Inheritance Tax Guide 2025-26: Thresholds, Rates & How to Reduce It

Q: What is the inheritance tax threshold in 2025-26?

The Nil-Rate Band (NRB) is £325,000 — the amount of your estate that is free from Inheritance Tax. If you also leave your main home to direct descendants (children or grandchildren), an additional Residence Nil-Rate Band of £175,000 applies, giving a total of £500,000 before any IHT is due. For married couples and civil partners, both nil-rate bands can be transferred to the surviving spouse, potentially allowing up to £1,000,000 to pass free of IHT.

Q: Do I need to pay inheritance tax?

You do not pay IHT on assets you receive as a beneficiary — the estate pays it before assets are distributed. The estate pays IHT at 40% on the value above the available nil-rate bands. Only about 4% of UK estates pay IHT. You may be affected if the total value of your estate (property, savings, investments, personal possessions) exceeds £325,000 — or £500,000 if you own a home you are leaving to your children.

Q: How can I reduce inheritance tax legally?

The main legal ways to reduce IHT include: making use of the £3,000 annual gifting exemption each year; making regular gifts from surplus income (these are immediately exempt if they do not reduce your standard of living); gifting assets more than 7 years before death (potentially exempt transfers); leaving at least 10% of your net estate to charity (which reduces the IHT rate to 36%); contributing to pensions (which are outside your estate for IHT); and making use of Business Property Relief or Agricultural Property Relief on qualifying assets.

Inheritance Tax is charged at 40% on estates above the nil-rate band. With proper planning — annual gifts, pensions, and using both spouses' allowances — many families can significantly reduce the bill.

IHT thresholds 2025-26 — NRB £325,000 plus RNRB £175,000 = £500,000 before 40% applies

How Inheritance Tax Works

Inheritance Tax (IHT) is a tax on the estate of someone who has died. The estate — everything the deceased owned, including property, savings, investments, and personal possessions — is valued. IHT is charged at 40% on the portion of the estate above the available nil-rate bands. The tax is paid by the estate before assets are distributed to beneficiaries.

About 4% of UK estates pay IHT in any given year. However, with rising property values, an increasing number of homeowners are being brought into scope — particularly in London and the South East where average house prices regularly exceed £500,000 on their own.

The Nil-Rate Bands

Nil-Rate Band (NRB): £325,000. This is the standard threshold below which no IHT is due. It has been frozen at this level since 2009 and is set to remain frozen until at least 2030 — meaning more estates are caught each year due to rising asset values.

Residence Nil-Rate Band (RNRB): An additional £175,000 if you leave your main home to direct descendants (children, step-children, grandchildren, etc.). This brings the combined threshold to £500,000 for those who qualify. The RNRB is reduced by £1 for every £2 of estate value above £2,000,000 — so estates above £2,350,000 receive no RNRB at all.

Spouse/civil partner transfer: When a married person or civil partner dies, any unused proportion of their NRB and RNRB can be transferred to the surviving spouse. This means a couple can potentially leave up to £1,000,000 (£650,000 NRB + £350,000 RNRB) free of IHT to their children.

Worked Example

Estate value: £800,000 (including main home worth £400,000), passing to two adult children. The deceased is a widow whose late spouse's unused NRB was transferred.

Available NRB: £325,000 (own) + £325,000 (transferred) = £650,000
Available RNRB: £175,000 (own) + £175,000 (transferred) = £350,000
Total exempt: £650,000 + £350,000 = £1,000,000 — but estate is only £800,000
IHT due: £0 — the entire estate falls within the available nil-rate bands

Without the spouse transfer: NRB £325,000 + RNRB £175,000 = £500,000. Taxable: £800,000 − £500,000 = £300,000 × 40% = £120,000 IHT.

Key IHT Exemptions and Reliefs

Annual Gifting Exemption

You can give away up to £3,000 per year completely free of IHT. You can also carry forward one year's unused exemption, meaning if you did not use it last year, you can give away up to £6,000 in the current year.

Small Gifts

You can give up to £250 per person per year to as many different people as you like — with no IHT consequences. These cannot be combined with the annual exemption for the same recipient.

Gifts from Surplus Income

Regular gifts made from your income (not capital) — such as contributing to grandchildren's savings regularly — are immediately exempt from IHT, provided they do not reduce your own standard of living. There is no cap on the amount. This exemption is powerful but requires evidence that the gifts were habitual and from surplus income.

The Seven-Year Rule

Gifts that do not fall under other exemptions are called Potentially Exempt Transfers (PETs). If you survive for 7 years after making the gift, it falls completely outside your estate. If you die within 7 years, the gift is included in your estate — but taper relief reduces the IHT on it if more than 3 years have passed (40% → 32% → 24% → 16% → 8% after years 3-7).

Business Property Relief and Agricultural Relief

Qualifying business assets can attract up to 100% relief from IHT — meaning they pass free of IHT regardless of value. This applies to shares in unquoted trading companies, business partnerships, and certain agricultural land. From April 2026, the government has proposed limiting 100% relief to the first £1,000,000 of qualifying assets, with 50% relief above that.

Frequently Asked Questions

What is the inheritance tax threshold in 2025-26?

The Nil-Rate Band is £325,000. With the Residence Nil-Rate Band of £175,000 for those leaving a home to direct descendants, the effective threshold can be £500,000. Married couples can combine both, potentially sheltering up to £1,000,000.

Do I need to pay inheritance tax?

You do not personally pay IHT on an inheritance you receive — the estate pays it. If your own estate is below £325,000 (or £500,000 with RNRB), your estate will owe no IHT. Only around 4% of UK estates pay IHT.

How can I reduce inheritance tax legally?

Annual gifts (£3,000), regular gifts from income, the seven-year gifting rule, pension contributions (which are outside your estate), leaving 10% to charity (reduces rate to 36%), and Business Property Relief are the main legal methods. A financial adviser can help with more complex planning.