Inheritance tax exemptions and reliefs: a plain-English guide
Inheritance tax (IHT) is charged on the estate of a person who has died. The tax applies to the value of the estate above the nil-rate band (NRB), which is the tax-free threshold.
The NRB currently stands at £325,000 and is frozen at that level until at least April 2031. There is also a residence nil-rate band (RNRB) of £175,000, which applies when someone leaves their main home to a direct descendant such as a child or grandchild. Both thresholds are frozen until April 2031. Above those thresholds, inheritance tax is charged at 40%.
Several exemptions and reliefs can reduce the amount of IHT an estate owes. In addition, from 6 April 2027, most unused pension funds will be brought into the estate for IHT purposes under the Finance Act 2026, a significant change covered in our dedicated guide on inheritance tax on pensions.
This article gives a plain-English overview of the main exemptions and reliefs. IHT is a complex area, so if you need guidance on a specific estate, request a consultation with a probate specialist.
The spouse and civil partner exemption
Transfers between spouses or civil partners are generally exempt from inheritance tax, regardless of the value involved. This means a surviving spouse can inherit their partner’s entire estate with no IHT liability.
Any unused NRB can also be transferred to the surviving spouse or civil partner, potentially doubling the tax-free threshold on the second death. The same applies to the RNRB.
One situation caps that exemption. The old test asked whether the receiving partner was domiciled in the UK. Since 6 April 2025 it asks whether they are a long-term UK resident, which broadly means UK resident for at least 10 of the previous 20 tax years. If the person who died was long-term resident but their partner is not, the exemption stops at £325,000. The surviving partner can elect to be treated as long-term resident, though that brings their worldwide assets into UK inheritance tax.
Pensions and the spousal exemption
From 6 April 2027, most unused pension funds will form part of the taxable estate. However, pensions left to a surviving spouse or civil partner will still benefit from the spousal exemption and will not trigger an IHT charge.
Gifts and the annual exemption
Lifetime gifts may be subject to IHT unless they fall within an exemption. The most commonly used is the annual exemption, which allows an individual to give away up to £3,000 per tax year free of IHT. If the full £3,000 is not used in one year, the unused portion can be carried forward to the following tax year, but only for one year.
Other gift exemptions include:
- Gifts between spouses or civil partners, which are generally exempt, subject to the long-term UK residence restriction described above.
- Gifts to UK-registered charities, which are fully exempt.
- Small gifts of up to £250 to any number of recipients in a single tax year. You cannot use this for someone who has already received part of your £3,000 annual exemption.
- Wedding and civil partnership gifts. A parent can give £5,000, a grandparent or great-grandparent £2,500, and anyone else £1,000.
- Regular gifts out of surplus income. There is no upper limit on these, provided the gifts are regular, come from income rather than savings, and do not reduce your standard of living.
That last exemption is the most valuable and the most often lost. Your executors have to prove it after you have died using Schedule IHT403. They will need a year-by-year record of your income, your normal spending and the gifts you made. Keep a simple annual note while you are alive, with a short letter explaining what you intend to do and why.
The seven-year rule
If a gift does not fall within an exemption, it may still escape IHT if the person who made it survives for seven years afterwards. This is known as the seven-year rule. A gift made within seven years of death is not simply added to the estate. It becomes chargeable in its own right, and it uses up the nil-rate band first, before anything the person still owned when they died. Gifts made more than seven years before death fall outside the calculation entirely.
Who pays the tax on a failed gift?
This surprises most people. The tax on a gift that fails is not the estate’s bill first. The person who received the gift is primarily liable. The tax is normally due six months after the end of the month of death, and interest may be charged after that deadline. If it remains unpaid 12 months after the end of the month of death, HMRC can also look to the executors. So if you are administering an estate, tell anyone who received a large gift that the bill is theirs, and tell them early.
Taper relief on gifts
Taper relief can reduce the IHT charge on gifts made more than three years before the person died. It does not reduce the value of the gift itself. Instead, it reduces the rate of tax applied to it.
The reductions work as follows:
- Three to four years before death: tax rate reduced by 20%
- Four to five years before death: tax rate reduced by 40%
- Five to six years before death: tax rate reduced by 60%
- Six to seven years before death: tax rate reduced by 80%
For example, a gift made six years before death would attract a tax rate of 8% (40% reduced by 80%), rather than the standard 40%. Taper relief only applies where the total value of gifts made in the seven years before death exceeds the available nil-rate band, so in many cases the relief has no practical effect.
Charitable giving and inheritance tax
Gifts to charities and qualifying non-profit organisations are fully exempt from IHT. A gift made in a will or during a person’s lifetime to a registered UK charity is deducted from the estate before IHT is calculated, whatever its value.
Qualifying gifts include cash, shares, property and gifts made through a trust. The charity must qualify as a UK charity for tax purposes.
There is also an incentive for those who leave at least 10% of their net estate to charity: the IHT rate on the rest of the estate reduces from 40% to 36%.
Business Property Relief
Business Property Relief (BPR) reduces the value of qualifying business assets for IHT purposes. It can apply to shares in unquoted companies, certain land and buildings, and machinery and equipment used in a qualifying business, provided the deceased owned the business or asset for at least two years before death. Land, buildings, machinery and equipment must also have been used mainly for a qualifying business during that period.
Where an estate includes company shareholdings, see our guide on transferring shares after the death of a shareholder.
BPR from 6 April 2026
The Finance Act 2026 reformed BPR with effect from 6 April 2026. BPR now shares a combined allowance with Agricultural Property Relief (see below). The first £2.5 million of combined qualifying business and agricultural property attracts 100% relief. Any value above that receives 50% relief, giving an effective IHT rate of 20% on the excess.
Any unused portion of the £2.5 million allowance is transferable between spouses and civil partners, so a couple can potentially shelter up to £5 million of qualifying assets at 100% relief.
Certain assets attract 50% relief outright and fall outside the combined allowance entirely. These include land, buildings and machinery owned personally but used in a qualifying business, controlling shareholdings in listed companies, and shares traded on AIM.
BPR is subject to specific conditions. Always seek advice from a probate or tax specialist to confirm whether it applies to a particular estate.
Agricultural Property Relief
Agricultural Property Relief (APR) reduces the value of qualifying agricultural property for IHT purposes. It can apply to farmland, pasture, growing crops and certain farm buildings. Livestock, farm machinery and equipment do not qualify for APR, though they may qualify for BPR instead.
One limit on APR is worth understanding. It only covers the agricultural value of the land, meaning what it would be worth if it could only ever be farmed. Where land carries development potential, the extra value sits outside APR. Business Property Relief may cover that balance where the land is used in a working farming business, so the two reliefs are best modelled together.
To qualify, the property must have been owned and occupied for agricultural purposes immediately before death. The minimum ownership period is two years where the owner farmed the land themselves, or seven years where the land was let to a tenant farmer.
Our full guide to Agricultural Property Relief and probate covers the reform and the transitional rules in detail.
APR from 6 April 2026
APR is now subject to the same combined allowance as BPR under the Finance Act 2026. The first £2.5 million of combined agricultural and business property qualifies for 100% relief. Value above that attracts 50% relief and an effective IHT rate of 20% on the excess. The allowance is transferable between spouses and civil partners.
As with BPR, APR is subject to specific conditions. Seek professional advice to confirm whether it applies.
The consequences of getting IHT wrong
The rules governing inheritance tax exemptions and reliefs are detailed and interact in ways that are easy to misread. An error in either direction carries real consequences: overpaying deprives beneficiaries of their inheritance, while underpaying can leave the executor or administrator personally liable to HMRC for the shortfall.
Where IHT remains payable after all exemptions and reliefs have been applied, there is still the question of how to fund it before estate assets can be released.
Check the free routes first. HMRC’s Direct Payment Scheme lets the deceased’s own bank pay the tax before probate is granted, using form IHT423. Where the estate includes land, a business or qualifying shares, the tax can be paid in ten annual instalments, and for agricultural and business property those instalments are normally interest-free. If the estate genuinely cannot raise the money, you can also ask HMRC to postpone payment until after the grant.
Where none of those work, an inheritance tax loan can bridge the gap. It is a commercial product with a cost attached, so it is worth exhausting the free options before taking one.
For specialist guidance, get a probate quote from an expert solicitor.
Frequently asked questions
What is the inheritance tax threshold in 2026/27?
The standard nil-rate band is £325,000. There is also a residence nil-rate band of £175,000, available when a main home passes to a direct descendant such as a child or grandchild. Both thresholds are frozen until April 2031. A married couple or civil partners can combine their allowances, potentially sheltering up to £1 million from IHT.
Will my pension be subject to inheritance tax?
Under current rules (2026/27), most unused pension funds sit outside the estate for IHT. However, the Finance Act 2026 changes that. From 6 April 2027, most unused pension funds and pension death benefits will be included in the estate for IHT purposes and may be taxed at 40%. Pensions left to a surviving spouse or civil partner remain exempt. See our guide on inheritance tax on pensions for more detail.
How does the seven-year rule work for gifts?
A gift made to an individual that is not covered by an exemption may still escape IHT if the person who made it survives for seven years afterwards. If death occurs within seven years, the gift becomes chargeable in its own right and uses the nil-rate band before the estate is calculated. Taper relief may reduce the tax due on the gift if it was made more than three years before death. Read our full guide to the inheritance tax seven-year rule.
Who is personally liable if the wrong amount of IHT is paid?
The executor or administrator of the estate is responsible for calculating and paying the correct amount of IHT. If the wrong amount is paid and HMRC raises an enquiry, the executor can be held personally liable for any underpayment. This is one of the main reasons professional advice matters, particularly for larger or more complex estates.
This article is for general guidance only and does not constitute legal, tax or financial advice. Rules and thresholds can change and every estate is different. For advice on your own circumstances, speak to a qualified professional. You can book a free legal consultation through The Probate Network.
