Inheritance Tax UK 2026/27 — Thresholds, Gifting, Pensions and Legal Reduction

Inheritance Tax is charged at 40% on the value of a person’s estate above their available tax-free bands. For many families — particularly those who own property — the question is not just whether IHT applies, but how the thresholds, gifting rules, spouse exemptions, and pension treatment interact to shape the actual bill. Understanding that interaction is more useful than worrying about the headline rate in isolation.

This hub is the starting point for IHT on PocketWise. It covers the key thresholds for 2026/27, how the nil-rate bands work for individuals and couples, the gifting rules that reduce taxable estates during life, the coming pension change from April 2027, and the main legal planning routes. For the broader financial planning context, see the Estate Planning hub.

Key IHT Thresholds 2026/27

Both the NRB (£325,000) and RNRB (£175,000) are frozen until at least April 2028. As house prices and asset values rise, more estates are being pulled into scope — the frozen bands mean a larger proportion of wealth is taxable each year.

How the Nil-Rate Bands Work

Standard Nil-Rate Band

The £325,000 NRB applies to the full taxable estate — property, savings, investments, personal possessions, and any lifetime gifts made within seven years of death. Everything above this threshold is taxed at 40%.

Residence Nil-Rate Band

The RNRB (£175,000) is available in addition to the NRB when a main residence is passed directly to children, grandchildren, or other direct descendants. It tapers away for estates over £2 million (reducing by £1 for every £2 above the threshold).

Combined thresholds at a glance:

Spouse and Civil Partner Exemption

Everything passing to a spouse or civil partner is completely exempt from IHT — there is no limit. Their unused NRB and RNRB also transfer automatically to the surviving spouse, which is how couples can reach the £1 million combined threshold.

Worked Example: Family Home

Scenario: Margaret dies in 2026/27 with an estate worth £780,000, including a home valued at £450,000 which passes to her two children. She has not used any of her NRB. Her husband died five years ago and left everything to her, so his full NRB and RNRB are available to transfer.

• Transferred NRB from husband: £325,000
• Margaret’s own NRB: £325,000
• Total NRB available: £650,000
• Transferred RNRB from husband: £175,000
• Margaret’s own RNRB: £175,000 (home passes to children)
• Total RNRB available: £350,000
• Total tax-free threshold: £1,000,000
• Estate value: £780,000
• IHT due: £0 — estate is fully within the combined threshold

If Margaret were single with the same estate and no transferred allowances:

• Available threshold: £325,000 + £175,000 = £500,000
• Taxable estate: £780,000 − £500,000 = £280,000
• IHT at 40%: £112,000

The Seven-Year Rule and Gifts

IHT planning during life is largely about the seven-year rule. Gifts made more than seven years before death are completely outside the estate. Gifts made within seven years are potentially exempt transfers (PETs) and may be included in the estate.

Taper relief on gifts made within 3–7 years:

Note: Taper relief only applies to the tax on a gift, not the gift itself. And gifts only become taxable if they exceed the available NRB after other estate assets are accounted for.

IHT-Free Gifts You Can Make Now

These are fully exempt regardless of the seven-year rule:

• Annual exemption: £3,000 per tax year per person (carry forward one unused year = up to £6,000)
• Small gifts exemption: £250 per person to any number of individuals (cannot combine with annual exemption for the same person)
• Wedding/civil partnership gifts: £5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else
• Normal expenditure out of income: Regular gifts from surplus income (not capital) that do not affect your standard of living — fully exempt and uncapped, but must be habitual and documented

The April 2027 Pension Change

This is the most significant upcoming change to IHT planning. Currently, defined contribution pension pots sit outside the taxable estate. If you die before drawing the pension, your nominated beneficiaries receive it free of IHT — the pension never forms part of the estate calculation.

From April 2027, the government has announced that most pension pots will be brought within the IHT net. The detail of exactly how this will work (particularly around interaction with existing NRBs) is still being finalised, but the direction is clear: pension pots will no longer be the reliable IHT-free vehicle they currently are.

What this means now:

If you have a large pension pot and were relying on it as a tax-efficient legacy, you should:

1. Review whether your nominated beneficiaries are correctly recorded
2. Model the potential IHT exposure on your combined estate from 2027 onwards
3. Consider whether drawdown spending from the pension (preserving other assets) still makes sense given the rule change
4. Get professional advice if the pension pot materially affects your estate position

For further pension and estate planning context, see the Pensions & Retirement section.

Gifting Property: The Reservation of Benefit Trap

One of the most common IHT planning mistakes is giving away the family home while continuing to live in it. Under the “gift with reservation of benefit” rules, if you give a property but keep benefiting from it (living rent-free), HMRC treats it as still in your estate for IHT purposes.

For a property gift to be effective for IHT:

• You must vacate the property entirely, or
• You must pay a full market-rate rent to the new owner

You cannot give the house to your children, continue living in it, and expect the value to leave your estate. It does not work.

What This Cluster Covers

Related Hubs

• Estate Planning hub — wills, lasting power of attorney, and broader wealth transfer
• Pensions & Retirement section — pension death benefits and the April 2027 IHT change
• Capital Gains Tax hub — CGT on asset disposals, including gifted assets

The Core Inheritance Tax Cluster

• Inheritance Tax Guide
• IHT Threshold 2026
• Inheritance Tax Calculator
• Gift Tax Guide
• Gifting Money to Children
• Gifting Money to Grandchildren
• Gifting Property to Children
• How to Avoid Inheritance Tax Legally
• Inheritance Tax Planning Guide