How does Inheritance Tax work?

Inheritance Tax thresholds for 2026/27

There are two main tax-free amounts. The first applies to every estate. The second only applies if a home goes to children or grandchildren.

HMRC's official table shows the £325,000 nil rate band staying the same until at least 5 April 2031.

Inheritance Tax is charged at 40%, but only on the part of the estate above the threshold. If you leave 10% or more of the net value of your estate to charity, the rate on some assets can drop to 36%.

Worked example 1: a single person

Jo dies with an estate worth £450,000. Jo leaves everything to a friend, so only the £325,000 threshold applies.

• Amount over the threshold: £450,000 minus £325,000 = £125,000
• Tax at 40%: £50,000

Worked example 2: a married couple

Pat dies first and leaves everything to their wife, Sam. There is no Inheritance Tax on anything left to a husband, wife or civil partner, so none of Pat's thresholds are used. When Sam dies, the unused thresholds pass to Sam's estate. Sam leaves the family home (worth £400,000) and savings (£500,000), £900,000 in total, to their children. The home is worth more than the two £175,000 home allowances added together, so both can be used in full.

• Sam's thresholds: £325,000 plus £175,000 = £500,000
• Pat's unused thresholds added: another £500,000
• Total threshold: £1,000,000
• Inheritance Tax to pay: none, because £900,000 is below £1,000,000

What changes your threshold

• Who gets your home. The extra £175,000 only applies if the home goes to direct descendants. This includes children, grandchildren, stepchildren, adopted and foster children. It does not include nieces, nephews or brothers and sisters.
• Estates over £2 million. The residence nil rate band goes down by £1 for every £2 the estate is worth over £2 million. For example, an estate of £2,100,000 loses £50,000, leaving £125,000. At £2,350,000 or more it is gone completely.
• Gifts in the last 7 years. Gifts made in the 7 years before death can use up the £325,000 threshold first. Gifts are tax free if you live 7 more years after making them.
• Unused threshold from a late spouse or civil partner. This can be added to the surviving partner's threshold, as in example 2.

Gifts you can make each year

Pensions from April 2027

From 6 April 2027, most unused pension funds and death benefits will count as part of the estate for Inheritance Tax. Death in service benefits from a registered pension scheme will not count.

Paying the tax

The estate normally pays the tax, not the people who inherit. It must be paid by the end of the sixth month after the person died. For a death in January, that means by 31 July. HMRC charges interest on late payment. The rate has been 7.75% since 9 January 2026.

Inheritance Tax rules are the same in England, Scotland, Wales and Northern Ireland.

Related guides

• What is the residence nil rate band?
• Do you pay Inheritance Tax on gifts?
• How do I apply for probate?

Where these figures come from

• How Inheritance Tax works (GOV.UK)
• Inheritance Tax thresholds and interest rates (HMRC)
• Inheritance Tax: passing on a home (GOV.UK)
• Inheritance Tax residence nil rate band (HMRC)
• Inheritance Tax: gifts (GOV.UK)
• Inheritance Tax: unused pension funds and death benefits (HMRC)
• Pay Inheritance Tax (GOV.UK)