Most people who worry about inheritance tax do not need to. But with thresholds frozen and house prices rising, more families are being caught out than ever before. Here is how to tell whether it applies to you.
AFTER READING THIS, YOU WILL UNDERSTAND
- Whether your estate is likely to face inheritance tax, based on the thresholds that apply in 2026/27
- How the nil rate band and residence nil rate band work together, and what passes between spouses and civil partners
- What changes for pensions in April 2027, and whether your family’s position needs attention now
If you have found yourself wondering whether your estate might be affected, you are asking exactly the right question. This article explains how inheritance tax works clearly, so you can work out where you stand.
What is inheritance tax, exactly?
Inheritance tax (IHT) is a tax charged on the value of your estate when you die. Everything you own is counted. It is paid by your estate before anything is passed to the people you have left it to.
The standard inheritance tax rate is 40%. But it only applies to the portion of your estate above a certain threshold. Below the tax-free threshold, nothing is taxed.
The thresholds: what is tax-free?
Everyone has a tax-free allowance called the nil rate band, which acts as the threshold for inheritance tax. In 2026/27, this inheritance tax allowance is £325,000. Anything below that figure passes to your beneficiaries without any IHT being due.
If you own a home and you are leaving it to your children or grandchildren, who are classed as direct descendants, you may also benefit from an additional allowance called the residence nil rate band. This is currently £175,000. Together, these bring your total tax-free threshold to £500,000.
For married couples and civil partners, it gets more generous. Any allowance your spouse or civil partner does not use can be transferred to you when they die. This means a couple can potentially pass on up to £1 million without any inheritance tax bill.
One thing to keep in mind as you read: tax rules can change over time, and how they apply depends entirely on your individual circumstances. The thresholds described here are the rules as they stand today.
A simple example:
- Your estate is worth £650,000, including your family home. You are widowed, and your spouse’s unused allowances have transferred to you. Your combined tax-free threshold is £1,000,000, so no inheritance tax is due.
- But if your estate were worth £1,200,000, the £200,000 above the threshold would be taxed at the standard inheritance tax rate of 40%, resulting in an inheritance tax bill of £80,000.
So why are more families affected now than before?
Here is the issue. The nil rate band has been frozen at £325,000 since 2009. It is not going up until at least 2031. Meanwhile, house prices have risen significantly across most of the UK, especially in the South of England.
That means estates that would have sat comfortably below the threshold a decade ago are now closer to it, or above it, simply because of rising property values. Not because anyone has become dramatically wealthier.
It is sometimes called fiscal drag. The threshold stays still while the value of your assets moves upward. More families find themselves asking how much inheritance tax they might owe, without having done anything differently.
Some things that are exempt from inheritance tax
Not everything is counted. A few things worth knowing:
- Assets passed between spouses or civil partners during their lifetime or on death are exempt from inheritance tax entirely.
- Gifts to charities are exempt. If you leave more than 10% of your estate to charity, the IHT rate on the rest drops from 40% to 36%.
- You can give away up to £3,000 in each tax year using your annual gift allowance, without it counting towards your estate.
- Larger gifts made to individuals are potentially exempt, but only if you live for at least seven years after making them.
One thing changing in 2027 you should know about
Currently, most pension funds sit outside your estate for IHT purposes. From April 2027, this changes. Unspent pension funds will be included in your estate. If you have a significant pension pot and were planning to pass it on, this is worth being aware of now rather than in two years.
Do I need to do something?
Not necessarily, and that is the reassuring answer for most people. If your estate is comfortably below the tax-free threshold of £325,000, or £500,000 if you own a home you are leaving to direct descendants, you do not currently have an IHT liability.
If your estate is closer to those thresholds, or above them, it is worth having a proper conversation. There are legitimate ways to plan, and the earlier you start, the more options you have. This is not about clever schemes. It is about making sure your wishes are carried out in the most straightforward way possible.
KEY TAKEAWAYS
- Inheritance tax is charged at 40%, but only on the portion of your estate above your tax-free threshold.
- The nil rate band is £325,000 in 2026/27. Leaving your home to direct descendants can add a further £175,000.
- Married couples and civil partners can combine unused allowances, potentially passing on up to £1 million tax-free.
- The threshold has been frozen since 2009, so rising house prices are pulling more ordinary families into scope.
- From April 2027, unspent pension funds will be included in your estate for inheritance tax purposes.
- If your estate is comfortably below the thresholds, you may not need to do anything at all.
QUESTIONS TO ASK YOUR FINANCIAL ADVISER
- What is my estate worth today, and where does it sit against the tax-free thresholds?
- Would the residence nil rate band apply if I leave my home to my children or grandchildren?
- Can I use my late spouse or civil partner’s unused allowances, and how is that claimed?
- How does the April 2027 pension change affect what I am planning to leave behind?
- What straightforward steps could reduce my family’s exposure to inheritance tax?
Thinking about whether this applies to you?
Inheritance tax is one of those topics where a conversation is worth far more than a Google search. Everyone’s situation is different. The thresholds, the exemptions, and what you can do about it all depend on the specifics of your estate.
If you would like to understand where you stand, we are happy to help. Book your first chat today. Tax treatment depends on individual circumstances and may change over time, which is exactly why a conversation about your specific position is worth more than any general guide. It is also worth knowing that inheritance tax planning is not regulated by the Financial Conduct Authority.
