Photo by Kelly Sikkema on Unsplash

Inheritance Tax UK 2026: Record Receipts, Frozen Thresholds, and How to Reduce Your Family's Bill

Inheritance tax just had its fifth consecutive record-breaking year. HMRC collected £8.5 billion in 2025/26 — up from £8.2 billion the year before and more than double the £3.8 billion collected a decade ago. The tax that was once the preserve of the genuinely wealthy is now firmly a middle-income issue, catching families whose only significant asset is the family home in London or the South East.

The situation is about to get considerably worse. Both IHT thresholds are frozen at their current levels until 2031. Pensions — the largest asset most families hold outside their estate — enter the IHT net from April 2027. The number of estates paying IHT is expected to double by 2030. And HMRC is actively investigating more families than ever: over 14,000 bereaved families have been investigated for potentially underpaid IHT since 2022/23.

This guide explains exactly how the system works, who is affected, the key thresholds and reliefs for 2026/27, the incoming pension change that will catch tens of thousands of additional families, and every legal strategy available for reducing what your family will owe.

How Inheritance Tax Works

Inheritance tax is charged at 40% on the value of your estate above your available tax-free thresholds at the date of death. It is paid by the estate — the executors settle the bill with HMRC before distributing anything to beneficiaries. Beneficiaries do not pay it directly.

The estate includes everything you own at the time of death: property, savings, investments, cash, vehicles, jewellery, and business assets. It also includes assets you gave away within the last seven years (under certain conditions), and from April 2027 it will include your unspent pension pot.

The key exemption: everything left to a spouse or civil partner is completely exempt from IHT, regardless of value. This is the spousal exemption and it is absolute. The IHT problem typically arrives at the second death — when assets pass to children or others.

The Thresholds in 2026/27

There are two main allowances that determine how much of your estate passes tax-free.

The nil-rate band (NRB): Every individual has a nil-rate band of £325,000. This has been frozen at this level since 2009. If it had risen with inflation since then, it would now be approximately £500,000. It is confirmed to remain at £325,000 until April 2031.

The residence nil-rate band (RNRB): An additional allowance of £175,000 applies when you leave your main home to direct descendants — children, stepchildren, grandchildren, or great-grandchildren. It does not apply if you leave the home to siblings, friends, or other relatives. The RNRB is also frozen until 2031. It begins tapering away for estates worth more than £2 million, reducing by £1 for every £2 above that threshold, and disappearing entirely at £2.35 million.

The combined allowances by situation:

Anything above these thresholds is charged at 40%. On a £700,000 estate left by a single person to their children: £500,000 is tax-free, the remaining £200,000 is taxed at 40%, producing an IHT bill of £80,000.

Why More Families Are Being Caught

The nil-rate band has been frozen since 2009. In that time, average UK house prices have more than doubled. The result is straightforward: estates that would have been well under the threshold fifteen years ago are now significantly over it, purely because of property price growth rather than any increase in real-terms wealth.

The effect is most acute in London and the South East, where average house prices routinely exceed £500,000. A family in inner London with a £700,000 home, modest savings, and a pension pot faces a substantial IHT liability even before considering any other assets — despite being far from wealthy by London standards.

The number of estates due to be caught by IHT is expected to double by 2030, according to experts, with the freeze on thresholds alongside pension reforms cited as key drivers.

Rachael Griffin, tax and financial planning expert at Quilter, described IHT as "now firmly a middle-income issue," noting that with thresholds frozen and further policy changes still feeding through, bills are becoming harder to mitigate.

The Pension Bombshell: April 2027

The most significant change to IHT in a generation arrives in April 2027. From that date, unspent pension pots will be included in your taxable estate for IHT purposes.

Currently, defined contribution pensions sit outside your estate entirely. This has made them the most tax-efficient wealth transfer vehicle available — many people have deliberately drawn down from other assets first specifically to preserve a pension pot for their heirs, knowing it passed free of IHT.

From April 2027, that strategy ends. Your unspent pension will be added to the value of your estate and taxed alongside everything else.

AJ Bell's Sarah Coles warned that this single change is expected to pull 10,500 additional estates into the IHT net in the first year alone, with a further 38,500 estates already liable seeing their bills increase by an average of £34,000.

The position is worse than that headline suggests for estates where the pension beneficiary is a non-spouse. When you die after age 75, your pension beneficiaries already pay income tax on what they draw out. From 2027, they will also face IHT on the pension before they receive it. The combined effect — IHT on the pension pot plus income tax on drawdown — could produce an effective total rate of 67% for beneficiaries of those dying after age 75.

The urgency is real. Research by Wesleyan Financial Services shows nine in ten advisers are already seeing increased pension withdrawals ahead of the changes — but inheritance tax expert Nick Henshaw warns that some of these decisions are irreversible and risk backfiring, with clients triggering income tax today without necessarily improving their overall position. Modelling your specific situation with an adviser before making any changes to your pension drawdown strategy is essential.

What Changed in April 2026

Two significant changes landed at the start of this tax year that affect business owners and farmers in particular.

Agricultural Property Relief (APR) and Business Property Relief (BPR) are now less generous. Previously, qualifying agricultural land and business property could receive 100% relief — meaning they passed entirely free of IHT regardless of value. From April 2026, the 100% relief only applies to the first £1 million of combined agricultural and business property. Above that, relief falls to 50%, producing an effective IHT rate of 20% on the excess. For farming families with land values often running into several millions, this is a material and painful change.

HMRC enforcement is intensifying. More than 14,000 bereaved families have been investigated for potentially underpaid IHT since 2022/23, with case volumes running ahead of the previous year. HMRC is specifically cracking down on property valuations in IHT returns — challenging estates where the declared property value appears below market rate. If your estate includes property and you undervalue it, HMRC is increasingly likely to notice.

Legal Strategies for Reducing IHT

Despite the tightening environment, substantial mitigation is still possible with early planning. The key is starting well before death — most strategies require time to work.

1. Use the Annual Gift Exemption

Every individual can give away £3,000 per year free from IHT, regardless of any other gifting. Unused allowance from the previous tax year can be carried forward — so if you did nothing last year, you can give £6,000 this year. A couple can give £12,000 combined.

Additional small gift exemptions allow you to give £250 to as many individuals as you like per year, provided you have not used another IHT exemption for the same person. Wedding gifts have their own allowances: £5,000 to a child, £2,500 to a grandchild.

These amounts are modest in the context of estate values but compound meaningfully over time. £3,000 per year for twenty years removes £60,000 from an estate — saving £24,000 in IHT.

2. Make Gifts from Surplus Income

This is the most powerful and underused gifting strategy. Gifts made regularly from your normal income — not from capital — can be entirely exempt from IHT immediately, with no seven-year survival period required.

The conditions: the gifts must be regular (not one-off), must genuinely come from income rather than savings or capital, and must not reduce your own standard of living. A retired person with pension income exceeding their living costs who makes regular monthly transfers to children or grandchildren may qualify for this exemption entirely. Meticulous records are essential — HMRC scrutinises these claims carefully.

3. Potentially Exempt Transfers and the Seven-Year Rule

Any gift not covered by an exemption becomes a Potentially Exempt Transfer (PET). If you survive seven years from the date of the gift, it falls entirely outside your estate with no IHT to pay. If you die within seven years, the gift is brought back into the estate calculation — but taper relief reduces the effective IHT rate on gifts made between three and seven years before death:

4. Leave Money to Charity

Charitable gifts in your will are completely exempt from IHT. Better still: if at least 10% of your net estate goes to charity, the IHT rate on the remainder falls from 40% to 36%. This sounds modest but on a large estate the saving can be significant — and on an estate where charitable giving was intended anyway, structuring it to hit the 10% threshold is straightforwardly worthwhile.

5. Take Out Life Insurance Written in Trust

A life insurance policy can be written in trust, meaning the payout goes directly to your beneficiaries without passing through your estate. The proceeds are therefore outside your estate for IHT purposes and can be used to pay the IHT bill on the rest of the estate — preventing beneficiaries from having to sell the family home to raise the cash.

Writing a policy in trust costs nothing extra. You must ensure it is set up correctly at inception — a financial adviser or solicitor can handle this. Whole-of-life policies are typically used for this purpose; they remain in force for your lifetime and pay out however late you live.

6. Consider Trusts

Assets placed into certain types of trust can be removed from your estate over time, though trust law is complex and rules have tightened significantly in recent years. Discretionary trusts, loan trusts, and discounted gift trusts each have different tax treatments and uses. Trusts also trigger their own IHT charges on entry and every ten years. This is an area where professional advice is essential — the wrong trust structure can create problems rather than solve them.

7. Review Your Pension Strategy Ahead of April 2027

Given the incoming pension change, anyone with a substantial defined contribution pension pot should model the IHT impact before April 2027 and review whether their drawdown strategy remains optimal. Increasing pension withdrawals to live on and preserving other assets is a strategy some people have relied on — this logic largely inverts from 2027 when the pension itself becomes taxable. The correct approach varies significantly by individual circumstances and requires modelling with a financial adviser.

When to Act

The earlier estate planning begins, the more tools are available. The seven-year rule, gifts from surplus income, and the regular gifting exemptions all require time to work. By contrast, deathbed gifting is largely ineffective — HMRC is alert to large gifts made in the final months of life, and seven-year taper relief provides limited protection for gifts made in the last three years.

The April 2027 pension change is now less than a year away. If you have a significant pension pot, the window for reviewing your strategy before the rules change is closing. This is not a reason to panic or make irreversible decisions — but it is a reason to have a conversation with an independent financial adviser in the next six months.

Frequently Asked Questions

Does everyone pay inheritance tax? No. IHT currently affects around 4% of estates. However, with thresholds frozen until 2031 and the pension change in 2027, the proportion is expected to rise significantly — particularly affecting estates with London or South East property or substantial pension savings.

Do I pay IHT if I inherit from a spouse? No. Spousal transfers are fully exempt from IHT, regardless of value. The IHT issue typically arises when assets then pass from the surviving spouse to children or others.

Can I give my house to my children to avoid IHT? Only if you also stop living in it. If you give your home away but continue to live there, it is a Gift with Reservation of Benefit and remains in your estate. To use the seven-year rule, the gift must be genuine and unconditional. Downsizing and gifting the proceeds is one approach some families use.

What is the nil-rate band and when did it last change? The nil-rate band is the basic IHT-free threshold, currently £325,000. It has been fixed at this level since 2009. The residence nil-rate band of £175,000 was introduced in 2017 and is also frozen until 2031.

Is IHT paid before or after beneficiaries receive anything? IHT is paid by the estate before assets are distributed. The executors are responsible for calculating and settling the bill with HMRC — generally within six months of the date of death, or interest begins to run. Beneficiaries receive their share after tax has been paid.

Where can I get help with IHT planning? Unbiased connects you with FCA-regulated independent financial advisers specialising in estate planning and IHT. For legal aspects including trusts and wills, look for a solicitor accredited by the Society of Trust and Estate Practitioners (STEP) at step.org.

This article is for informational purposes only and does not constitute financial, tax, or legal advice. IHT rules, thresholds, and reliefs are correct for 2026/27 as published by HMRC and are subject to change. For advice specific to your estate, always consult an FCA-regulated financial adviser and a qualified solicitor.