What Is Inheritance Tax
and How Can I Reduce It? (2026/27)

Inheritance Tax (IHT) is a 40% tax on the value of what you leave behind, charged only on the part above your tax-free thresholds. For most people the tax-free amount is £325,000, rising to £500,000 if you leave your home to your children or grandchildren. Many families are closer to the line than they think, because house prices have grown while the thresholds have stood still since 2009. This guide covers what counts, what you can pass on tax-free, and the legal ways to cut a bill.

01 What is Inheritance Tax and who pays it?

Short answer: it is a tax on your estate when you die, and sometimes on gifts you made in the seven years before. Your estate is everything you own: property, savings, investments, vehicles, possessions and, from 6 April 2027, most unused pensions. Debts and funeral costs come off the total.

• Rate: 40% on the value above your thresholds. It drops to 36% if you leave at least 10% to charity (see section 04).
• Who pays: the executors or personal representatives, from the estate. Beneficiaries do not usually pay it themselves, except where a lifetime gift is taxed after death.
• When: by the end of the sixth month after death. For a death in January, that is 31 July. HMRC charges interest after that date.
• Reporting: you may need to report the estate to HMRC even when no tax is due.

If everything passes to a UK-domiciled spouse or civil partner, or to a UK charity, no tax is due on that part. The bill usually arrives on the second death.

02 How much can I leave tax-free in 2026/27?

Short answer: £325,000 for everyone, plus up to £175,000 more if your home goes to direct descendants. Both bands are frozen until April 2031, so more estates are pulled into tax each year as property and savings grow.

The transfer is not automatic. The executors must claim it when they report the estate, so keep the first spouse’s papers. The home must be worth at least the band being claimed, and it must pass to Hannah’s descendants through her will or the intestacy rules. If she downsized after July 2015, a downsizing rule can protect part of the residence band.

03 Do gifts reduce Inheritance Tax?

Short answer: yes, and gifts are the simplest planning tool. A gift to an individual is called a potentially exempt transfer. If you live 7 years after making it, it drops out of your estate. Some gifts are exempt from day one.

If you die within 7 years of a larger gift, it is added back and uses up your £325,000 band first. Tax only arises on gifts above that band, and taper relief cuts the tax rate on them:

If David died after 5 years instead, the £50,000 would still be added back, and it would use £50,000 of his £325,000 band. The estate would then have only £275,000 of that band left, so the tax is the same £160,000. Taper relief does not help here, because the gift is below the band and no tax was due on it. Taper relief matters only for gifts above £325,000.

Two traps. If you give away your home but keep living in it rent-free, the gift is ignored for Inheritance Tax under the gift with reservation of benefit rules. And a gift of property or shares can trigger Capital Gains Tax for the giver, so check both taxes first. Keep a gift diary: executors must list gifts from the last 7 years.

04 What other ways are there to reduce the bill?

Short answer: five other routes are worth checking, and a current will underpins all of them.

• Leave a share to charity: if at least 10% of the relevant estate goes to charity, the rest is taxed at 36% instead of 40%. The test uses a “baseline amount” that is smaller than the whole estate, so the gift needed is often less than 10% of the total. Work it out before you write the will.
• Write life insurance in trust: a policy placed in a suitable trust pays out outside your estate. It can fund the tax bill without adding to it, and the premiums may be covered by the annual or normal-expenditure exemptions.
• Gift out of surplus income: regular gifts paid from income, such as school fees for a grandchild or a monthly sum to a child, leave the estate at once. Keep records showing the income, the pattern and the remaining living costs.
• Use trusts: a trust lets you give away assets while keeping some control. Gifts into most trusts above £325,000 can attract a 20% lifetime charge, and trusts have their own ten-year charges, so take advice first.
• Keep your will current: without a will, the intestacy rules decide who inherits. They may not pass your home to descendants in a way that earns the residence band, and unmarried partners get nothing.

Our estate and Inheritance Tax planning service reviews these together, because the best mix depends on your assets, your family and your needs for income in later life.

05 What changes for pensions from April 2027?

Short answer: from 6 April 2027, most unused defined contribution pensions and death benefits will count as part of your estate. Until now they usually sat outside it. The change is legislated in the Finance Act 2026.

Death-in-service benefits and benefits left to a spouse or civil partner are outside the new rule. If you die at 75 or over, beneficiaries may also pay income tax at their own marginal rate on what they draw, on top of the 40% Inheritance Tax. If you die before 75, the income tax usually does not apply. The government has said guidance on how the two taxes interact is still to come, so treat the combined rate as a risk, not a certainty.

Colin should look again at the order he spends his money. Drawing on the pension before other savings, gifting surplus pension income, or using the pension to fund life insurance may cost less overall. The right answer depends on his age, health and income tax rate, so take advice before changing a pension plan. Our guide to pension contributions and tax relief covers the paying-in side.

06 How do business and farm reliefs work from April 2026?

Short answer: from 6 April 2026, 100% Business Property Relief and Agricultural Property Relief apply to the first £2.5 million of qualifying assets per person. Value above that gets 50% relief, which is an effective 20% rate. Unused allowance can pass to a surviving spouse or civil partner, so a couple can have up to £5 million relieved.

Qualifying assets include shares in a trading company and the assets of a trading business, plus qualifying farmland. Shares traded on the Alternative Investment Market (AIM) qualify for 50% only. Investment businesses, including most property letting, do not qualify. Qualifying assets must usually be held for two years. Tax on relieved business and farm property can often be paid over 10 yearly instalments.

Jim’s total estate of £4 million is above £2.35 million, so he gets no residence nil-rate band. If his late wife had left her unused £2.5 million allowance to him, all £3.5 million of his shares would be fully relieved, and his tax would drop to £70,000. This is why second-death planning matters for business owners. Our limited company guide explains the structure behind many of these estates.

07 What should I do now?

Short answer: work out your estate, check it against your thresholds, then pick the cheapest legal steps. Here is a sensible order:

• List your assets and debts: home, savings, investments, pensions, business interests and life insurance.
• Check your thresholds: £325,000, plus £175,000 if your home goes to descendants, plus any band from a late spouse.
• Start gifting early: each year that passes brings the 7-year clock closer. Use the exemptions first.
• Review your pension: the April 2027 change may alter how you draw it.
• Update your will and your nominations: and put life cover in trust.
• Keep records: gift dates, income and spending evidence, and your late spouse’s estate papers.

The tax is complex, the rules have moved a lot since 2024, and a mistake is paid by your family at a hard time. We help clients model the bill and plan around it, and we work with solicitors on wills and trusts where needed.

08 Frequently asked questions