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Tax year 2026/27 Last reviewed: 25 October 2026
Inheritance Tax and estate planning for 2026/27
Inheritance Tax is 40% above the £325,000 threshold. The threshold can reach £500,000 if a home passes to children or grandchildren, and a surviving spouse can pass on up to £1 million. For deaths on or after 6 April 2026, Business Relief at 100% is capped at £2.5 million. Most unused pensions join the estate from 6 April 2027.
The tax year 2026/27 runs from 6 April 2026 to 5 April 2027. The nil-rate band, the residence nil-rate band and the taper threshold are fixed in law up to and including the 2030/31 tax year. Business Relief and pensions are the two large changes, and both are now law.
Key takeaways
- Rate and threshold: Inheritance Tax is 40% on the part of an estate above £325,000. There is normally no tax if the estate is below the threshold, or if everything above it goes to a spouse, civil partner, charity or community amateur sports club.
- Home: the threshold can rise to £500,000 if you leave your home to children or grandchildren and the estate is worth less than £2 million. A surviving spouse or civil partner can pass on up to £1 million.
- Fixed thresholds: the £325,000 nil-rate band, the £175,000 residence nil-rate band and the £2 million taper threshold stay at these levels up to and including the 2030/31 tax year, which ends on 5 April 2031.
- Business and farms: for deaths on or after 6 April 2026, 100% relief covers the first £2.5 million of qualifying property. Above that, relief is 50%. A spouse or civil partner can pass on unused allowance, up to £5 million together. Shares on AIM get 50%.
- Pensions: for deaths on or after 6 April 2027, most unused pension funds and death benefits count as part of the estate. Finance Act 2026 made this law. Death in service benefits are excluded.
- Gifts: no tax is due on a gift if you live for 7 years after giving it, unless it goes into a trust. Gifts 3 to 7 years before death are taxed at 32% down to 8%, but only when gifts in those 7 years total more than £325,000.
- ISAs: ISA investments form part of the estate for Inheritance Tax, so an ISA does not take money out of the estate.
What are the Inheritance Tax thresholds for 2026/27?
Inheritance Tax is 40% on the part of an estate above the £325,000 nil-rate band. The threshold rises to £500,000 if you leave your home to children or grandchildren and the estate is under £2 million. A surviving spouse or civil partner can pass on up to £1 million. These figures are fixed in law until 5 April 2031.
| Item | Amount | Detail |
|---|---|---|
| Nil-rate band | £325,000 | The tax-free amount for one person. The rate above it is 40%. |
| Residence nil-rate band | Up to £175,000 | Added if you leave your home, or a share in it, to children (including adopted, foster and stepchildren) or grandchildren. |
| Both bands together | Up to £500,000 | £325,000 plus £175,000, for an estate worth less than £2 million. |
| Surviving spouse or civil partner | Up to £1 million | Unused threshold passes to the survivor, so both bands of each partner can be used. |
| Taper threshold | £2,000,000 | The residence nil-rate band falls by £1 for every £2 the estate is worth above this. |
Sources: How Inheritance Tax works, the residence nil-rate band guidance, IHTA 1984 Schedule 1 and section 8D.
GOV.UK gives this example: an estate of £500,000 with a tax-free threshold of £325,000 pays 40% of £175,000, which is £70,000.
The thresholds are fixed in law until 5 April 2031
The nil-rate band, the residence nil-rate band and the £2 million taper threshold do not rise with inflation for the tax years up to and including 2030/31. Finance Act 2021 section 86, as amended by Finance Act 2026 section 72, sets this. The 2030/31 tax year ends on 5 April 2031. Sources: Finance Act 2021 section 86 and Finance Act 2026 section 72.
How the home allowance tapers away
The residence nil-rate band falls by £1 for every £2 that the estate is worth above £2 million. It is nil once the estate reaches £2,350,000, because half of £350,000 is the whole £175,000. A lost band means £70,000 more tax, which is 40% of £175,000.
| Estate value | Above £2 million | Band reduced by | Residence nil-rate band |
|---|---|---|---|
| £2,000,000 | £0 | £0 | £175,000 |
| £2,100,000 | £100,000 | £50,000 | £125,000 |
| £2,200,000 | £200,000 | £100,000 | £75,000 |
| £2,350,000 | £350,000 | £175,000 | £0 |
The value used for the taper is all the assets less debts. You do not take off exemptions, such as the spouse exemption, or reliefs, such as Business Relief or Agricultural Relief. Source: GOV.UK residence nil-rate band guidance.
Take a single person who leaves an estate of £2,100,000 to their children, including a home worth £450,000, with no gifts and no reliefs. The estate is £100,000 over £2 million, so the residence nil-rate band falls by £50,000 to £125,000. The estate less both bands is £1,650,000, and 40% of that is £660,000. Without the taper the tax would be £640,000, so the taper adds £20,000.
Worked example: a couple and their home
| Line | Working | Amount |
|---|---|---|
| Estate of the survivor | Includes the family home | £1,200,000 |
| Two nil-rate bands | 2 × £325,000 | £650,000 |
| Two residence nil-rate bands | 2 × £175,000 | £350,000 |
| Total threshold | The two lines above | £1,000,000 |
| Estate above the threshold | £1,200,000 less £1,000,000 | £200,000 |
| Inheritance Tax at 40% | 40% of £200,000 | £80,000 |
This is an example. It assumes the first partner left everything to the survivor, so no band was used, and that the home goes to children or grandchildren. It also assumes no gifts, reliefs or other exemptions.
Leaving money to charity
The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if 10% or more of the net value goes to charity in the will. The legal test is in Schedule 1A to the Inheritance Tax Act 1984 and is worked out separately for each part of the estate.
How does the £2.5 million Business Relief and Agricultural Relief allowance work?
For deaths on or after 6 April 2026, 100% Business Relief and Agricultural Relief is limited to £2.5 million of qualifying business and farming property combined. Value above that gets 50% relief. A spouse or civil partner can pass on unused allowance, so a couple can have up to £5 million. Shares traded on AIM get 50%.
| Qualifying property | Relief |
|---|---|
| The first £2.5 million of qualifying business and agricultural property, combined | 100% |
| Value above £2.5 million | 50% |
| Shares traded on markets that are not "listed" for HMRC, such as the Alternative Investment Market (AIM) | 50% |
| Shares that control more than 50% of the voting rights in a listed company | 50% |
| Land, buildings or machinery owned by the person and used in a business they controlled or were a partner in | 50% |
Sources: Business Relief for Inheritance Tax, Agricultural Relief and Finance Act 2026 Schedule 12. You must have owned the business or asset for at least 2 years before death.
Worked example: a business worth £10 million
| Line | One allowance of £2.5 million | Allowance of £5 million with the transferred £2.5 million |
|---|---|---|
| Qualifying property | £10,000,000 | £10,000,000 |
| Value above the allowance | £7,500,000 | £5,000,000 |
| 50% relief on that part | £3,750,000 | £2,500,000 |
| Value charged | £3,750,000 | £2,500,000 |
| Inheritance Tax at 40% | £1,500,000 | £1,000,000 |
Tax on the business property only, before the nil-rate bands and any other relief or exemption. The part above the allowance bears an effective 20%: 50% relief leaves half the value charged, and 40% of half is 20%.
A business worth £5 million with a £5 million allowance has all its value relieved at 100%, so the tax on it is nil. A holding of AIM shares worth £100,000 gets 50% relief, so £50,000 is charged and the tax at 40% is £20,000, an effective 20%.
What counts towards the allowance
- The allowance covers qualifying property in the estate, qualifying property given away on or after 30 October 2024 if the gift was made within 7 years of death, and qualifying property held in trust.
- A spouse or civil partner can transfer unused allowance from the estate of a partner who died first, which can make the total up to £5 million. If the first death was before 6 April 2026, the full £2.5 million can be transferred.
- The claim for the transferred allowance is due by the later of 4 years after the death and 6 months after the executor started the role.
- Business Relief is not available if the business mainly deals in securities, stocks or shares, land or buildings, or makes or holds investments.
For capital gains on business assets, see the Capital Gains Tax guide.
What happens to pensions and Inheritance Tax from 6 April 2027?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits count as part of the deceased person's estate for Inheritance Tax. Finance Act 2026 made this law. Death in service benefits from a registered pension scheme are excluded. Personal representatives report and pay any tax due. Earlier deaths follow the current rules.
What changes and who pays
- Finance Act 2026 received Royal Assent on 18 March 2026. The change applies to deaths on or after 6 April 2027. If a member dies before that date, the current rules apply even if benefits are paid later.
- Personal representatives report and are liable to pay any Inheritance Tax due on unused pension funds and death benefits. Once benefits are vested in a beneficiary, the beneficiary becomes jointly and severally liable for the tax on them. Pension scheme administrators are not normally liable.
- The tax is due at the end of the sixth month after the date of death, and interest runs after that.
- If they reasonably expect tax to be due, personal representatives can direct pension scheme administrators to withhold 50% of the taxable benefits for up to 15 months from the date of death and pay HMRC before releasing the rest. This does not apply to exempt benefits, funds under £1,000 or continuing annuities.
- All death in service benefits payable from a registered pension scheme are excluded from the estate, and so are dependants' scheme pensions.
Source: GOV.UK policy paper, the technical note and Finance Act 2026 sections 66 and 71. HMRC says guidance, templates and online tools for personal representatives will be published for April 2027.
How Income Tax fits in
Inheritance Tax and Income Tax can both apply to the same pension benefits. If the member died below age 75, survivors' annuities and dependants' drawdown funds are usually tax free, and so are lump sum death benefits while the member's lump sum and death benefit allowance of £1,073,100 has not been exceeded. If the member was over age 75, all death benefits are taxable.
When Inheritance Tax is paid, the part of the benefits that matches the tax (and any interest) does not count as the beneficiary's taxable income. If the pension scheme pays the tax through a payment notice, Income Tax is charged on the benefits after the Inheritance Tax has come off. A beneficiary who pays Income Tax on the full amount first has to work with HMRC to reduce their taxable income, and HMRC says it will publish further guidance.
| Case | Inheritance Tax at 40% | Income Tax | Total tax | Share of the £100,000 |
|---|---|---|---|---|
| Died below age 75, benefits usually tax free | £40,000 | £0 | £40,000 | 40% |
| Died over age 75, Income Tax at 20% | £40,000 | £12,000 | £52,000 | 52% |
| Died over age 75, Income Tax at 40% | £40,000 | £24,000 | £64,000 | 64% |
| Died over age 75, Income Tax at 45% | £40,000 | £27,000 | £67,000 | 67% |
This is an example. It assumes the estate is already above its nil-rate bands, so the whole £100,000 is charged at 40%, and that all of the remaining £60,000 is taxed at the Income Tax rate shown (20%, 40% or 45% in England, Wales and Northern Ireland for 2026/27). Real cases depend on the estate, the beneficiary's other income and the type of benefit.
ISAs and Inheritance Tax
ISA investments form part of the estate for Inheritance Tax. After death the ISA stays free of Income Tax and Capital Gains Tax until the executor closes it, estate administration is completed, or 3 years and 1 day after death. A surviving spouse or civil partner can add an extra tax-free amount to their own ISA allowance if the death was on or after 6 April 2018. See our ISAs explained guide.
How do gifts and the seven-year rule work?
No Inheritance Tax is due on a gift if you live for 7 years after giving it, unless the gift goes into a trust. Gifts in the 3 years before death are taxed at 40%. Gifts 3 to 7 years before death are taxed on a sliding scale, but only when gifts in those 7 years total over £325,000.
| Years between gift and death | Rate of tax on the gift |
|---|---|
| Less than 3 | 40% |
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
Taper relief reduces the tax on the gift, not the value of the gift. Source: How Inheritance Tax works.
Worked example from GOV.UK
Sally died on 1 July 2022 and was not married or in a civil partnership. She made three gifts in the 9 years before her death, and her remaining estate was worth £400,000.
| Gift or estate | Timing | Tax |
|---|---|---|
| £50,000 to her brother | 9 years before death | Nil, because it was more than 7 years before death |
| £325,000 to her sister | 4 years and 2 months before death | Nil, because it is within the £325,000 threshold |
| £100,000 to her friend | 3 years before death | 32% of £100,000, which is £32,000, paid by the friend |
| Remaining estate of £400,000 | On death | 40% of £400,000, which is £160,000, paid by the estate |
Source: GOV.UK, How Inheritance Tax works. The total tax is £192,000. The same £100,000 gift made 5 to 6 years before death would be taxed at 16%, which is £16,000, and made less than 3 years before death at 40%, which is £40,000.
Gifts that are exempt
- Gifts between spouses or civil partners are exempt in any amount, if the recipient lives in the UK permanently and the couple are legally married or in a civil partnership. Gifts to charities and political parties are also exempt.
- Annual exemption: you can give away £3,000 a tax year. You can carry an unused amount forward for one tax year only, so the most in one year is £6,000. GOV.UK's example: £2,000 given in one year and £4,000 in the next is exempt, because the second year has its own £3,000 plus the £1,000 left over.
- Small gifts: up to £250 per person each tax year, if you have not used another allowance on the same person.
- Weddings and civil partnerships: £5,000 to a child, £2,500 to a grandchild or great-grandchild and £1,000 to anyone else. You can combine this with other allowances, except the small gift allowance.
- Regular gifts from normal income: there is no limit on the amount, as long as you can afford the payments after your usual living costs and pay them from your regular income.
Regular gifts from income
HMRC's manual says a gift must meet all three conditions: it forms part of your normal expenditure, it is made out of income, and it leaves you with enough income to keep your normal standard of living. A gift of capital, such as jewellery or shares, does not qualify unless you bought it from income specifically to give it away. Income means net income after Income Tax, and payments from an insurance policy, such as regular withdrawals, are usually capital. Without evidence to the contrary, HMRC treats income as becoming capital after 2 years.
GOV.UK's example is a regular payment of £60 a month, which is £720 a year, used together with the £3,000 annual exemption. Keep a record of what you gave, who you gave it to, its value and the date. Sources: GOV.UK, IHTM14231 and IHTM14250.
Giving away your home
If you give away your home and keep living in it, you must pay rent to the new owner at the going rate and pay your share of the bills. Otherwise it is a gift with reservation and counts as part of your estate, and the 7 year rule does not apply to it. You do not have to pay rent if you only give away part of the property and the new owners also live there.
Gifts and Capital Gains Tax
A gift to anyone other than a spouse, civil partner or charity is a disposal for Capital Gains Tax at market value on the date of the gift. A person who inherits an asset is treated as acquiring it at its market value on the date of death. The Capital Gains Tax guide has the rates.
How are trusts treated for Inheritance Tax?
Most types of trust pay Inheritance Tax on transfers into the trust above the £325,000 threshold, at 20% if the trustees pay. A trust can also pay an exit charge of up to 6% when assets leave it and a charge at each 10 year anniversary. The £2.5 million relief allowance applies to qualifying property held in trust.
- Most property in a trust is relevant property. Inheritance Tax can be due when assets leave the trust (an exit charge, up to 6%) and at each 10 year anniversary of the trust.
- For most types of trust, tax is due on transfers above £325,000, counting chargeable gifts made in the previous 7 years. If the trustees pay, the rate is 20%.
- The 10 year anniversary charge is worked out on the net value of the relevant property, which is the value after deducting debts and reliefs such as Business Relief or Agricultural Relief.
- A bare trust is one where the beneficiary is entitled to both the income and the assets, so both count as part of their estate when they die. In an interest in possession trust the beneficiary is entitled only to the income.
Finance Act 2026 gives trusts their own 100% relief allowance for the 10 year and exit charges, and relief is 50% above it. The rules are in sections 124G to 124I of the Inheritance Tax Act 1984, and the amount depends on when the trust was set up and what was transferred into it. How the £2.5 million allowance applies depends on the type of trust. Sources: GOV.UK, Trusts and Inheritance Tax and Finance Act 2026 Schedule 12.
Frequently asked questions about Inheritance Tax
What is the Inheritance Tax threshold for 2026/27?
The nil-rate band is £325,000. Inheritance Tax is 40% on the part of the estate above it. The threshold can rise to £500,000 if you leave your home to children or grandchildren and the estate is worth less than £2 million. The figures are fixed in law up to and including the 2030/31 tax year.
How much can a married couple pass on without Inheritance Tax?
A surviving spouse or civil partner can pass on up to £1 million. That is two nil-rate bands of £325,000 plus two residence nil-rate bands of £175,000. It needs the home to go to children or grandchildren, and the residence band falls away for estates worth £2,350,000 or more.
Is there a limit on Business Relief and Agricultural Relief?
Yes. For deaths on or after 6 April 2026, 100% relief covers the first £2.5 million of qualifying business and agricultural property combined. Value above that gets 50% relief. A spouse or civil partner can transfer unused allowance, which can make it up to £5 million. Shares traded on AIM get 50%.
Will my pension count towards Inheritance Tax?
For deaths on or after 6 April 2027, most unused pension funds and pension death benefits count as part of the estate. Death in service benefits from a registered scheme are excluded. Personal representatives report and pay any tax due. Deaths before 6 April 2027 follow the current rules.
Is Income Tax charged on top of Inheritance Tax on a pension?
It can be. If the member died below age 75, death benefits are usually tax free. If the member was over age 75, benefits are taxable. When Inheritance Tax is paid, the part of the benefits matching that tax does not count as the beneficiary's taxable income.
How does the seven-year rule work?
No tax is due on a gift if you live for 7 years after giving it, unless it goes into a trust. Gifts in the 3 years before death are taxed at 40%. Gifts 3 to 7 years before death are taxed at 32%, 24%, 16% or 8%, but only if gifts in those 7 years total more than £325,000.
Which gifts are exempt from Inheritance Tax?
Gifts to a spouse or civil partner who lives in the UK permanently, and gifts to charities, are exempt. You can also give £3,000 a tax year, £250 per person, wedding gifts of £5,000, £2,500 or £1,000, and regular gifts from normal income that you can afford after your usual living costs.
Do ISAs count as part of my estate?
Yes. ISA investments form part of the estate for Inheritance Tax. After death the ISA stays free of Income Tax and Capital Gains Tax until the executor closes it, estate administration is completed, or 3 years and 1 day after death. A surviving spouse or civil partner may be able to add an extra tax-free amount.
Where can you read more?
UK Tax hub
Every UK tax topic in one place, with the 2026/27 rates and thresholds.
Capital Gains Tax
Rates, the annual exempt amount and what happens to gains on gifts and inherited assets.
Planning and strategies
Ways to plan around the tax rules.
Family and Marriage Tax
Tax rules for couples and families.
ISAs explained
How ISAs work, including what happens to an ISA after death.
Inheritance Tax estimator
Estimate Inheritance Tax using the nil-rate band, the residence nil-rate band and its taper over £2 million, allowances passed on by a late spouse, gifts and gifts to charity.
Primary sources
- GOV.UK: How Inheritance Tax works
- GOV.UK: Residence nil-rate band
- GOV.UK: Business Relief for Inheritance Tax
- GOV.UK: Agricultural Relief for Inheritance Tax
- GOV.UK: Inheritance Tax on pensions, technical note
- GOV.UK: Trusts and Inheritance Tax
- legislation.gov.uk: Finance Act 2026, Part 2
- legislation.gov.uk: Inheritance Tax Act 1984 section 8D
What should you check?
Which of these checks matter depends on what you own, who you leave it to and when you give it away. The figures and dates on this page are as at 25 October 2026. For your own numbers, use the estimator or ask a qualified professional.
Estate value: add up the estate and compare it with £325,000, £500,000 and £1 million. Above £2 million, the residence nil-rate band starts to fall.
Business owners and farmers: check whether qualifying property could pass £2.5 million, because relief above that is 50%.
Pensions: for deaths on or after 6 April 2027, unused pension funds can count towards the estate. Check who the scheme would pay and whether the member would be over age 75.
Gifts: keep a record of what you gave, who you gave it to, its value and the date. The 7 year rule runs from the date of each gift.
Regular gifts: if you give from income, keep records of your income, your spending and each gift.
TaxYZ provides educational information only and is not authorised to give financial or legal advice. Inheritance Tax and estate planning involve complex personal circumstances and intergenerational tax consequences. All figures reflect GOV.UK, HMRC guidance and legislation as at 25 October 2026. The pension rules described are law under Finance Act 2026 and apply to deaths on or after 6 April 2027, so always verify the current position with a qualified tax adviser or solicitor. This page does not constitute tax, legal, or financial advice.