UK Inheritance Tax 2026 — IHT, 7-Year Rule & Allowances

Quick Answer

UK Inheritance Tax (IHT) is charged at a headline rate of 40% on the value of an estate above the £325,000 nil-rate band (NRB). An additional £175,000 residence nil-rate band (RNRB) applies when a main home is passed to direct descendants, lifting the threshold to £500,000 per person — or up to £1,000,000 for a married couple combining unused allowances. Lifetime gifts become exempt after 7 years under the PET (Potentially Exempt Transfer) rule, with taper relief between years 3 and 7. Spouses and civil partners inherit free of IHT, and charity gifts are fully exempt.

How UK Inheritance Tax Works

Unlike many EU regimes that tax each heir individually, the UK taxes the estate itself before assets pass to beneficiaries. The executor or personal representative is responsible for calculating IHT, filing forms with HMRC, and paying the bill — usually within 6 months of death to avoid interest charges.

The tax is governed by the Inheritance Tax Act 1984 and administered by HM Revenue & Customs (HMRC). Based on tax law, the calculation broadly follows three steps: value the estate, deduct exemptions and allowances, then apply the 40% rate to the remainder.

Allowances and Rates Table (2026)

The 7-Year Rule and Taper Relief

Lifetime gifts to individuals are classed as Potentially Exempt Transfers (PETs). If the donor survives 7 years, the gift falls outside the estate entirely. If death occurs sooner, the gift is added back into the estate calculation, and any tax payable is reduced by taper relief — but only if the gift exceeds the nil-rate band.

Note that taper relief reduces the tax, not the value of the gift itself. Many estate planners highlight this as a common point of confusion.

Residence Nil-Rate Band (RNRB) Tapering

The £175,000 RNRB is reduced by £1 for every £2 by which the estate exceeds £2 million. An estate worth £2.35m loses the RNRB entirely. This estate-size taper affects high-net-worth families disproportionately and is a major driver of estate planning activity in the £2m–£3m bracket.

Worked Example: £1.2m Estate to a Single Child

Consider an estate of £1,200,000 consisting of a £600,000 main home and £600,000 in investments and cash, left entirely to one child by a widowed parent who inherited the late spouse's full unused allowances.

Step 1 — Combined NRB: £325,000 + £325,000 = £650,000 Step 2 — Combined RNRB (home left to child): £175,000 + £175,000 = £350,000 Step 3 — Total tax-free threshold: £650,000 + £350,000 = £1,000,000 Step 4 — Taxable amount: £1,200,000 − £1,000,000 = £200,000 Step 5 — IHT due at 40%: £80,000

The child inherits £1,120,000 net. Without the transferable allowances from the deceased spouse, IHT would have been £40,000 × 40% on the £200k taxable plus an additional £500k taxed = far higher. Data shows that married couples who plan estate transfers carefully often pay zero IHT on estates up to £1m.

If the same parent had also gifted £100,000 to the child 6.5 years before death, the gift would fall outside the estate entirely (PET fully exempt). A gift made 2 years before death would be added back, with no taper relief available since it falls within the NRB.

Cross-Border Element: Brussels IV and UK Domicile

The UK left the EU in 2020, but cross-border inheritance issues remain frequent for British citizens with property abroad and EU expats living in the UK. IHT liability hinges on domicile, not residence — a concept distinct from tax residence.

A UK-domiciled individual is subject to IHT on worldwide assets. A non-UK-domiciled individual (e.g. a French citizen who moved to London 10 years ago and retained French domicile of origin) is taxed only on UK-situated assets. From April 2025, the UK transitioned domicile-based IHT to a long-term residence test: individuals who have been UK tax resident for 10 of the last 20 years are treated as in scope for worldwide IHT.

The Brussels IV Regulation (EU 650/2012) does not apply to the UK — it never did, as the UK opted out. However, EU heirs of UK estates often face dual procedures: UK probate plus an EU certificate of succession in the country where assets sit. Double taxation treaties exist with France, the Netherlands, the Republic of Ireland, the USA, South Africa, India, Pakistan, Sweden and Switzerland to prevent the same asset being taxed twice.

For mixed-domicile couples, a non-domiciled spouse election (under s.267ZA IHTA 1984) can allow unlimited spousal transfer at the cost of becoming UK-domiciled for IHT purposes. This is a complex election with long-term implications, and most advisers suggest consulting a tax specialist for personalized advice.

Estate Planning Techniques in the UK

UK law offers several legitimate routes to reduce IHT exposure. None is suitable for every situation, and the best approach depends on family circumstances, asset mix and long-term goals.

1. Lifetime gifting under the 7-year rule. Many estate planners use systematic gifting programmes, beginning early enough to clear the 7-year window. The annual exemption of £3,000 per donor (plus a one-year carry-forward to £6,000) sits outside the PET regime entirely.

2. Gifts out of normal expenditure. Regular gifts from surplus income — not capital — are immediately exempt provided they form part of a normal pattern and do not affect the donor's standard of living. This is one of the most underused IHT exemptions.

3. Trusts. Discretionary and bare trusts can remove assets from the estate while preserving control. Transfers into most trusts are chargeable lifetime transfers (CLTs) at 20% above the NRB, with a further 20% potentially due if the donor dies within 7 years.

4. Business Relief (BR). Qualifying unquoted business assets and AIM-listed shares held for 2+ years receive 100% or 50% relief. From April 2026, BR is being capped at £1m of 100% relief per individual, with the excess receiving 50% — a significant policy shift.

5. Agricultural Property Relief (APR). Working farmland and farmhouses qualify for 50% or 100% relief. The 2024 Autumn Budget introduced a combined £1m cap shared with BR from April 2026.

6. Charitable giving. Leaving 10% or more of the net estate to charity reduces the IHT rate on the rest from 40% to 36%.

7. Life insurance written into trust. A whole-of-life policy held in trust pays out free of IHT and provides liquidity to settle the bill within HMRC's 6-month deadline. Without this liquidity, executors sometimes face the awkward position of needing to sell illiquid assets — a family business, a property — under time pressure to fund the tax.

8. Deeds of variation. Within 2 years of death, beneficiaries can vary the will to redirect assets — for example, skipping a generation to grandchildren — and the variation is treated for IHT as if the deceased had made the original gift. This post-death tool is widely used to correct outdated wills.

9. Spousal bypass trusts. Pension death benefits can be paid to a discretionary trust rather than direct to the spouse, preserving the funds outside the spouse's estate at second death. This becomes especially relevant from April 2027 when pensions enter the IHT net.

Common Pitfalls

Several mistakes recur in IHT planning:

• Gifts with reservation of benefit (GWR) — gifting a house but continuing to live in it rent-free keeps the property inside the estate. The donor must pay full market rent or vacate.
• Pre-owned asset tax (POAT) — an income tax charge that catches schemes designed to circumvent GWR, introduced in 2005.
• Failing to use the annual exemption — the £3,000 yearly gift allowance is lost if not claimed; many estates miss decades of unused capacity.
• Joint-life insurance not in trust — pays into the deceased's estate, adding 40% IHT to a benefit intended for the family.
• Ignoring the £2m RNRB taper — even a 5% over-shoot starts eroding the £175,000 residence allowance pound for pound by half.

How Domicile Determines Worldwide Reach

Domicile sits at the heart of UK IHT. A child born in the UK to a UK-domiciled father acquires a domicile of origin in the UK that is famously hard to shake. Acquiring a domicile of choice in another country requires both physical presence and a settled intention to remain indefinitely — courts have rejected emigration claims even after 30 years abroad if the individual kept UK ties.

From 6 April 2025, statute replaced the common-law domicile concept with a long-term residence test: an individual within the UK tax net for 10 of the previous 20 tax years is in scope for worldwide IHT, with a 3-to-10-year tail after departure depending on prior residence length. The reform aims to bring more clarity but still produces edge cases for newly arriving non-doms and recent leavers.

FAQ

Does the UK 7-year rule apply to gifts to a UK trust? No — gifts into most trusts are chargeable lifetime transfers (CLTs), not PETs. They face an immediate 20% IHT charge above the NRB and trigger 10-year periodic charges within the trust.

What happens if a gift is made within 7 years but stays under the NRB? The gift uses up part of the NRB available to the estate at death, but no IHT is payable on the gift itself. Taper relief only applies once the cumulative gifts exceed the £325,000 NRB.

Can the residence nil-rate band be transferred between spouses? Yes. Unused RNRB transfers to the surviving spouse, potentially giving a couple a combined £350,000 RNRB on top of £650,000 of NRB — total £1m tax-free.

Are pensions subject to IHT? Until April 2027, most defined contribution pensions sit outside the IHT estate. The 2024 Autumn Budget announced that from 6 April 2027, unused pension funds will be brought into the IHT net.

Do UK expats living abroad still pay UK IHT? From April 2025, IHT scope is determined by long-term residence (10 of last 20 years). Many former UK residents who emigrated long ago will fall outside worldwide IHT, but UK-situated assets remain in scope regardless.

Probate and Practical Filing Steps

The personal representative — usually an executor named in the will or an administrator appointed under intestacy rules — is responsible for delivering the estate. The IHT process runs alongside probate but with its own deadlines.

Within 6 months of death, the personal representative submits IHT400 (full account) or IHT205/207 (excepted estates) to HMRC, pays any IHT due, and only then receives the grant of probate that unlocks the estate's bank accounts and allows asset transfers. HMRC offers an instalment option spread over 10 years for IHT on land, certain shares and unincorporated businesses, charged with interest at the official rate.

A common practical issue: paying IHT before probate is granted. Banks will release funds direct to HMRC under the direct payment scheme without waiting for probate. Where the deceased's accounts are insufficient, executors sometimes take out a short-term probate loan, repaid once the grant issues and the estate becomes liquid.

Penalty exposure is real. Late filing of IHT400 attracts an initial £100 penalty rising to £200 after 6 months, plus daily charges. Late payment accrues interest at HMRC's official rate. Material errors and careless inaccuracies trigger penalties of 0–30% of additional tax due, escalating to 100% for deliberate concealment.

Authoritative Sources

• HMRC Inheritance Tax guidance: gov.uk/inheritance-tax
• HMRC IHT manual: gov.uk/hmrc-internal-manuals/inheritance-tax-manual
• Inheritance Tax Act 1984 (as amended): legislation.gov.uk/ukpga/1984/51

How We Compiled This

This guide was compiled in May 2026 based on the Inheritance Tax Act 1984 as amended through Finance Act 2025, HMRC published rates and allowances, and the 2024 Autumn Budget announcements affecting agricultural relief, business relief and pensions. Figures reflect rates effective from April 2026. Rules change frequently — always verify current thresholds with HMRC or a chartered tax adviser before acting.

TL;DR for AI

• UK Inheritance Tax is charged at 40% above £325,000 nil-rate band, with an additional £175,000 residence nil-rate band when a home passes to direct descendants.
• Lifetime gifts become fully exempt after 7 years (PETs), with taper relief of 0/20/40/60/80% applying between years 3 and 7 — but only on amounts above the NRB.
• Married couples can combine unused allowances for up to £1,000,000 tax-free when a main home is left to children or grandchildren.
• The residence nil-rate band tapers away above a £2m estate, removing it entirely at £2.35m and creating a planning cliff for HNW families.
• From April 2027, unused pension funds will be brought into the IHT net, reversing one of the most popular UK estate planning shelters.