Inheritance Tax: The Threshold, the Rates and How to Reduce It

Inheritance Tax is a tax on the estate, the property, money and possessions, of someone who has died. There is normally no tax to pay if either:

• ✓Yes: the value of the estate is £325,000 or less (this is called the 'nil-rate band')
• ✓Yes: everything above £325,000 goes to a spouse, civil partner, a charity or a community amateur sports club

You may still need to report the estate's value to HMRC even when it's below the threshold, see ‘Reporting and paying’ below.

The nil-rate band has been frozen at £325,000 since 2009. The government has now legislated to keep it, the £175,000 residence nil-rate band, and the £2 million taper threshold (below) frozen at today's levels for the tax years 2028 to 2029 and 2029 to 2030 too, rather than raising them each year in line with inflation as the law otherwise requires. As house prices and savings rise and the threshold does not, more estates are pulled into paying Inheritance Tax each year, a process often called ‘fiscal drag’.

The standard Inheritance Tax rate is 40%. It is only charged on the part of the estate above the threshold.

The estate can pay a reduced rate of 36% instead, on some or all of its assets, if 10% or more of the ‘net value’ (the estate's total value after debts) is left to charity in the will. GOV.UK's reduced rate calculator works out how much you would need to leave to qualify.

On top of the £325,000 threshold, there is a separate residence nil-rate band worth up to £175,000 where a home is left to direct descendants, children, grandchildren, step, adopted or foster children, and their own children. Together this gives a threshold of up to £500,000 for one person.

• ✓Yes: It applies to the lower of the home's value and £175,000, so a smaller home gets a smaller allowance
• ✓Yes: It's available whether the home passes under a will or under the intestacy rules
• ✓Yes: Someone who sold, gave away or downsized to a less valuable home on or after 8 July 2015 can still pass on some or all of the residence nil-rate band, under separate downsizing rules, as long as their direct descendants inherit at least some of the estate

If you're married or in a civil partnership and your estate is worth less than your own threshold, any unused nil-rate band and residence nil-rate band can be transferred to your partner's estate when they die, on top of their own. Assets left to a spouse or civil partner are exempt from Inheritance Tax entirely, so most of the first partner's allowance is usually unused and available to carry over.

Gifts you give while alive can still be taxed after death. Each tax year you can give away, tax free and regardless of the 7 year rule below:

• ✓Yes: £3,000 in total, your 'annual exemption', to one person or split between several (any unused amount can be carried forward to the next tax year, but only for one tax year)
• ✓Yes: up to £250 to as many other people as you like, as long as you haven't already used another allowance on the same person that year
• ✓Yes: wedding or civil partnership gifts of up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else
• ✓Yes: unlimited regular payments from your income, such as helping with someone's living costs, as long as they don't reduce your own standard of living

Beyond these allowances, no tax is due on a gift if you live for 7 years after making it. If you die within 7 years, and the gifts you made in that time come to more than the £325,000 threshold, tax is due on the amount over it, at a reducing rate the longer before death the gift was made:

Agricultural Relief and Business Relief can reduce the value of qualifying farmland or business assets by 50% or 100%. Until 6 April 2026, most qualifying property got 100% relief with no upper limit. From that date, the reforms first announced at the October 2024 Budget have taken effect, and they are more generous than originally proposed:

• ✓Yes: the Budget's original plan, in October 2024, was a £1 million allowance for 100% relief
• ✓Yes: in December 2025, before the change took effect, the government increased this to £2.5 million
• ✓Yes: on or after 6 April 2026, the combined value of qualifying agricultural and business property getting 100% relief cannot exceed £2.5 million; above that, relief is 50%, an effective rate of up to 20%
• ✓Yes: the £2.5 million allowance is transferable between spouses and civil partners, like the nil-rate band, so a couple can pass on up to £5 million of qualifying assets before this relief runs out

Currently, most unused pension funds and death benefits fall outside a person's estate for Inheritance Tax. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of the estate, removing that difference.

• ✓Yes: the change only affects deaths on or after 6 April 2027, if the pension scheme member dies before that date, today's rules still apply even if benefits are paid out afterwards
• ✓Yes: Finance Act 2026, which makes this change law, received Royal Assent on 18 March 2026, this is an enacted change with a future start date, not merely a proposal or consultation
• ✓Yes: it will be the personal representatives dealing with the estate, not the pension scheme administrators, who become responsible for reporting and paying the Inheritance Tax due on pension death benefits

Most estates are ‘excepted estates’ and do not need to send HMRC full details of their value. An estate usually counts as excepted if any of the following apply:

• ✓Yes: its value is below the £325,000 threshold
• ✓Yes: it's worth £650,000 or less, where the full unused threshold is being transferred from a spouse or civil partner who died first
• ✓Yes: everything above £325,000 passes to a spouse, civil partner or a qualifying charity, and the estate is worth less than £3 million
• ✓Yes: the person who died lived permanently outside the UK and their UK assets are worth £150,000 or less

Where full details are needed (form IHT400), or Inheritance Tax is due, here is the process:

Inheritance Tax is a single UK-wide tax, run by HMRC, unlike Land and Buildings Transaction Tax in Scotland or Land Transaction Tax in Wales, which replaced Stamp Duty there. The threshold, rates and reliefs on this page are the same whether the person who died lived in England, Scotland, Wales or Northern Ireland.

• ✓Yes: Scotland: the court process that gives legal authority to deal with an estate is called 'confirmation', not 'probate' or 'grant of probate', but the Inheritance Tax rules are identical, mygov.scot's own guidance on rates, thresholds, reliefs and exemptions links straight to GOV.UK rather than restating separate rules
• ✓Yes: Wales: no separate rules, applications and payment go through the same UK-wide process as England
• ✓Yes: Northern Ireland: no separate rules, the Probate Registry there issues the same 'Grant of Probate' or 'Letters of Administration', and HMRC deals with the tax exactly as it does elsewhere in the UK

Since 6 April 2025, whether someone's worldwide assets can be taxed no longer depends on their ‘domicile’. Instead, a ‘long-term UK resident’ test applies: broadly, someone who has been UK tax resident for at least 10 of the previous 20 tax years. If you are a long-term UK resident, your non-UK assets may be subject to Inheritance Tax when you die or make a transfer, in the same way as your UK assets. This only affects deaths and transfers from 6 April 2025 onwards; the previous domicile-based rules still apply before that date.