation.

UK Inheritance Tax 2025/26

Everything you need to know about IHT if your estate exceeds GBP 1M. Updated for the April 2026 Business Property Relief reforms and April 2027 pension changes.

Reviewed by [Reviewer Name], Chartered Accountant (CA)

Updated: February 202515 min read

TLDR

-IHT is charged at 40% on estates above GBP 325,000 (nil-rate band). Married couples can combine allowances for up to GBP 1,000,000 tax-free.
-From April 2026: Business Property Relief capped at GBP 2.5M at 100%. AIM shares drop to 50% relief (effective 20% IHT).
-From April 2027: Unused pensions included in your estate for IHT. The single best IHT shelter is closing.
-IHT receipts are forecast to reach GBP 14.5B by 2030/31 - a 76% increase in five years.
-Legitimate reduction strategies exist: gifting, surplus income exemption, BPR-qualifying investments, FICs, charitable giving, and life insurance in trust.

How IHT Works

Inheritance tax is charged at 40% on the value of your estate above the nil-rate band (GBP 325,000). The nil-rate band has been frozen since 2009 and will remain frozen until at least 2030. In real terms, adjusted for inflation, it would be approximately GBP 525,000 today.

Married couples and civil partners benefit from the transferable nil-rate band: any unused portion of the first spouse's NRB passes to the surviving spouse, potentially doubling the combined allowance to GBP 650,000. Add the Residence Nil-Rate Band (GBP 175,000 per person when passing a qualifying property to direct descendants) and the combined tax-free amount reaches GBP 1,000,000 for a married couple.

However, the RNRB tapers for estates above GBP 2,000,000, reducing by GBP 1 for every GBP 2 above the threshold. For estates over GBP 2,700,000 the RNRB is completely eliminated.

Estimated IHT liability by estate size (single person, no reliefs)
Estate Value	NRB + RNRB	Taxable Amount	IHT at 40%	Effective Rate
GBP 500,000	GBP 500,000	GBP 0	GBP 0	0%
GBP 1,000,000	GBP 500,000	GBP 500,000	GBP 200,000	20%
GBP 2,000,000	GBP 500,000	GBP 1,500,000	GBP 600,000	30%
GBP 5,000,000	GBP 325,000	GBP 4,675,000	GBP 1,870,000	37.4%
GBP 10,000,000	GBP 325,000	GBP 9,675,000	GBP 3,870,000	38.7%

April 2026: Business Property Relief Reform

Deadline

From 6 April 2026, Business Property Relief is fundamentally changing. The previous regime offered unlimited 100% relief on qualifying business assets. The new regime introduces a GBP 2,500,000 cap at 100% relief (revised up from the initially announced GBP 1,000,000 following significant political backlash in December 2025).

Above the GBP 2,500,000 threshold, only 50% relief applies - meaning an effective IHT rate of 20% on the excess. AIM-listed shares will receive only 50% relief regardless of value, giving a flat effective rate of 20%.

BPR impact comparison: before and after April 2026
BPR Assets	Old Relief	Old IHT	New Relief	New IHT
GBP 1,000,000	100%	GBP 0	100%	GBP 0
GBP 2,500,000	100%	GBP 0	100%	GBP 0
GBP 5,000,000	100%	GBP 0	75%	GBP 500,000
GBP 10,000,000	100%	GBP 0	62.5%	GBP 1,500,000

April 2027: Pensions Brought Into IHT

Deadline

From 6 April 2027, unused pension funds will count as part of your estate for IHT purposes. This is arguably the most significant IHT change in decades. Pensions have been the single most effective IHT planning tool - sitting entirely outside the estate, growing tax-free, and passing to beneficiaries free of IHT (though subject to income tax on drawdown).

After April 2027, beneficiaries may face double taxation: IHT on the pension value within the estate, plus income tax when they draw down the inherited pension. For someone with a GBP 1,000,000 pension pot, the combined tax charge could exceed 60% depending on the beneficiary's income tax position.

Death-in-service benefits have been excluded from the change following industry lobbying. Individuals who need to restructure their pension strategy before April 2027 should seek professional advice now - the window is narrowing.

How to Reduce Your IHT Liability

There are several legitimate strategies for reducing IHT. The right combination depends on your specific circumstances, estate composition, and objectives.

Key IHT reduction strategies
Strategy	Mechanism	Time Required	Complexity
Gifting (7-year rule)	Remove assets from estate	7 years for full exemption	Low
Surplus income exemption	Regular gifts from income	Immediate effect	Medium
BPR-qualifying investments	50-100% relief on qualifying assets	2+ years holding	Medium
Family Investment Company	Transfer growth to next generation	Ongoing structure	High
Life insurance in trust	Cover the IHT liability	Immediate on death	Low
Charitable giving (10%+)	Reduce rate from 40% to 36%	Immediate effect	Low
Pension drawdown restructuring	Reduce pension in estate	Before April 2027	Medium

The estimated IHT bill on a GBP 5,000,000 estate is GBP 1,870,000. With proper planning, this can be significantly reduced. Use our calculator to estimate your specific liability, then speak to a vetted specialist.

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Frequently Asked Questions

Common questions answered

Important Notice

This content is for informational purposes only and does not constitute financial advice. Tax treatment depends on individual circumstances and may change. Consult a qualified professional before making financial decisions. MoneyBlis is not regulated by the Financial Conduct Authority and does not provide personalised financial advice.