Inheritance tax has a fearsome reputation, yet most estates never pay a penny of it. The fear comes from misunderstanding the allowances — people hear "40%" and panic, without realising how much is sheltered before that rate ever applies. For families that do cross the threshold, though, the bill can be large, and a little planning goes a long way. Here is who actually pays inheritance tax in 2025/26, and what legally reduces it.
- Everyone has a £325,000 nil-rate band before any inheritance tax is due.
- Leaving your home to children or grandchildren adds a £175,000 residence band.
- Married couples and civil partners can combine allowances — up to £1,000,000.
- Anything above the allowances is taxed at 40% (36% if you leave 10% to charity).
The allowances that shelter most estates
Inheritance tax (IHT) is charged on the value of everything you leave — property, savings, investments, possessions — minus debts. But it only bites above your tax-free allowances, and these are more generous than most people assume.
| Allowance | 2025/26 amount | Condition |
|---|---|---|
| Nil-rate band (NRB) | £325,000 | Everyone |
| Residence nil-rate band (RNRB) | £175,000 | Leaving your home to direct descendants |
| Combined, single person | up to £500,000 | Home to children/grandchildren |
| Combined, couple | up to £1,000,000 | Transferable allowances |
That last row is the key one. When the first spouse or civil partner dies, anything left to the survivor is completely exempt, and their unused allowances transfer. So a surviving spouse can have two nil-rate bands and two residence bands — up to £1,000,000 — before IHT applies. That single fact takes the vast majority of family homes out of the tax. Estimate your own position with the inheritance tax calculator.
The residence band and its catch
The £175,000 residence band only applies if you leave your home (or its value) to direct descendants — children, grandchildren, stepchildren or adopted children. Leave the house to a sibling or a friend and you lose it. There is also a taper: for estates worth more than £2 million, the residence band reduces by £1 for every £2 above that line, disappearing entirely on large estates. Wealthy families therefore cannot rely on it.
What counts toward your estate
To know whether you are near the threshold, add up the open-market value of everything you own and subtract what you owe. Our estate value calculator does this, but the broad picture is:
Some things usually fall outside the estate, which is where planning starts: most pensions (though unused pension funds are due to be brought into IHT from April 2027), and life insurance written in trust, which pays beneficiaries directly rather than through the estate.
The legal ways to reduce it
If your estate is heading over the allowances, several long-established reliefs help:
- Spouse exemption — leave anything to your spouse or civil partner tax-free, and transfer your allowances.
- Gifting — give money away and survive seven years, and it falls outside your estate entirely. Smaller exemptions (£3,000 a year, wedding gifts, regular gifts from surplus income) are immediate. The gift calculator shows how the seven-year rule and taper relief work.
- Charity — gifts to charity are exempt, and leaving 10% of your estate to charity cuts the rate on the rest from 40% to 36%.
- Life insurance in trust — a policy written in trust keeps the payout out of your estate, useful for covering an expected bill.
A gift with strings attached does not work If you give away your home but keep living in it rent-free, it is a "gift with reservation of benefit" and still counts as yours for IHT. The classic mistake. To remove an asset from your estate you generally have to give it up genuinely and completely.
The seven-year rule in brief
Most lifetime gifts to individuals are "potentially exempt." Survive seven years from the date of the gift and it is free of IHT. Die within seven years and it counts back toward your estate — though taper relief reduces the tax on gifts above the nil-rate band the longer you survived. A common misconception is that taper helps every gift; it only reduces tax that is actually due, so a gift within your nil-rate band gets no benefit from it because there was no tax to taper in the first place.
Frequently asked questions
£325,000 per person tax-free, rising to £500,000 if you leave your home to direct descendants. Married couples and civil partners can combine allowances for up to £1,000,000.
40% on the value of the estate above your allowances, reduced to 36% if you leave at least 10% of the net estate to charity.
No. Transfers between UK-domiciled spouses and civil partners are completely exempt, and your partner's unused allowances transfer to you.
Most pensions currently fall outside the estate, but the government plans to bring unused pension funds into inheritance tax from April 2027.
Yes. Gifts fall outside your estate if you survive seven years, and several gifts are immediately exempt — including £3,000 a year and regular gifts from surplus income.
Figures are 2025/26 estimates for the UK. Inheritance tax planning is highly personal — take professional advice before acting on gifts, trusts or insurance.