Inheritance Tax in the UK: The Complete Guide

Inheritance tax is charged at 40% on the value of your estate above your tax-free allowances. The estate is everything you own at death (property, savings, investments, vehicles, possessions, and your share of anything held jointly) less your debts and funeral costs. If the total falls below your combined allowances, there is no tax to pay. Only the value above the allowances is taxed, and only at the point it exceeds them.

There is a reduced rate of 36% rather than 40% where you leave at least 10% of the net value of your estate to charity. The 10% is measured against the estate after allowances have been deducted, so the calculation is more involved than it first looks, but for estates already inclined to give, the lower rate can mean the charity receives more while the tax bill falls.

The tax is normally paid by the executors out of the estate before anything is distributed to beneficiaries, and it is usually due within six months of the end of the month of death. Interest runs on anything paid late. Tax on property and some other assets can be paid in instalments over ten years, which matters when the estate is asset-rich but cash-poor and the family does not want to be forced into a quick sale.

Every person has a nil-rate band of £325,000. That is the amount of your estate that passes free of inheritance tax before the 40% rate applies to anything above it. The band has been frozen at £325,000 since 2009, which means that as house prices and asset values have risen, more estates have been drawn into paying tax simply by standing still.

On top of the nil-rate band there is a separate residence nil-rate band of up to £175,000. This applies where you leave your home, or your share of it, to direct descendants: children, including adopted, step and foster children, and grandchildren. It does not apply to a home left to siblings, nieces, nephews, or friends. Combined, a single person leaving a qualifying home to their children has up to £500,000 of tax-free allowance.

The residence nil-rate band tapers away for larger estates. For every £2 by which the net estate exceeds £2,000,000, the residence band is reduced by £1. An estate of £2,350,000 or more therefore loses the entire £175,000 residence allowance. This taper is one of the reasons high-value estates often benefit most from planning, because bringing the estate below the £2,000,000 threshold can restore a substantial allowance.

Transfers between spouses and civil partners are completely exempt from inheritance tax, with no upper limit, provided both are UK domiciled. When the first partner dies, anything left to the survivor passes tax-free, and crucially, any unused nil-rate band and residence nil-rate band transfer to the survivor as well.

This is why a married couple or civil partnership can pass on up to £1,000,000 free of inheritance tax in the right circumstances. If the first to die leaves everything to their partner, none of their allowances are used, so the survivor's estate can claim two full nil-rate bands (£325,000 plus £325,000) and two full residence nil-rate bands (£175,000 plus £175,000) where a qualifying home passes to direct descendants. That is £650,000 plus £350,000, or £1,000,000 in total.

The transfer is not automatic and the claim must be made by the executors when the second partner dies, supported by records from the first death. The percentage of the band that was unused is what carries forward, not a fixed cash sum, so good record-keeping after the first death protects the allowance years later. Unmarried partners do not get the spouse exemption or the transferable bands, which is a significant and often overlooked exposure.

Your estate is broader than most people assume. It includes the obvious things: your home and any other property, cash and savings, ISAs, shares and investments, vehicles, jewellery, art, and personal possessions. It also includes your share of jointly owned assets, money owed to you, and the value of some life insurance policies that are not written in trust.

It also reaches back into your lifetime. Gifts you made in the seven years before death can be added back into the estate for the calculation, and certain gifts where you kept a benefit (for example giving away the house but continuing to live in it rent-free) are treated as still yours under the gifts with reservation of benefit rules. These catch-all provisions are why ad hoc, undocumented gifting often fails to achieve the saving people expect.

From April 2027, unused pension funds are being brought within the scope of inheritance tax. Pensions have historically sat outside the estate, which made them an efficient way to pass wealth down, so this is a significant change for anyone whose retirement savings exceed what they expect to spend. It is one of several reasons to revisit a plan made under the old rules.

There is no single trick to inheritance tax planning. There is a set of established, legitimate levers, and the right plan usually combines several of them to suit a particular family and estate. The starting point is always the allowances above, used in full and protected by a well-drafted will.

Exemptions and gifting come next. You can give away £3,000 each tax year under the annual exemption, and carry forward one unused year, so a couple can move £12,000 in a single year where neither used the previous year's allowance. Small gifts of up to £250 per person are exempt, as are normal gifts out of surplus income where you can evidence a regular pattern that does not reduce your standard of living. Larger gifts become potentially exempt transfers, which fall out of the estate entirely if you survive seven years. Our guide on lifetime gifting and the seven-year rule covers this in full.

Beyond gifting, trusts let you pass assets to the next generation while retaining a measure of control or protecting beneficiaries who are not ready to manage wealth, and they have their own tax treatment that needs care. Business Relief and Agricultural Relief can take qualifying business and farming assets largely outside the charge, though these are changing from April 2026. Leaving 10% or more to charity unlocks the reduced 36% rate. Each of these has detailed conditions, and combining them well is where specialist advice earns its keep.

Some estates genuinely do not need professional planning. If you are well within the allowances, leaving everything to a spouse or to children who inherit a modest estate, a sound will may be all you need. The calculator above will give you a sense of whether you are in that position.

Planning earns its cost where the estate is above or close to the allowances, where it includes a business, a farm, or substantial pension savings, where the family situation is complex (second marriages, unmarried partners, children from different relationships, or a vulnerable beneficiary), or where you want to make significant lifetime gifts and need them structured correctly. The 2026 changes to Business and Agricultural Relief and the 2027 inclusion of pensions both make a review timely for anyone affected.

When you are ready, this is where we help. We handle inheritance tax planning, trusts, lifetime gifting, business succession, wills and estate structuring, and probate and estate administration. You tell us your situation, we come back within 48 hours with a fixed written quote, and we do the work. There is no charge for the initial enquiry and no obligation to proceed.