Inheritance tax sounds frightening because the rate is 40 per cent. In practice, most estates in the UK do not pay it at all. The reason is a mix of allowances, exemptions, and the residence nil-rate band, all of which sit on top of each other.
Below is a plain-English walk through the 2026/27 rules, with figures, examples, and the planning points most families should at least consider.
The two main allowances
Every person has a nil-rate band of £325,000. Above that, anything you leave behind could be taxed at 40 per cent. If you leave your main home to children, step-children, or grandchildren, you also get a residence nil-rate band of up to £175,000. Together that is £500,000 for a single person.
Married couples and civil partners can pass allowances to each other, so the combined threshold can be as much as £1 million before any tax is due.
The taper for larger estates
The residence nil-rate band is reduced by £1 for every £2 that your estate is worth above £2 million. This is often called the taper, and it is the reason that families with homes in high-value areas sometimes find they lose the benefit completely.
What counts as part of your estate
Your estate includes cash, savings, investments, property, and most valuable possessions. It also usually includes the money you have given away in the seven years before you die. From April 2027, most unused pension pots will also count, which is a major change that affects people who had planned to use their pension as an inheritance vehicle.
Common exemptions and reliefs
- Spouse exemption: anything left to a UK-domiciled husband, wife, or civil partner is free of inheritance tax.
- Charity exemption: gifts to registered charities are fully exempt and, if you leave 10 per cent or more of your estate to charity, the overall rate on the rest falls to 36 per cent.
- Annual gift allowance: you can give away £3,000 a year free of inheritance tax, plus small gifts of up to £250 per person.
- Business and agricultural relief: certain business and farm assets can qualify for 50 or 100 per cent relief, although the 2025 Budget has tightened these rules from April 2026.
Practical ways to reduce the bill
The cheapest planning tool is still a will. Without one, the intestacy rules decide who gets what, and that can waste the spouse exemption and the residence nil-rate band. A simple will costs a fraction of the tax it can save.
Lifetime gifts, life insurance written in trust, and pension contributions before April 2027 can each reduce the taxable estate. Every plan should be looked at as a whole, not as isolated tactics.
Try the numbers yourself
Use our inheritance tax calculator to see a rough figure for your estate, then pair it with our pension calculator to understand how pension funding changes the long-term picture. For most families, IHT is not something to fear, but it is something to understand.