Inheritance Tax (IHT) is a 40% tax on the part of your estate above your tax-free threshold. Most estates pay nothing — but with frozen thresholds and rising house prices, more families are being caught. Here’s how it works in 2026.
The thresholds
- Nil-rate band: the first £325,000 of your estate is tax-free.
- Residence nil-rate band: an extra £175,000 if you leave your home to children or grandchildren — lifting the threshold to £500,000.
- Couples: any unused threshold passes to a spouse or civil partner, so couples can pass on up to £1 million tax-free.
- Anything left to a spouse, civil partner or charity is exempt.
How the tax is worked out
IHT is charged at 40% on the value above your threshold. For example, an estate of £500,000 with a £325,000 threshold would be taxed on £175,000 — a bill of £70,000. Leave 10% or more to charity and the rate on the rest drops to 36%.
Gifts and the 7-year rule
Gifts you make while alive can fall outside your estate if you live for 7 years afterwards. Die within 7 years and the gift may be taxed, though taper relief can reduce the rate. There are also annual exemptions — you can give away up to £3,000 a year, plus small gifts of up to £250 per person, free of IHT.
Common ways to reduce a bill
- Use the residence nil-rate band by leaving your home to direct descendants.
- Make use of annual gift exemptions and regular gifts from surplus income.
- Leave a charitable legacy to cut the rate to 36%.
- Consider life insurance written in trust, or specialist trusts — with advice.