Part one · the picture
What's changing in inheritance tax
Inheritance tax was designed to catch large estates. But with the nil-rate band frozen since 2009, rising property and asset prices are dragging ordinary families in — and the rules are tightening around pensions and reliefs.
It's been a record-breaker. IHT raised £8.5bn in 2025/26 — a fifth consecutive annual record — not because rates rose, but because frozen thresholds and rising asset prices pull more estates in. The official forecast has it reaching about £14.5bn by 2030/31, a roughly 67% jump over five years.
HMRC inheritance tax receipts
£ billion per financial year · 2030/31 = OBR forecast
Four drivers: thresholds frozen since 2009; rising asset prices; the non-dom regime abolished; and pensions entering the estate from April 2027. IHT is still ~0.7% of all tax — about £300 per household.
How UK IHT works, 2026/27
It's an estate tax — charged on the estate before assets pass to heirs, at a flat 40% above the tax-free bands. Spouses and charities are exempt, and a couple leaving a home to descendants can pass up to £1m tax-free.
| Element | Value | Notes |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Per person; frozen since 2009 |
| Residence nil-rate band | £175,000 | Home left to direct descendants |
| Couple + home, combined | up to £1m | Both bands transferable to a spouse |
| RNRB taper threshold | £2m | RNRB withdrawn £1 per £2 above |
| Standard rate | 40% | On the estate above the bands |
| Reduced charity rate | 36% | If ≥10% of net estate to charity |
| Spouse / civil partner | £0 | Unlimited exemption |
The three changes that matter
| When | What changes |
|---|---|
| 6 Apr 2026 | Agricultural & Business Property Relief reformed: 100% relief capped at a £1m allowance per person (now transferable to a spouse), 50% relief above — an effective 20% rate on the excess. |
| 6 Apr 2027 | Unused pension pots and most death benefits brought into the estate. Pensions stop being an IHT shelter — the single biggest change for savers. |
| 5 Apr 2031 | NRB, RNRB and the £2m taper threshold remain frozen until at least this date (extended again at the Autumn 2025 Budget). |
Sources: OBR inheritance tax; Deloitte & Practical Law on the Autumn 2025 Budget; GOV.UK: how IHT works.
Who actually pays
From the wealthy few to the homeowning many
Around 4–5% of deaths currently result in an IHT charge. The OBR expects that to roughly double to about 1 in 10 estates by 2030/31 — increasingly ordinary homeowners rather than only the very rich.
Share of deaths resulting in an IHT charge
% of estates · OBR
The great wealth transfer
Generational wealth is concentrating, then cascading
An estimated £5.5–7 trillion will pass between UK generations over the next ~30 years. Wealth sits overwhelmingly with older cohorts — and inheritance is becoming a larger part of younger people's lifetime income.
The wealth waiting to move
UK estimates · industry, IFS & Resolution Foundation
Inheritance as a share of lifetime income, by birth decade
Institute for Fiscal Studies projection
Median inheritance is projected to roughly double too — from ~£66,000 (1960s-born) to ~£136,000 (1980s-born).
Sources: Institute for Fiscal Studies & Resolution Foundation on inheritances and intergenerational wealth.
In context
A high headline rate — but the threshold is the real story
At 40%, the UK's top rate is near the upper end of the G7 but not the highest. What makes the UK distinctive is its low tax-free threshold: the 40% bites ordinary homeowners, where other countries either exempt vast amounts or tax nothing at all.
Top inheritance / estate tax rate to direct heirs
% · 2026, indicative · gold = UK
| Country | Top rate | Tax-free allowance (direct heirs) |
|---|---|---|
| Japan | 55% | ~¥48m (~£250k, family of 3) |
| France | 45% | €100,000 per child |
| United Kingdom | 40% | £325k (+£175k home) — low |
| United States | 40% | ~$13.6m — very high |
| Germany | 30% | €400,000 per child |
| Italy | 4% | €1m per child |
| Canada | 0% | No IHT — but CGT applies on death |
Across the OECD the average estate-tax rate is ~15% (median ~7%), and 15 of 34 countries levy nothing on assets passed to lineal heirs. Source: Tax Foundation.
Part two · the response
How to pass wealth on — the pension pivot
The April 2027 change flips the long-standing logic of holding the pension back as a tax-free legacy. For many, the new question is whether to draw the pension down (paying income tax) and recycle the surplus into exempt gifts — rather than leave it to face IHT and beneficiary income tax combined.
Drawing a larger pension income and gifting the surplus regularly out of that income is immediately IHT-exempt (no seven-year wait) — but the withdrawals are taxed at your marginal rate. There's no universal answer: it turns on your tax band, life-expectancy assumptions, and how much surplus income the plan actually throws off.
Two cautions: drawing tax-free cash specifically to boost pension contributions can trigger anti-recycling rules; and flexibly accessing a DC pension triggers the £10,000 Money Purchase Annual Allowance, capping future DC contributions.
The gifting toolkit
What you can give, and how fast it's exempt
Some gifts leave the estate immediately; others (PETs) need seven years. The immediate exemptions are unglamorous but reliable — and gifts from surplus income have no cap at all.
| Strategy | Limit | Exempt when? | Key condition |
|---|---|---|---|
| Normal expenditure out of income | No limit | Immediately | Regular, from surplus income, no drop in living standard — must be evidenced |
| Annual exemption | £3,000/yr | Immediately | Carry forward one unused year → £6,000 |
| Small gifts | £250/person | Immediately | Any number of people; not with the annual exemption to the same person |
| Wedding gifts | £5k/£2.5k/£1k | Immediately | £5k child, £2.5k grandchild, £1k anyone else |
| Gifts to spouse / civil partner | No limit | Immediately | Both UK-domiciled (or elect) |
| Gifts to charity | No limit | Immediately | Also cuts the estate rate to 36% if ≥10% of net estate |
| Potentially Exempt Transfer (PET) | No limit | After 7 years | Outright gift to a person; no reservation of benefit |
| Chargeable transfer (into trust) | No limit | After 7 years | 20% entry charge above NRB; 10-yearly trust charges |
How long until a gift is fully outside the estate
years · gold = the seven-year clock
Two rows do the heavy lifting for substantial wealth: unlimited gifts from income (immediate) and unlimited gifts of capital as PETs (after seven years). Everything else trims at the edges.
Sources: GOV.UK: rules on gifts; abrdn Techzone.
PETs & the 7-year rule
How a PET works — and the taper myth
Give an asset outright to a person and there's no tax at the time. Survive seven years and it's fully outside your estate. Die within seven years and it's a "failed PET" — pulled back in, using up your nil-rate band first.
Effective IHT rate on gifts above the NRB, by years survived
% · taper relief · gold = fully exempt
The reservation-of-benefit trap: if you give something away but keep using it (e.g. gift the house but live there rent-free), it stays in your estate — the clock never starts. Pay a market rent, or don't retain the benefit.
Sources: Price Bailey; The Private Office; UK Finance Tools.
Beyond gifting
The structural levers
Gifting moves wealth out. These reduce, defer, or insure the bill on what stays in.
| Lever | What it does | Watch-out |
|---|---|---|
| Spouse exemption + transferable bands | Pass everything to a spouse tax-free; unused NRB/RNRB transfer, giving a couple up to £1m with a home | Defers, doesn't remove — tax can land on the second death |
| Charity 36% rate | Leave ≥10% of the net estate to charity and the rate on the rest drops 40%→36% | Only worthwhile if you'd give to charity anyway |
| Whole-of-life insurance in trust | Pays a lump sum outside the estate to cover the IHT bill (or a failed PET's liability) | Premiums for life; must be written in trust |
| Trusts (discretionary / bare) | Control timing and who benefits; remove growth from the estate | CLT entry/exit/10-year charges; complexity — take advice |
| RNRB & downsizing addition | £175k extra band for a home to descendants; preserved if you downsize or sell | Tapers away above a £2m estate |
| BPR / APR | Relief on qualifying business/farm assets | From April 2026, 100% only up to £1m/person; 50% above |
| Deed of variation | Redirect an inheritance you receive within 2 years of death | Needs beneficiary agreement; specific formalities |
Sequencing & risk
Act early, evidence everything, expect change
Start the clock early. A PET only works if you survive seven years, so the value of gifting falls the longer it's left. Use the immediate exemptions every year — they don't carry forward (except the one-year annual-exemption carry).
Keep your own resilience first. Gifting is irreversible. Model your own income needs and care-cost risk before giving capital away — the plan has to survive a long retirement and possible care fees.
Evidence gifts from income. HMRC wants a pattern of regular gifts and proof you could afford them from income without dipping into capital. Keep a simple written record.
Sources: S&W; Hunters Law; Blincoe.
Common questions
Inheritance tax in 2026, answered
What is changing in inheritance tax?
The nil-rate band (£325,000) and residence nil-rate band (£175,000) are frozen until at least April 2031. Agricultural and business property relief is capped from April 2026. And from 6 April 2027, unused pension pots are brought into the estate for inheritance tax — the biggest change for savers.
What is the 7-year rule on gifts?
An outright gift to an individual (a "potentially exempt transfer") leaves your estate for inheritance tax if you survive seven years. Die within seven years and it is brought back into the estate, using your nil-rate band first.
How does taper relief work?
Taper reduces the IHT rate on a gift from 40% down to 8% between years three and seven after the gift. Crucially, it reduces the tax, not the gift's value — and only applies to gifts above the £325,000 nil-rate band. Below that, surviving three years saves nothing; you still need the full seven.
Can I give money away to avoid inheritance tax?
Within limits, yes. Each person can give £3,000 a year, small gifts of £250 per person, and wedding gifts — all immediately exempt. Regular gifts from surplus income are also exempt with no cap, provided they don't reduce your standard of living and are evidenced. Larger gifts of capital are PETs that leave the estate after seven years.
Are pensions subject to inheritance tax?
From 6 April 2027, unused pension pots and most death benefits are included in the estate for IHT. Where death is after age 75, beneficiaries also pay income tax on withdrawals, so the two taxes can combine to well above 40%.
How much can a couple pass on tax-free?
Up to £1 million, if they leave a home to direct descendants: two nil-rate bands of £325,000 plus two residence nil-rate bands of £175,000, all transferable between spouses. The residence band tapers away once the estate exceeds £2 million.
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