Inheritance tax thresholds 2026/27: the complete guide
Inheritance tax is sometimes called a "voluntary tax" because proper planning can reduce or eliminate it. But you need to understand the rules first. This guide covers every threshold, exemption, and relief available in 2026/27, with worked examples showing how they interact.
The nil-rate band: a brief history
The nil-rate band (NRB) has been frozen at £325,000 since April 2009. Before that, it rose with inflation most years. Had it continued to rise with CPI, it would be approximately £445,000 today. The freeze is effectively a stealth tax increase: as house prices and asset values have risen, more estates are caught by IHT each year.
| Year | NRB | Notes |
|---|---|---|
| 2009/10 to 2028/29 | £325,000 | Frozen (confirmed to at least 2028) |
| 2007/08 | £300,000 | Transferable NRB introduced |
| 2004/05 | £263,000 | |
| 1999/00 | £231,000 |
HMRC collected £7.5 billion in IHT receipts in 2025/26, up from £5.4 billion in 2021/22. The frozen threshold combined with rising property values explains this 39% increase over just 4 years.
The residence nil-rate band (RNRB)
Introduced in April 2017, the RNRB adds £175,000 to your tax-free threshold if you leave a home (or the proceeds of a downsized home) to direct descendants. Direct descendants means children, grandchildren, great-grandchildren, stepchildren, adopted children, and foster children. It doesn't include nieces, nephews, siblings, or friends.
The RNRB has conditions:
- You must own (or have owned) a residential property
- That property (or a share of it) must pass to direct descendants
- The RNRB is capped at the value of the property passing to descendants (you can't claim £175,000 if your share of the house is only worth £100,000)
- For estates over £2 million, the RNRB tapers away at £1 for every £2 above £2M
If you downsized or sold your property after 8 July 2015, you may still qualify under the "downsizing" provisions. This allows the RNRB to apply to other assets (up to the value of the former home) left to direct descendants, provided you downsized for genuine reasons (health, moving to sheltered accommodation).
Transferable allowances for married couples
When the first spouse dies and leaves everything to the survivor (which is exempt from IHT anyway), their entire NRB and RNRB go unused. Both allowances can transfer to the surviving spouse in full.
On the second death, the executor can claim the transferred allowances. This means a married couple or civil partnership can effectively shelter up to £1,000,000 from IHT:
- Two NRBs: 2 × £325,000 = £650,000
- Two RNRBs: 2 × £175,000 = £350,000
- Combined: £1,000,000
The transfer is proportional, not a fixed amount. If the first spouse used 40% of their NRB (by leaving some assets to children directly), only 60% transfers to the survivor. This matters when planning gifts in wills.
The £2 million taper
Estates over £2 million lose the RNRB at a rate of £1 for every £2 above £2 million. The standard RNRB of £175,000 disappears completely at £2,350,000. For a couple claiming a double RNRB of £350,000, the taper eliminates it at £2,700,000.
This taper creates a peculiar cliff edge. An estate of exactly £2 million has a combined allowance of £500,000 (NRB + RNRB) and pays IHT of £600,000 (40% of £1.5M). An estate of £2,350,000 has a combined allowance of only £325,000 (NRB only, RNRB fully tapered away) and pays £810,000 in IHT. The extra £350,000 in estate value results in £210,000 more tax. That's an effective marginal rate of 60% in the taper zone.
Gifts and the 7-year rule in detail
Any gift you make during your lifetime is a "potentially exempt transfer" (PET). If you survive 7 years, the gift falls completely outside your estate. Die within 7 years and it's added back for IHT purposes.
Gifts use up your nil-rate band first. If you give away £400,000 and die within 7 years, the first £325,000 is covered by your NRB (so the gift itself isn't taxed). But your estate no longer has any NRB to use. The remaining £75,000 of the gift is taxed at 40% if death occurs within 3 years, with taper relief reducing the rate if death is between 3 and 7 years.
The taper relief schedule:
| Years survived | Percentage of full rate | Effective rate |
|---|---|---|
| 0 to 3 | 100% | 40% |
| 3 to 4 | 80% | 32% |
| 4 to 5 | 60% | 24% |
| 5 to 6 | 40% | 16% |
| 6 to 7 | 20% | 8% |
| 7+ | 0% | 0% |
A common misconception: taper relief reduces the tax on the gift, not the value of the gift. And it only applies to the portion above the nil-rate band. If your total gifts in the 7 years before death are under £325,000, taper relief is irrelevant because no tax is due on the gifts anyway.
Annual and small gift exemptions
These exemptions are immediate; they don't require you to survive any period:
Annual exemption: £3,000 per tax year. You can carry forward one year's unused exemption, so if you didn't use last year's, you can gift £6,000 this year. After that, it's use-it-or-lose-it.
Small gifts exemption: £250 per recipient per year. You can give £250 to as many people as you like, but you can't combine this with the annual exemption for the same person. So you can give Person A £3,000 (annual exemption) and Person B £250 (small gift), but you can't give Person A £3,250 and call it both.
Wedding gifts: up to £5,000 from a parent, £2,500 from a grandparent or great-grandparent, £1,000 from anyone else. Must be made before the wedding (or civil partnership ceremony) and conditional on it taking place.
Gifts from surplus income
This is the most valuable exemption for people with high incomes. If you can demonstrate that gifts are made from your income (not your capital), are part of a regular pattern, and you maintain your normal standard of living after making them, the gifts are immediately exempt from IHT. No 7-year wait, no limit on amount.
Example: you have after-tax income of £120,000 and your normal living expenses are £70,000. You regularly gift £40,000 per year to your children. Over 15 years, that's £600,000 removed from your estate with zero IHT consequences. You need to keep records showing the pattern of giving and that your standard of living wasn't affected.
HMRC scrutinises this exemption carefully. They'll want to see: regular payments (monthly or annually), evidence of surplus income, and that you're not dipping into capital. Keeping a schedule of gifts and a breakdown of your annual income and expenditure is essential.
Business property relief (BPR)
If you own a qualifying business or shares in a qualifying unquoted company, BPR can reduce the value of those assets by 50% or 100% for IHT purposes. The main rates:
- 100% relief: a business or interest in a business, unquoted shares (including AIM shares)
- 50% relief: shares controlling a quoted company, land/buildings/machinery used in your business
You must have owned the asset for at least 2 years. The business must not be mainly an investment activity (property letting doesn't qualify, but a trading property development company might). BPR has saved many family businesses from being sold to pay IHT. A family business worth £2 million could pass to the next generation with zero IHT if full BPR applies.
Agricultural property relief (APR)
Similar to BPR but for agricultural land and buildings. The agricultural value (not the development value) qualifies for 100% relief if the owner farmed it themselves, or 50% if it was let to a tenant farmer. You need 2 years' ownership if you farmed it yourself, or 7 years if it was let.
Farm buildings, farmhouses (if "character appropriate" to the agricultural property), and agricultural land all qualify. But only the agricultural value gets relief. If land has development potential worth more than its agricultural value, the excess is taxable.
Paying IHT in instalments
IHT is normally due 6 months after the end of the month of death. But for certain assets (property, businesses, shares, land), you can elect to pay in 10 equal annual instalments. Interest is charged on the outstanding balance (currently 7.5% per year for non-property, but property instalments may be interest-free if the property is sold within the instalment period).
This is particularly useful for estates that are "asset rich, cash poor." If the estate is mostly a family home, the executors can either sell the property to pay the tax or use the instalment option to spread the payment over 10 years while the beneficiaries decide what to do.
Use our IHT calculator to estimate the tax on your specific estate and see how different allowances and exemptions apply to your situation.