Inheritance Tax generates enormous anxiety — but only around 4% of UK estates actually pay it. This guide explains who really needs to worry, what the thresholds mean in practice, and what you can do now to reduce a future liability.
Last updated: April 2026 · Written by the EasyCalculators team
Despite the headlines, Inheritance Tax affects a relatively small proportion of UK deaths. HMRC data shows that around 4–5% of estates pay IHT each year. The reason so many people worry about it is primarily that house prices have pushed estates above the nil-rate band in regions like London and the South East — but for most of the UK, the thresholds are still sufficient.
Every person has a nil-rate band (NRB) of £325,000. Any estate worth below this pays no IHT at all. Above this threshold, the standard IHT rate is 40%.
Crucially, this threshold is frozen until April 2031 — meaning that as house prices and wealth accumulate, more estates will gradually be pulled into the IHT net over time.
If you own your home and leave it to direct descendants (children, grandchildren, stepchildren), an additional Residence Nil-Rate Band (RNRB) of £175,000 applies. This gives a single person a total IHT threshold of £500,000 when passing a property to their children.
Direct descendants include: children (biological, adopted, fostered, stepchildren), grandchildren, and their spouses or civil partners. Nieces, nephews, siblings and friends do not qualify for the RNRB.
The RNRB also tapers for very large estates: it's reduced by £1 for every £2 that the total estate exceeds £2 million. Above £2.35 million, the RNRB is withdrawn entirely.
This is the most valuable feature of the IHT system for married couples and civil partners. When the first spouse dies, if they don't use all of their allowances, the unused portion transfers to the surviving spouse.
In practice, most couples leave everything to each other — which is always exempt from IHT (spouse exemption). This means the survivor inherits both nil-rate bands:
For the majority of married couples, the combined £1 million threshold means IHT is genuinely not a concern.
In practical terms, IHT becomes relevant if:
One of the most important and misunderstood aspects of IHT planning is the treatment of gifts made during your lifetime. Gifts to individuals are called Potentially Exempt Transfers (PETs). If you survive 7 years after making the gift, it becomes fully exempt from IHT.
If you die within 7 years, the gift is included in your estate — but taper relief reduces the IHT due on gifts made more than 3 years before death:
| Years between gift and death | IHT rate on gift |
|---|---|
| Less than 3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| More than 7 years | 0% (fully exempt) |
Note that taper relief only applies to the IHT above the nil-rate band — it doesn't reduce the tax if the gift itself is within the NRB.
You can make gifts each year that are immediately outside your estate — no 7-year rule required:
"The whole estate is taxed at 40%." No — only the amount above the available thresholds. On a £600,000 estate with a £500,000 threshold, only £100,000 is taxed, giving an IHT bill of £40,000.
"I need to give my house away to avoid IHT." Giving your home away but continuing to live in it counts as a "Gift with Reservation of Benefit" and remains in your estate anyway. This approach rarely works and can create other problems.
"My pension will be taxed for IHT." Currently, defined contribution pension pots sit outside your estate for IHT purposes — they pass free of IHT (though potentially subject to income tax for the beneficiary). From April 2027, HMRC has proposed bringing unused pension pots into estates, which will be a significant change for those with large pension pots.