How it works
- Value the estate. Property, savings, investments and possessions, less debts.
- Apply the nil rate band. The first £325,000 is taxed at 0%.
- Add the residence nil rate band. Up to £175,000 more when a home passes to children or grandchildren.
- Apply 40%. The rest is taxed at 40%, or 36% if you leave at least 10% of the estate to charity.
The main reliefs
Transfers between spouses and civil partners are exempt, and unused nil rate bands pass to the survivor, so a couple can often pass on up to £1 million between them. Gifts made more than 7 years before death usually fall out of the estate, and Business and Agricultural Relief can reduce the value of qualifying assets.
The £2 million taper that catches ordinary families
The residence nil rate band gives each person an extra £175,000 of allowance when a home passes to direct descendants. What the headlines rarely mention is the taper. Once an estate exceeds £2 million, the residence allowance is withdrawn at £1 for every £2 over the line.
Watch what that does in practice. A widow leaves an estate of £2.35 million including the family house to her children, with her late husband's allowances fully transferred. At £2 million she would have had £1 million of combined allowances. At £2.35 million the two residence bands of £175,000 each are completely gone, because £350,000 over the threshold wipes out £175,000 of relief twice over. Her taxable estate has not just grown by £350,000, it has also lost £350,000 of allowance, and the extra tax on that alone is £140,000. The effective rate on the slice between £2 million and £2.35 million is 60%.
This is why lifetime giving matters most for estates hovering just above £2 million. A gift that brings the estate below the line on death restores allowances as well as removing the gifted value, and the taper is measured before business and agricultural reliefs are applied, which surprises even solicitors.
What changed for business owners in April 2026
For deaths and transfers from 6 April 2026, the old unlimited 100% business and agricultural relief has gone. Each person now has a £1 million combined allowance for assets qualifying at 100%, and anything above that qualifies at 50% instead, which produces an effective inheritance tax rate of 20% on the excess. Shares listed on AIM get the 50% rate from the first pound, with no £1 million allowance at all.
The planning consequences are significant. The £1 million allowance is not transferable between spouses, so a will that leaves everything to the survivor can waste the first death's allowance entirely. Couples with trading companies or farms worth more than £1 million now need to consider using both allowances, whether through direct gifts to children on the first death or through trust structures. Anyone who made a will before autumn 2024 on the assumption that the business would pass free of tax should have it reviewed, because that assumption no longer holds.
Pensions join the estate from April 2027
Under rules already announced, unused pension funds and most death benefits are due to come within the estate for inheritance tax from 6 April 2027. For years the standard advice was to spend other assets first and leave the pension untouched as an inheritance vehicle. That logic is about to invert.
From April 2027 a large untouched pension can push an estate over the £2 million taper as well as being taxed itself, and where the member dies after 75 the beneficiaries also pay income tax on what they draw, producing combined effective rates that can approach 67% at the top end. Reviewing the order in which you draw on savings, and whether to take and gift pension income during retirement, has become one of the most valuable conversations in estate planning. The right answer differs sharply depending on age, health and the size of the other assets, which is exactly why generic advice fails here.
The gift order most people get wrong
Two gifts of the same size can have completely different tax outcomes depending on sequence. Exempt gifts, the annual £3,000, small gifts of £250, wedding gifts and regular gifts out of surplus income, leave the estate immediately and never enter the seven year clock. Potentially exempt transfers, meaning most other gifts, only leave the estate after seven years, and if death comes sooner they use up the nil rate band before the estate does, in the order the gifts were made.
The one that repays attention is the exemption for regular gifts out of income. There is no monetary cap. A person with a pension of £60,000 who lives comfortably on £40,000 can give away £20,000 a year, every year, immediately exempt, provided the pattern is regular and it comes from income rather than capital and does not reduce their standard of living. The record keeping matters, because the executors will have to complete a schedule showing income and expenditure for each year of the pattern. We ask clients who use this exemption to keep a simple annual note, which turns a difficult argument with HMRC into a formality.
Worried about the bill on your estate?
Inheritance tax is one of the most reducible taxes with planning. TaxTune reviews your estate, uses every band and relief, and helps structure gifts and assets to protect more for your family.
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Frequently asked questions
What is the inheritance tax threshold?
The nil rate band is £325,000, taxed at 0%. A residence nil rate band of up to £175,000 can be added when you leave your home to direct descendants.
What is the inheritance tax rate?
40% on the value of the estate above the available nil rate bands, reduced to 36% if you leave at least 10% of the estate to charity.
Is money left to my spouse taxed?
No. Transfers between spouses and civil partners are normally exempt, and any unused nil rate band passes to the survivor, potentially sheltering up to £1 million for a couple.
How can I reduce inheritance tax?
Use both nil rate bands, make gifts more than 7 years before death, leave to charity, and use reliefs such as Business and Agricultural Relief. Planning early gives the most options.
When is inheritance tax paid?
It is usually due within 6 months of the end of the month of death, and often has to be paid before probate is granted, though tax on property can be paid in instalments.