Inheritance Tax in 2025/26 — The Basics
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the available nil-rate bands. The "estate" includes property, savings, investments, and personal possessions — essentially everything you own at the date of death, minus any debts and allowable reliefs.
The key point that many people miss: with the right planning — using reliefs, lifetime gifting, trusts, and spouse exemptions — the effective IHT burden on many estates can be significantly reduced or eliminated entirely. Our estate builder above lets you model your full position.
The Nil-Rate Band (NRB)
The nil-rate band is the threshold below which no IHT is charged. In 2025/26, the NRB is £325,000 — frozen at this level since 2009, and currently set to remain frozen until at least April 2028. With rising property values, this freeze has brought more and more estates into the IHT net each year.
When a person dies and leaves their estate to a surviving spouse or civil partner, their unused NRB passes to the survivor. This means a couple can collectively have a NRB of up to £650,000 before IHT applies.
The Residence Nil-Rate Band (RNRB)
An additional allowance — the Residence Nil-Rate Band — applies when a main residence is passed to direct descendants (children, grandchildren, step-children). The RNRB is £175,000 per person in 2025/26. Like the NRB, a deceased spouse's unused RNRB transfers to the survivor.
This means a couple with a qualifying property can have a combined IHT threshold of up to £1,000,000 (£325,000 NRB × 2 + £175,000 RNRB × 2) before any IHT is payable. However, the RNRB is tapered away by £1 for every £2 of estate value above £2 million — so very large estates lose this benefit.
| Nil-Rate Bands 2025/26 | Single | Couple (both unused) |
|---|---|---|
| Nil-Rate Band | £325,000 | £650,000 |
| Residence NRB (if qualifying property) | £175,000 | £350,000 |
| Combined maximum | £500,000 | £1,000,000 |
The Spouse and Civil Partner Exemption
Assets left to a UK-domiciled spouse or civil partner are completely exempt from IHT — there is no limit on this exemption. This is why most couples with straightforward estates structure their Wills to leave everything to each other first, with the estate then passing to children or other beneficiaries on the second death.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
Qualifying business assets and agricultural land can receive up to 100% relief from IHT — meaning they are effectively removed from the chargeable estate. This applies to interests in unquoted trading companies, sole trader or partnership business assets, and farmland/farmhouses in agricultural use.
The 7-Year Gift Rule and Taper Relief
Gifts made during your lifetime are potentially exempt from IHT — provided you survive for 7 years from the date of the gift. If you die within 7 years, the gift is added back into your estate for IHT calculation purposes (a "Potentially Exempt Transfer" or PET).
Taper relief reduces the rate of IHT on gifts made between 3 and 7 years before death:
| Years Between Gift and Death | IHT Rate on Gift | Taper Relief |
|---|---|---|
| 0–3 years | 40% | 0% |
| 3–4 years | 32% | 20% |
| 4–5 years | 24% | 40% |
| 5–6 years | 16% | 60% |
| 6–7 years | 8% | 80% |
| 7+ years | 0% | 100% — completely exempt |
Annual Gift Exemptions (NOT Included in Calculator)
Several types of gift are immediately exempt from IHT and should not be entered into our calculator — they never form part of the chargeable estate:
- Annual gift exemption: £3,000 per year per person (can carry one year forward)
- Small gifts: Up to £250 per person per year (unlimited recipients)
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to others
- Gifts from normal expenditure out of income: Regular gifts that don't reduce your standard of living
- Gifts to charities, political parties, national museums
Pension Funds and IHT
Currently (before April 2027), most defined contribution pension funds sit outside the estate for IHT purposes — making them one of the most IHT-efficient assets to pass on. The government announced in October 2024 that from April 2027, unspent pension funds will be brought into the estate for IHT. This is a significant change that will affect many people's estate planning. Defined benefit pensions (final salary schemes) generally do not form part of the estate at all.