Inheritance Tax: nil-rate bands, the 7-year rule and gifts
Quick answer: Inheritance Tax (IHT) is charged at 40% on the value of an estate above the available nil-rate bands.
Inheritance Tax (IHT) is charged at 40% on the value of an estate above the available nil-rate bands. Most estates pay no IHT at all — but the rules are intricate, and large gifts, second homes and pensions can all change the calculation. This guide explains the main allowances, the 7-year rule on gifts, and the major change coming in April 2027 when most unused pensions are brought into IHT.
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Primary source: https://www.gov.uk/inheritance-tax
Nil-rate band and residence nil-rate band
Each individual has a nil-rate band of £325,000 — the first £325,000 of their estate is taxed at 0%. The band is frozen at this level until April 2030 (extended in the Autumn 2024 Budget).
On top, where a home is left to direct descendants (children, grandchildren and certain other lineal descendants), a Residence Nil-Rate Band of up to £175,000 is also available. The RNRB is tapered away £1 for every £2 of estate value above £2 million, so it disappears entirely once the estate hits £2.35 million.
Spouses and civil partners can transfer any unused proportion of both bands to the survivor, so a couple can typically pass up to £1 million to children IHT-free where the family home forms part of the estate.
The 7-year rule and gifting
Most lifetime gifts (a 'potentially exempt transfer') fall outside the estate if the donor survives 7 years from the date of the gift. If death occurs within 7 years, the gift uses up nil-rate band first; anything above the band is taxed.
Taper relief reduces the IHT charge on gifts above the nil-rate band where death is between 3 and 7 years after the gift: 20% relief at 3–4 years, 40% at 4–5, 60% at 5–6, 80% at 6–7. Taper relief reduces the tax, not the value, of the gift — and only applies once the nil-rate band is exhausted.
Several gifts are exempt regardless of the 7-year rule: the £3,000 annual exemption (carry forward one year if unused), small gifts up to £250 per recipient per year, wedding/civil partnership gifts (up to £5,000 from a parent, £2,500 grandparent, £1,000 anyone else), gifts between spouses, gifts to UK charities, and 'normal expenditure out of income' that does not affect the donor's standard of living.
What's in the estate (and what isn't)
Property, savings, investments, life insurance not in trust, vehicles, valuables and most other assets are part of the estate, valued at the date of death.
Life insurance policies written in trust generally fall outside the estate — a simple, free step that can save large amounts of IHT. Many providers will do this when the policy is set up.
At present most defined contribution pensions remain outside the estate. The Autumn 2024 Budget announced that, subject to legislation expected in 2026, unused pension funds and death benefits will form part of the estate for IHT from 6 April 2027 — see our dedicated guide for full detail.
Debts and reasonable funeral expenses are deducted from the gross estate before IHT is calculated.
Reliefs and exemptions
Business Relief: qualifying business assets and unquoted shares (including AIM shares held for at least 2 years) can attract 100% or 50% relief. Significant reforms apply from 6 April 2026: combined Business Relief and Agricultural Relief on assets above £1 million are reduced to 50%, with the relief on AIM shares cut to 50% (effectively a 20% IHT rate).
Agricultural Property Relief: similar mechanism for qualifying farmland and farm buildings, also affected by the April 2026 reforms.
Charitable gifts: gifts to UK-registered charities are fully exempt. Leaving 10%+ of the net estate to charity also reduces the IHT rate on the rest of the estate from 40% to 36%.
Common questions
- Do most estates actually pay IHT?
- No. Around 4–5% of UK estates pay any Inheritance Tax. The combination of nil-rate bands, the spouse exemption and pension/insurance trust treatment removes most estates from charge. The frozen bands until 2030 are slowly bringing more estates into scope through 'fiscal drag'.
- How is IHT actually paid?
- IHT is due 6 months after the end of the month of death. The executors usually pay from the estate's bank accounts using the Direct Payment Scheme. For tax on property, instalments over 10 years are allowed (with interest). Probate generally cannot be granted until at least part of the IHT is paid.
- What is 'gifts out of normal expenditure'?
- Regular gifts from income (not capital) that don't affect the donor's standard of living are immediately outside the estate — no 7-year wait. Examples include regular grandchildren's school fee contributions or monthly pension contributions for adult children. Detailed records of income, expenditure and the regular pattern are essential.
- Can I avoid IHT by giving everything away?
- Outright gifts only escape IHT if you survive 7 years. Gifts 'with reservation of benefit' (e.g. giving your home to your children but continuing to live in it rent-free) are treated as still being in your estate. Specialist advice is usually needed for any significant gifting plan.