What is Inheritance Tax (IHT)?▾
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. It is charged at 40% on the value above the nil-rate band. The estate is responsible for paying IHT before assets are distributed to beneficiaries.
What is the nil-rate band for 2025/26?▾
The nil-rate band is £325,000 per person. This means the first £325,000 of an estate is tax-free. If the deceased was married or in a civil partnership and the first spouse did not use their full allowance, the unused portion transfers to the surviving spouse, potentially giving up to £650,000.
What is the residence nil-rate band?▾
The residence nil-rate band is an additional £175,000 allowance available when you pass your home to direct descendants (children, grandchildren). Combined with the main nil-rate band, this gives up to £500,000 per person or £1,000,000 for a married couple. It tapers for estates above £2,000,000.
How does the 7-year gift rule work?▾
Gifts made within 7 years of death are brought back into the Inheritance Tax calculation. They are set against the nil-rate band first, in date order with the oldest gift taking the band first, so many gifts produce no tax at all. Only the part of a gift that exceeds the remaining nil-rate band is taxable, and it is taxed at 40%. Taper relief then reduces that tax — not the value of the gift — by 20% at 3-4 years, 40% at 4-5 years, 60% at 5-6 years and 80% at 6-7 years, giving effective rates of 32%, 24%, 16% and 8%. Whatever nil-rate band the gifts use up is no longer available to the death estate. Gifts made more than 7 years before death are exempt.
What is Business Property Relief (BPR)?▾
BPR reduces the value of qualifying business assets for Inheritance Tax. A trading business, an interest in a business, and shares in an unlisted trading company can qualify for 100% relief, while land, buildings or machinery used in a business you control qualify for 50%. From 6 April 2026 the 100% rate is capped: an individual has a £2,500,000 allowance covering business and agricultural property combined, and qualifying value above that allowance attracts 50% relief instead of 100%. Any unused allowance passes to a surviving spouse or civil partner, so a couple can shelter up to £5,000,000 at 100%. Shares quoted on a market such as AIM are also moving to 50% relief. Assets must normally have been held for at least 2 years and the business must be trading rather than mainly investment.
What is Agricultural Property Relief (APR)?▾
APR reduces the agricultural value of qualifying agricultural property. The property must have been occupied for agricultural purposes for at least 2 years before death (if occupied by the owner) or 7 years (if let to a tenant). From 6 April 2026 APR shares the same £2,500,000 allowance as Business Property Relief: the first £2,500,000 of combined qualifying business and agricultural property gets 100% relief and value above the allowance gets 50%. The allowance was originally announced at £1,000,000 in the Autumn Budget 2024 and raised to £2,500,000 on 23 December 2025.
Can I reduce IHT by giving to charity?▾
Yes. Gifts to charity are exempt from IHT. Additionally, if you leave 10% or more of your net estate to charity, the IHT rate on the remaining taxable estate reduces from 40% to 36%. This can sometimes mean leaving more to charity actually reduces the overall tax bill.
Does life insurance count towards IHT?▾
Life insurance payouts form part of your estate for IHT purposes unless the policy is written in trust. If written in trust, the payout goes directly to beneficiaries outside the estate and is not subject to IHT. This is one of the most common and effective IHT planning strategies.
How is IHT paid?▾
IHT is normally due within 6 months of the end of the month of death. For property, you can pay in instalments over 10 years. The personal representatives (executors) are responsible for paying IHT from the estate before distributing assets. HMRC charges interest on late payments.
Is there IHT between spouses?▾
Transfers between married couples and civil partners are completely exempt from IHT, regardless of the amount. Additionally, any unused nil-rate band from the first spouse can be transferred to the surviving spouse, effectively doubling the available allowance to £650,000 (or £1,000,000 including the residence nil-rate band).