What Is Inheritance Tax UK (2026)? A Plain-English Guide

Inheritance tax (IHT) is a tax charged on the value of a person's estate when they die, governed in England and Wales by the Inheritance Tax Act 1984 (IHTA 1984). The standard rate is 40%, charged on the portion of the estate that exceeds the nil-rate band (NRB). The current NRB is £325,000 and has been frozen at this level since 2009 — the government has confirmed the freeze will continue to at least 2030. Despite the political prominence of IHT, the tax affects a relatively small proportion of estates: HMRC data shows approximately 4–5% of UK deaths result in an IHT liability in any given year. The majority of estates are below the NRB threshold or qualify for reliefs that reduce or eliminate any charge. Who pays: (1) Personal representatives (executors or administrators) are responsible for calculating and paying IHT before a Grant of Probate is issued. They pay the tax from the estate's assets — not from their own funds; (2) Beneficiaries who receive specific assets outside the probate estate (such as jointly owned property passing by survivorship, or life insurance not in trust) may be required to pay IHT directly on those assets; (3) The estate itself funds the payment — beneficiaries do not pay IHT on what they receive; the estate pays before distributions are made. What is taxed: Your estate for IHT purposes (under IHTA 1984 s.5) includes everything you beneficially own at death: property; cash and bank accounts; investments; personal possessions; business interests; foreign assets if you are domiciled in the UK. Jointly owned assets (as tenants in common) are included at your share. Jointly owned assets passing by survivorship are also included at their full market value (though they pass outside the will). Life insurance paid directly to your estate (not written in trust) is included. Life insurance written in trust is NOT included — this is a key planning tool.

There are two main nil-rate bands that can reduce or eliminate an IHT charge: (1) The Nil-Rate Band (NRB): £325,000 per person. Frozen until at least 2030. The first £325,000 of your estate is charged at 0%. Everything above £325,000 is charged at 40% (or 36% if 10%+ of the estate is left to charity under IHTA 1984 s.7(4)); (2) The Residence Nil-Rate Band (RNRB): up to £175,000 per person (2026/27 rate). The RNRB applies when a qualifying residential property is left to a direct descendant (child, stepchild, adopted child, grandchild — but not a niece, nephew, or friend) or left to a trust for a direct descendant. Both conditions must be met: there must be a qualifying property AND it must pass to a qualifying beneficiary. The RNRB is tapered: for estates with a net value over £2,000,000, the RNRB reduces by £1 for every £2 of estate value over £2m. At £2,350,000 net estate (or £2,700,000 with both partners), the RNRB is fully withdrawn. The RNRB also applies where a person has downsized since 07 July 2015 (the downsizing addition); (3) Transferable NRB and RNRB (s.8A / s.8H): any unused NRB or RNRB from a deceased spouse or civil partner can be transferred to the surviving spouse's estate. This can give a surviving spouse a total NRB of up to £650,000 and a total RNRB of up to £350,000 — a combined threshold of up to £1,000,000 for a couple passing their home to children; (4) Combined example: Married couple, both die; home worth £400,000 left to children; rest of combined estate £600,000. Total: £1m. IHT threshold: £650,000 (double NRB) + £350,000 (double RNRB) = £1,000,000. IHT = £0. This is why the claim 'married couples can pass £1m free of IHT' is broadly accurate — but only when the RNRB conditions are met.

Several categories of assets are fully or partially exempt from IHT: (1) Spouse or civil partner exemption (IHTA 1984 s.18): gifts to a UK-domiciled spouse or civil partner during life or on death are completely exempt from IHT, regardless of value. This is the most powerful IHT exemption — there is no upper limit. Cohabiting partners do NOT qualify, regardless of how long the relationship has lasted. The exemption is limited where the recipient is not UK-domiciled (the spouse exemption cap is £325,000 in that case, though an election can extend this); (2) Charity exemption (IHTA 1984 s.23): gifts to qualifying UK charities (registered with the Charity Commission) are fully exempt from IHT. If 10%+ of the net estate is left to charity, the rate on the remainder reduces from 40% to 36%; (3) Business Property Relief (BPR) (IHTA 1984 ss.103–114): 100% relief on qualifying trading business interests (sole trader business, partnership interest, unquoted trading company shares) held for at least 2 years. 50% relief on certain other business assets. Budget 2024 change: from April 2026, BPR+APR combined above £1m will be taxed at 20% rather than 0%; (4) Agricultural Property Relief (APR) (IHTA 1984 ss.115–124): 100% relief on the agricultural value of qualifying agricultural property (working farmland, farmhouses, cottages) held for 2 years (owner-occupied) or 7 years (tenanted). Same Budget 2024 change as BPR; (5) National heritage property (IHTA 1984 s.31): conditional exemption for heritage assets (stately homes, art, archives) if owner undertakes maintenance and public access obligations; (6) Quick Succession Relief (IHTA 1984 s.141): credit against IHT where the same property is charged to IHT twice within 5 years; (7) Potentially Exempt Transfers (PETs): gifts made more than 7 years before death are completely exempt. The 7-year taper means gifts between 3 and 7 years before death are charged at reduced rates. Gifts within 7 years are included in the estate.

IHT payment deadlines are strict and can lead to interest charges if missed: (1) The main deadline (IHTA 1984 s.226): IHT must be paid by the end of the sixth month following the month of death. For example, if a person dies in January 2026, IHT is due by 31 July 2026. Interest accrues from the due date if payment is late (currently HMRC interest rate = Bank of England base rate + 2.5%); (2) Why the deadline can be a problem: to obtain a Grant of Probate (needed to access the deceased's bank accounts and sell assets), IHT must already have been paid or arrangements made. But personal representatives often cannot access estate assets until they have the Grant. This 'catch-22' can be resolved by: (a) IHT423 — direct payment from the deceased's bank accounts. HMRC can arrange for participating banks to transfer funds directly to HMRC before the Grant is issued; (b) Inheritance Tax 10-year instalment option (s.227 / s.228) — IHT on certain qualifying assets (property, unquoted company shares, agricultural land) can be paid in 10 annual instalments. Interest applies on each instalment if the asset has not been sold; (c) Accepting liability on the IPA (IHT account) before paying in full, which may satisfy probate requirements; (3) When no IHT is due: if the estate is within the nil-rate band and qualifies as an 'excepted estate', a simplified return is used and no IHT payment is required before applying for probate; (4) IHT reference number: before paying any IHT, personal representatives must apply to HMRC for an IHT reference number (form IHT422). This takes approximately 3–5 working days online. Without the reference number, payment cannot be made; (5) Chargeable lifetime transfers: IHT can also arise during life on certain gifts to trusts (chargeable lifetime transfers). The 20% lifetime rate applies. Additional IHT at a further 20% is due if the donor dies within 7 years.

Several widespread myths cause people to underplan or overplan for IHT: (1) 'My spouse will inherit everything free of tax — so there's no problem': partially true. Transfers between spouses are exempt under IHTA 1984 s.18. But the problem arises on the second death, when the combined estate — including the spouse's own assets and whatever was inherited from the first spouse — may be large enough to attract IHT. The IHT exposure is typically concentrated at the second death. Planning should be done by both spouses together; (2) 'If I just give away my house, it will be outside my estate': completely false in most cases. A gift of a property where the donor continues to live rent-free is a 'gift with reservation of benefit' (IHTA 1984 s.102) — the property remains in the estate for IHT purposes for the rest of the donor's life. The gift is ignored for IHT. The exception is if the donor pays a full market-rent commercial rent for occupying the property after the gift — which defeats the estate planning purpose; (3) 'The nil-rate band is £1,000,000': wrong for most people. The £1,000,000 combined threshold (double NRB + double RNRB) only applies where: both partners' thresholds are available (neither has been used on first death); a qualifying residential property passes to a direct descendant; the estate is under £2,000,000 net. For a single person, the maximum is £500,000 (£325,000 NRB + £175,000 RNRB); (4) 'I have to pay IHT within 6 months of death': IHT is due within 6 months of the END of the month of death — not 6 months from the date of death; (5) 'The executor pays IHT from their own money': executors pay IHT from the ESTATE'S money, not their own. However, they are personally liable if they distribute the estate before paying IHT and there are insufficient funds left to pay the liability (IHTA 1984 s.204).