Inheritance tax: how it works and how to plan for it
Inheritance tax is charged at 40% on estates above the tax-free bands, and the bands have been frozen for years while property and investment values have risen. Most of the effective planning has to start well before it is needed.
By Vince De Stefano, Head of Financial Services
Updated 26 October 2026
6 min read
Key takeaways
- Each person has a £325,000 nil-rate band, plus a £175,000 residence nil-rate band when a home passes to children or grandchildren.
- A married couple or civil partners can pass up to £1 million free of inheritance tax by combining both sets of bands.
- Most gifts fall outside your estate if you survive seven years, and some are exempt straight away.
- From 6 April 2027 most unused pension funds will count as part of your estate for inheritance tax.
How inheritance tax is charged
Inheritance tax is charged on your estate when you die: your home, savings, investments and possessions, less debts and funeral costs, plus certain gifts made in the previous seven years. The first £325,000 is the nil-rate band. Value above it is taxed at 40%, or 36% if at least 10% of the net estate is left to charity.
The residence nil-rate band adds up to £175,000 when your home, or the proceeds of a home you have downsized from, passes to your children, stepchildren or grandchildren. It is reduced by £1 for every £2 by which the estate exceeds £2 million. Both bands are frozen until April 2031.
Married couples and civil partners
Everything left to a spouse or civil partner is exempt, provided they are a long-term UK resident. If they are not, the exemption is limited to £325,000 unless they elect to be treated as UK resident. Any nil-rate band and residence nil-rate band not used on the first death can be transferred to the survivor, so a couple can pass up to £1 million between them before tax is due. The transfer is claimed when the second person dies, so keep records of the first estate.
Unmarried partners do not have this exemption. Our guide for unmarried couples covers the gaps.
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Lifetime gifts
Some gifts are exempt as soon as they are made:
- £3,000 a year in total, with one year's unused exemption carried forward;
- gifts of up to £250 per person to any number of people, where no other exemption has been used for that person;
- wedding gifts of up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else;
- regular gifts made out of surplus income that leave your standard of living unchanged.
Larger gifts to individuals are potentially exempt transfers. They fall outside your estate after seven years. If you die between three and seven years after the gift, any tax on it is reduced by taper relief. A gift you keep benefiting from, such as a house you continue to live in rent-free, stays in your estate. Our guide to gifting to children explains the rules.
Pensions from April 2027
Pensions have been one of the most effective ways to pass on wealth, because most defined contribution funds are outside the estate for deaths before 6 April 2027. For deaths on or after 6 April 2027 most unused pension funds and pension death benefits will be included in the estate for inheritance tax. Death-in-service benefits are excluded, and pensions left to a spouse or civil partner remain exempt. Our guide to pensions and inheritance tax sets out what to review.
Trusts, reliefs and life cover
- Trusts let you give assets away while controlling who benefits and when. Lifetime transfers into most trusts are taxed at 20% above the nil-rate band. See trusts explained.
- Business and agricultural property relief reduces the value of qualifying business and farming assets. Since 6 April 2026, 100% relief applies to the first £2.5 million of qualifying property and 50% relief above that, with unused allowance passing to a surviving spouse or civil partner. Plans that relied on the old unlimited relief should be reviewed.
- Life cover written in trust can pay a sum outside your estate to meet the tax, so your family does not need to sell assets to pay it.
- Your will decides whether the residence nil-rate band is available and how the spouse exemption is used. See making a will.
Paying the tax
Inheritance tax is due by the end of the sixth month after the month of death, and interest runs after that. Executors usually have to pay at least part of it before the grant of probate is issued, which can be difficult when most of the estate is in property. Tax on property can be paid in ten annual instalments. Our guide to probate covers the process.
Inheritance tax planning involves tax, investments and legal documents. Our accountants quantify the liability, our planners test what you can afford to give away, and our solicitors draft the wills and trusts.
Frequently asked questions
How much can I leave before inheritance tax is due?
£325,000 per person, plus up to £175,000 if your home goes to children or grandchildren. A married couple or civil partners can combine their bands to pass up to £1 million. The bands are frozen until April 2031.
What is the inheritance tax rate?
40% on value above the available bands, or 36% if at least 10% of the net estate goes to charity.
Is the seven-year rule still in place?
Yes. Gifts to individuals fall outside your estate if you survive seven years. If you die between three and seven years after a gift, taper relief reduces the tax on it.
Will my pension be subject to inheritance tax?
For deaths on or after 6 April 2027, most unused pension funds are included in the estate. Pensions left to a spouse or civil partner who is a long-term UK resident remain exempt.
Sources & further reading
The value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on your circumstances and may change.
This article is general information, not advice. Tax, financial and legal rules change and their effect depends on your circumstances. Check the current position and take professional advice before acting. Last reviewed 26 October 2026. Totus One Limited (company no. 16855798).
An independent financial planner advising individuals and families on pensions, investments, protection and inheritance.
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