Tax Explained
Inheritance Tax Explained
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the available nil-rate bands. With careful planning, the taxable estate can often be significantly reduced — but recent Budget changes have tightened some of the most valuable reliefs.
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Quick answer
What are the key takeaways?
The nil-rate band is £325,000 per person; unused nil-rate band can be transferred to a surviving spouse.
Key takeaways
The nil-rate band is £325,000 per person; unused nil-rate band can be transferred to a surviving spouse.
The residence nil-rate band adds up to £175,000 where a main home passes to direct descendants, but tapers away above estates of £2 million.
Business property relief (BPR) and agricultural property relief (APR) have been restricted from April 2026 following the Budget.
The 7-year rule means gifts fall out of the estate if the donor survives 7 years, with taper relief reducing the charge in years 3 to 7.
How is IHT calculated?
IHT is charged at 40% on the value of a person's estate above the nil-rate band (NRB) of £325,000. The NRB has been frozen at this level since 2009 and the freeze continues to 2030, meaning more estates are pulled into IHT each year as asset values rise.
Married couples and civil partners benefit from a transferable NRB: when the first spouse dies, any unused NRB passes to the surviving spouse, potentially doubling the combined NRB to £650,000.
What is the residence nil-rate band?
The residence nil-rate band (RNRB) of £175,000 is available where a main residential property is left to a direct descendant (children, grandchildren and some other descendants). Like the NRB, unused RNRB can be transferred to a surviving spouse.
The RNRB tapers away for larger estates: it reduces by £1 for every £2 by which the net estate exceeds £2 million. This means it is fully withdrawn for estates above £2.35 million for an individual or £2.7 million for a couple using both allowances.
How do business property relief and agricultural property relief work after the Budget?
Before April 2026, qualifying business assets and agricultural property could attract 100% relief from IHT, effectively removing them from the estate entirely. Unquoted trading companies and AIM-listed shares were particularly valuable planning tools.
From 6 April 2026, 100% Business and Agricultural Property Relief applies only up to a fixed allowance of combined qualifying assets per person; above it relief is 50%, an effective IHT rate of 20%. The allowance was announced as £1 million in the Autumn Budget 2024 and raised to £2.5 million in December 2025, with unused allowance transferable between spouses. This significantly changes IHT planning for farming families and business owners.
What changes for pensions in April 2027?
From 6 April 2027 most unused pension funds and death benefits will be included in the value of an estate for Inheritance Tax. Until then they have usually sat outside it, which is why many people deliberately spent other assets first and left the pension untouched.
Pensions left to a surviving spouse or civil partner remain exempt on the first death. The change bites on pensions passed to children and other beneficiaries, so nominations, the order of drawing on assets in retirement and lifetime gifts out of surplus income are all worth reviewing before April 2027.
What is the 7-year rule for gifts?
Outright gifts to individuals (known as potentially exempt transfers, or PETs) are free of IHT if the donor survives 7 years from the date of the gift. If the donor dies within 7 years, the gift is brought back into the estate — but taper relief reduces the IHT charge on gifts made 3 to 7 years before death.
Gifts out of normal expenditure from income, small annual exemptions of £3,000 per year and wedding gifts are also exempt from IHT regardless of the 7-year rule. These are often underused exemptions.
Questions
What do people ask about inheritance tax?
These answers cover the practical points clients commonly raise before asking Countify to review their own position.
Ask a different questionDoes IHT apply to everything I own?
IHT generally applies to the total value of your estate, including property, savings, investments, business interests and personal possessions, less any debts and the applicable nil-rate bands and reliefs.
Is a spouse exempt from IHT?
Transfers between UK-domiciled spouses and civil partners are fully exempt from IHT, both on death and as lifetime gifts.
How does IHT interact with Capital Gains Tax on death?
Assets passing on death receive a CGT uplift to market value, wiping out any accrued capital gain. However, IHT is still charged on the full estate value. The interaction between the two taxes is an important planning consideration for large estates.
Can Countify help with IHT planning?
Countify can calculate an estimated IHT liability, explain how available reliefs and exemptions apply to your estate and advise on strategies to reduce the tax due, including the implications of the April 2026 BPR and APR changes.
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Related reading
Where can you read more UK tax updates?
Countify's blog covers practical updates for individuals, landlords and business owners.
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