How much is inheritance tax? 7 year rule and exemptions in 2026

Inheritance tax is also known as ‘death tax’. It is a tax on the money, property and possessions (the estate) of a person who has died.

At a glance

Inheritance tax basics explained: Inheritance tax is generally charged at 40% on the part of an estate above the available tax-free threshold, with exemptions and additional allowances potentially increasing how much can pass tax-free.

Marriage can increase allowances: Spouses and civil partners can generally inherit tax-free and may transfer unused allowances, potentially allowing a couple to leave up to £1 million to their children free of inheritance tax in the circumstances described.

Gifting has important rules: Gifts may remain relevant for inheritance tax for seven years, although annual, small-gift, wedding and regular-income exemptions can allow certain gifts to be made tax-free.

Care funding needs consideration: Giving assets away for inheritance tax planning can still be treated by a council as deprivation of assets when assessing care funding, because there is no equivalent fixed seven-year cut-off for these assessments.

What is inheritance tax?

Inheritance tax is applied if the value of a person’s estate is over a certain threshold. This is known as the nil-rate band.

Statistics from the HMRC show around 4% of estates paid inheritance tax in 2020-21. However, by 2032-33 this looks set to rise to over 7%. This is due to the huge growth in house prices, according to the IFS (Institute of Fiscal Studies).

Exemptions from inheritance tax

In the UK, you will not have to pay inheritance tax if:

1. The estate is below £325,000

This is the standard nil-rate band.

2. You leave your estate to your spouse, civil partner, a charity or a community amateur sports club

Married couples and civil partners can inherit an unlimited amount tax-free, provided the partnership is legally recognised and both partners live permanently in the UK.

3. You leave your home to children or grandchildren

If your estate passes to your direct descendants, your threshold increases to £500,000, provided the estate is worth under £2 million.

4. You inherit from a spouse or civil partner

If your partner did not use their full allowance, you can add it to your own – creating a combined threshold of up to £650,000.

Important: HMRC must be informed of the estate value even if it is below the tax threshold.

How much inheritance tax do you pay to HMRC?

If the estate exceeds the available threshold, IHT is charged at:

40% on the amount above the threshold

Example:

• Estate value: £400,000
• Threshold: £325,000
• Taxable amount: £75,000
• Tax owed: £30,000

36% rate if leaving 10% or more to charity

This reduced rate applies if at least 10% of your net estate is given to charity.

Threshold frozen until 2030

Chancellor Rachel Reeves confirmed that the £325,000 threshold remains frozen until 2030.

Do you pay inheritance tax on private pensions?

Currently private pensions are exempt from inheritance tax.

So at the moment you can leave any unspent pension fund to named beneficiaries without paying any inheritance tax.

Chancellor Rachel Reeves announced in the Budget that from April 2027, this will change.

So if you leave your unspent private pension to anyone other than your spouse or civil partner, they will need to pay inheritance tax.

Is it better to be married to avoid inheritance tax?

There are certainly tax advantages to being married, but the biggest tax advantage is when it comes to inheritance tax.

If a husband or wife dies, the surviving partner can have their unused inheritance nil rate band of up to £325,000 if they leave them their assets. This would leave the survivor with £650,000 free of inheritance tax.

When both die, they will be able to leave the combined assets to their children. This means they can inherit up to £1 million free of inheritance tax.

Who pays inheritance tax on jointly owned property?

If you jointly own a property with a husband or wife or a civil partner and one of you dies, the rest of the property will go to the surviving partner who will pay no inheritance tax.

Joint tenants

If you are unmarried and own the property as ‘joint tenants’ you will not have a specific share in the asset. So each of the tenants or owners have equal rights to the whole property. If one dies, the other owner or tenant will automatically inherit the property.

This means if the value of the property is more than £325,000, the surviving partner may have to pay inheritance tax on any amount over the threshold for the entire property. This could mean the surviving partner having to sell the house to pay inheritance tax.

Tenants in common

If you are unmarried and own the property as tenants in common, each tenant or owner will own a defined share of the property. If one dies, they can leave their share to someone else in their will. You will have to pay inheritance tax if the share of the property of the person who has died is over the £325,000 threshold.

Could giving money away to reduce inheritance tax affect your future care funding?

Changes planned for April 2027 mean unused defined contribution pension funds are expected to be brought into the scope of inheritance tax. This could encourage some people to withdraw pension savings and give money to family members as part of their inheritance tax planning.

However, giving away substantial sums could have implications if you later need help paying for social care.

Lisa Morgan, head of the nursing care fee recovery team at Hugh James Solicitors, warns that inheritance tax planning and the rules councils use when assessing eligibility for help with care costs are separate.

She says: “A common misunderstanding is that inheritance tax planning rules and social care funding rules operate in the same way. In reality, they are entirely separate regimes. A gift that may fall outside an estate for inheritance tax purposes after seven years can still be examined by a local authority when assessing whether someone deliberately reduced assets to avoid care fees.”

When you apply to your local authority for help with care costs, it carries out a financial assessment. If it believes you deliberately gave away or reduced your assets to avoid paying for care, this may be treated as deprivation of assets.

This could include:

• giving substantial sums of money to relatives
• transferring ownership of a property
• putting money or other assets into a trust
• selling an asset for significantly less than it is worth
• unusually high or extravagant spending.

If the council decides deprivation of assets has taken place, it can assess you as though you still have the money or property you gave away. This is known as notional capital. Unlike the seven-year rule associated with inheritance tax gifts, there is no equivalent fixed seven-year cut-off for deprivation of assets assessments.

This does not mean you cannot give money to your children or grandchildren. The circumstances and your reasons for making the gift are important.

It is important to keep records of financial decisions

Ms Morgan recommends keeping evidence explaining significant financial decisions, such as financial advice, retirement plans, cashflow forecasts and records showing a history of regular gifting.

She says: “This evidence may later help demonstrate that the main purpose of the gift was genuine estate planning or family support – rather than avoiding care fees.”

For this reason, inheritance tax planning should take account not only of the potential tax saving but also how much money you may need to retain for your own future expenses, including the possibility of paying for care.

As Ms Morgan puts it: “The safest approach is balanced planning: reducing inheritance tax exposure where appropriate, while still ensuring enough money remains available to provide security and dignity later in life.”

What is the 7 year rule for inheritance tax?

If you give gifts of monetary value less than 7 years before you die, the person in receipt of the gift may have to pay tax on it.

Whether you pay tax will depend on

• Who you have given the gift to and their relationship to you
• How much the gift is worth
• When the gift was given to the person

Gifts subject to inheritance tax include:

• money
• goods such as furniture, paintings, antiques and jewellery
• a house, buildings or land
• stocks and shares which are listed on the London Stock Exchange
• shares that you had for less than 2 years before your death

There is no inheritance tax on gifts given to a husband or wife or a civil partner who live permanently in the UK and the gifts can be limitless.

If a parent sells their house to their child for less than it is worth, then the HMRC will count the difference between its market value and what you sold it for as a gift and will apply tax to it.

If the gift is given to the person three years before you die, the monetary value of the gift will be taxed at 40%.

Any gifts, over the £325,000 tax-free threshold, given between three and seven years before you die will be taxed on a sliding scale. This is known as ‘taper relief’.

​​Each tax year you can give tax free gifts

Every tax year, you can give away a total of £3,000 in gifts or money without this amount being added to the value of your estate and subject to inheritance tax. This is called an ‘annual exemption’.

The £3,000 can be gifted to one person or split between several people.

If you don’t use your annual exemption, you can take it forward to the next tax year but you can only do this for one tax year.

Small gifts allowance

You are allowed to gift up to £250 per person each tax year and give away as many gifts up to £250 as you like. But it needs to be to a different person each time.

Gifts for weddings and civil partnerships

You can give a tax free gift to a person who is getting a married or forming a civil partnership

You can give up to:

• £5,000 to your child
• £2,500 to your grandchild or your great-grandchild
• £1,000 to any other person

It is also possible to combine your two gift allowances in the same tax year. So you can give a wedding gift as well as the £3,000 that is tax-exempt.

Regular payments to another person

You will not be taxed on regular payments that you give to another person to help them with things like living costs.

These payments are called ‘normal expenditure out of income’ and can include:

• paying rent for a child
• paying into a savings account for a child aged under 18
• giving financial help to older relative

Can I give my house to my child but stay living there?

You will also be liable for inheritance tax if you give a gift to someone but you still benefit from it. This is called ‘a gift with reservation’.

A ‘gift with reservation’ would be giving your house to your son or daughter but still continuing to live there.

If you do decide to give your house to your child but continue to live there, they would only avoid inheritance tax when you die if:

• You pay rent at the market rate to your child
• You pay a share of the household bills
• You live there for seven years or longer

If you only give part of your property away or your child moves into the property with you then you do not have to pay rent.

Remember to keep records of any gifts you have given

You should keep records of any gifts you have given. You need to record the value of the gift, what you gave, who you gave it to and when it was given.

Who pays inheritance tax to the HMRC?

The person dealing with the estate is the executor. They are the ones who take the money from the estate to pay the inheritance tax.

It must be paid by the end of the sixth month after the person has died. If it is not paid by then, interest will be charged on top.