Inheritance Tax 2026 — Complete Guide

IHT basics — what you pay and when

Inheritance tax (IHT) is charged at 40% on the value of your estate above the nil rate band threshold. It is paid by the estate before assets are distributed to beneficiaries, and must generally be paid before probate is granted.

Your estate includes everything you own at death: property, savings, investments, business interests, life insurance not written in trust, and from April 2027, pension funds.

Nil rate bands 2026

Married couples and civil partners

Transfers between spouses and civil partners are exempt from IHT, regardless of value. Any unused NRB or RNRB from the first spouse to die is automatically transferable to the survivor's estate.

This means a married couple can effectively have a combined allowance of up to £1,000,000 before IHT applies — but only if the estate is structured correctly and the Will is drafted to maximise this.

APR and BPR — new £2.5m cap from April 2026

Agricultural Property Relief (APR) and Business Property Relief (BPR) previously provided 100% IHT relief on qualifying farmland, business assets, and AIM shares. From April 2026, a combined cap of £2.5m applies to 100% APR/BPR relief. Assets above this cap attract IHT at 20% (half the standard rate).

If you own a farm or business and relied on APR/BPR to shelter your estate from IHT, you need to review your estate plan urgently. The changes may significantly increase the IHT bill your estate faces.

Pensions and IHT — critical change from April 2027

This is the most significant IHT change of the decade. From April 2027, unspent pension funds will form part of your taxable estate for IHT purposes.

Currently, pension funds sit outside your estate — you can name a beneficiary (a pension nomination) and the funds pass to them free of IHT. From April 2027, this changes. The pension fund will be valued and added to your estate. Combined with the rest of your estate, this could push many people who currently have no IHT liability into the IHT net.

How to reduce your IHT bill legally

• Annual gifting exemption — you can give away £3,000 per year free of IHT. Married couples can give £6,000 combined. Unused allowance carries forward one year.
• Small gifts exemption — up to £250 to any number of recipients per year, free of IHT.
• Wedding gifts — parents can give £5,000 per child, grandparents £2,500, others £1,000.
• Gifts out of surplus income — regular gifts from income that don't reduce your standard of living are immediately exempt.
• Seven-year rule — gifts made more than seven years before death are free of IHT (taper relief applies from year 3).
• Life insurance in trust — a life policy written in trust pays outside your estate — the proceeds don't form part of the taxable estate and there's no IHT on them.
• Charitable giving — gifts to charity are IHT-exempt, and leaving at least 10% of your estate to charity reduces the IHT rate on the rest from 40% to 36%.

Why your Will needs reviewing now

Given the April 2026 APR/BPR changes and the incoming April 2027 pension changes, any Will drafted before 2025 should be reviewed urgently. Specific triggers for review:

• You own a farm or business and relied on APR/BPR for IHT shelter
• You have a significant pension fund
• Your estate is worth more than £500,000 as an individual or £1,000,000 as a couple
• You have not reviewed your Will in the last two to three years
• Your family circumstances have changed (divorce, new children, death of a beneficiary)