If you’re selling, downsizing or simply getting your affairs in order this year, inheritance tax is worth a proper look. The thresholds are frozen until 2031, more homes are being pulled into the tax net as property values rise, and a big change to how pensions are treated is on its way. Whether you’re helping ageing parents plan ahead or thinking about your own estate, here’s where things actually stand.
What is inheritance tax, and who pays it?
Inheritance tax (IHT) is charged on the value of someone’s estate when they die: their property, savings, investments and possessions, minus any debts. It’s the estate that pays, not the people who inherit, and it’s usually settled by the executor before the rest of the estate is distributed.
Most estates never pay a penny of it. But because property makes up such a large share of most people’s wealth, and house prices have kept climbing while the tax-free allowances haven’t moved, more families are being caught than ever before.
The nil-rate band and residence nil-rate band
Every individual has a standard tax-free allowance, the nil-rate band, of £325,000. This has been frozen since 2009 and, following the November 2025 Budget, will now stay at that level until 5 April 2031.
On top of this, if you leave your main home to children, grandchildren or other direct descendants, you can use the residence nil-rate band of £175,000, also frozen until 2031. Together, that gives an individual up to £500,000 tax-free. Because both allowances can transfer between spouses and civil partners, a married couple or couple in a civil partnership can shelter up to £1 million between them.
Anything above your available allowance is taxed at 40%, dropping to 36% if you leave at least 10% of your net estate to charity. You can check the current figures directly on GOV.UK’s inheritance tax pages.
The £2 million taper
If an estate is worth more than £2 million, the residence nil-rate band starts to shrink: it loses £1 of allowance for every £2 the estate sits above that threshold. By the time an estate reaches £2.35 million, the residence nil-rate band has gone entirely, leaving only the standard £325,000 allowance. This taper is also frozen until 2031, confirmed in the government’s inheritance tax thresholds policy paper. If your estate, including your home, is getting close to that figure, it’s worth having this modelled properly rather than guessing.
Selling or downsizing? Your allowance may still be protected
A question we hear a lot from homeowners thinking about a smaller property or a move into retirement living: does selling the family home mean losing the residence nil-rate band?
Not necessarily. If you’ve sold or given away a home since 8 July 2015, and other assets of equivalent value pass to your direct descendants when you die, HMRC’s “downsizing addition” can preserve some or all of the allowance you’d otherwise lose. It’s a genuinely useful rule, but the calculations aren’t always straightforward, so it’s worth raising with a solicitor or adviser before you sign anything. If you’re weighing up whether downsizing makes sense for you at all, our guide to downsizing your home and our piece on buying a retirement property cover the practical side of the move.
Gifting and the seven-year rule
Giving money or assets away during your lifetime is still one of the simplest ways to reduce a future inheritance tax bill, but the rules haven’t changed much and it’s easy to get wrong.
What you can give away tax-free each year
Everyone has an annual exemption of £3,000, which can be split between as many people as you like. If you didn’t use last year’s allowance, you can carry it forward one year, giving you up to £6,000 in total. Separately, you can give up to £250 to as many individuals as you like each year, as long as they haven’t already received part of your £3,000 exemption. There are also specific allowances for weddings and civil partnerships, and gifts between spouses or civil partners are exempt in full. The full list is set out on GOV.UK’s gifts and inheritance tax guidance.
Larger gifts and the seven-year clock
Bigger gifts, sometimes called potentially exempt transfers, fall outside your estate for inheritance tax purposes if you survive seven years after making them. Die within that window and the gift may still be taxed, though taper relief can reduce the amount due the longer you’ve survived. It’s a useful strategy, but don’t gift away money you might need later in life. If you’re not sure whether a gift, a trust or simply leaving things as they are makes most sense, a financial adviser can talk you through the trade-offs. MoneyHelper’s free guidance on inheritance tax is a good starting point if you’d rather do some reading first.
Trusts, and what’s changed for business and farming assets
Trusts can still be useful, particularly if you want to control how and when money reaches younger beneficiaries, or you’re concerned about how it will be managed. They’re not automatically tax-efficient, though, and the rules around them are detailed, so this is one area where proper advice earns its fee.
One change worth flagging if you or a family member owns a business or farmland alongside your home: from 6 April 2026, 100% relief on qualifying agricultural and business property is capped at £1 million per person, combined, with only 50% relief above that. The £1 million allowance can be transferred between spouses and civil partners. It’s a significant shift from the unlimited relief that used to apply, so anyone in this position should get it reviewed sooner rather than later.
The big one coming in 2027: pensions
Until now, most unused pension pots have sat outside your estate for inheritance tax purposes, making them one of the more tax-efficient things to pass on. That changes from 6 April 2027, when most unused pension funds and death benefits will be brought into the value of your estate. Death-in-service benefits from registered schemes are excluded. If part of your later-life planning has relied on your pension staying outside your estate, it’s worth revisiting that plan well before the change takes effect.
What this means if you’re selling, buying or planning ahead
For most homeowners, none of this changes the day-to-day business of buying or selling a property. But if your estate includes a home that’s grown substantially in value, particularly anywhere prices have risen fastest, it’s worth understanding roughly where you stand. A conversation with your local agent about your property’s current value, alongside proper advice from a solicitor or financial adviser, gives you a much clearer picture than guesswork. Our Members can help with an up-to-date valuation as a starting point for that conversation.
Frequently asked questions
Do I have to pay inheritance tax on my parents’ house?
Not directly. Inheritance tax is paid by the estate before it’s distributed, not by the people who inherit. If the estate’s value, including the property, is below the available allowances, no tax is due at all.
What is the inheritance tax threshold in 2026?
For the 2026/27 tax year, the standard nil-rate band is £325,000 per person, plus up to £175,000 if a home passes to direct descendants. That’s up to £500,000 for an individual, or £1 million for a married couple or civil partners once both allowances transfer.
Can I avoid inheritance tax by gifting my house to my children now?
You can gift it, but it’s rarely as simple as it sounds. If you continue living in the property without paying a market rent, HMRC generally still treats it as part of your estate under the “gift with reservation of benefit” rules. Speak to a solicitor before making any decision like this.
Does downsizing to a smaller home affect my inheritance tax allowance?
Not necessarily. The residence nil-rate band can still apply through the “downsizing addition” if you’ve sold or given away a home since July 2015 and left assets of equivalent value to direct descendants. The calculation can be complex, so get advice specific to your situation.
This article is general information only and doesn’t take account of your personal circumstances. It isn’t financial or legal advice. Inheritance tax rules can be complex and are subject to change, so please speak to a qualified solicitor or financial adviser before making decisions about your estate, gifts or property.
