Inheritance Tax Guide 2026/27: Thresholds, Reliefs and Planning

Inheritance Tax Guide 2026/27

Inheritance Tax (IHT) at 40% on estates above the nil rate band affects an increasing number of families each year — not just the ultra-wealthy. Rising property values combined with frozen thresholds mean that ordinary homeowners in expensive areas increasingly face significant IHT exposure. Understanding the reliefs available and planning early can preserve substantial wealth for your beneficiaries.

IHT Thresholds 2026/27

IHT is charged at 40% on the portion of the estate above the available thresholds.

How IHT Is Calculated

Example: Estate valued at £850,000 (married couple, children)

Same estate with no RNRB (e.g., no children, or property not passing to direct descendants):

• Estate: £850,000 − £650,000 NRB = £200,000 taxable
• IHT: £200,000 × 40% = £80,000

The Residence Nil Rate Band: Conditions

The £175,000 RNRB is only available when:

1. You own a residential property that has been your main residence at some point
2. The property is inherited by direct descendants (children, grandchildren, stepchildren, adopted children — not nieces/nephews or friends)
3. Estate does not exceed £2,000,000 (RNRB tapers away by £1 for every £2 above this)

The 7-Year Rule: Potentially Exempt Transfers

Gifts made to individuals more than 7 years before death are completely exempt from IHT. This is called a Potentially Exempt Transfer (PET).

Gifts made in the final 7 years before death are potentially chargeable, but with taper relief reducing the rate:

Strategic implication: Make significant gifts as early as possible to start the 7-year clock. A gift made at age 65 that you survive to 72 is completely IHT-free.

Annual Gifting Exemptions

These gifts are immediately exempt from IHT — they do not use the 7-year clock:

Regular gifts from income: One of the most powerful exemptions. Gifts that meet three conditions are immediately exempt: they must be regular (e.g., monthly), paid from income (not capital), and not affect your standard of living.

Business Property Relief (BPR) and Agricultural Property Relief (APR)

Business assets qualifying for BPR reduce their IHT value by 50% or 100% depending on the asset type:

• Sole trader business or share of partnership: 100% relief
• Shares in unquoted trading company: 100% relief
• Controlling interest in quoted company: 50% relief

Agricultural property used for farming: up to 100% APR on agricultural value.

Pension Changes from 2027

The government has proposed including pension pots in the estate for IHT purposes from April 2027. Currently, most pension pots sit outside the estate. This proposed change (subject to legislation) would significantly affect estate planning strategies — monitor developments closely and take advice if you have significant pension assets.

Key IHT Planning Strategies

The 36% reduced rate: If 10% or more of the net estate is left to charity, IHT applies at 36% rather than 40% on the remainder. This can make charitable giving financially beneficial to beneficiaries.

Frequently Asked Questions

Q: If I give my house to my children while alive, does it leave my estate? Only if you genuinely vacate it. Living in the property after giving it away is a "gift with reservation of benefit" — the property remains in your estate for IHT purposes. To avoid this, you must pay full market rent to your children.

Q: When is IHT due? Within 6 months of the date of death. Executors must pay before probate is granted (the legal authority to administer the estate). Property-related IHT can be paid in 10 annual instalments.

Q: Doesn't everything pass to my spouse tax-free? Yes — transfers between spouses and civil partners are IHT-exempt. Additionally, any unused NRB and RNRB transfers to the surviving spouse, potentially doubling available allowances on second death.

Q: My estate is below the threshold now — should I still plan? Property prices may increase; the frozen threshold erodes each year in real terms. If your net worth is above £500,000 as an individual or £750,000 as a couple, IHT planning is increasingly relevant. Review as circumstances change.