# UK Inheritance Tax Explained: Who Pays, How Much, and How to Avoid the 40% Death Tax

> Inheritance tax charges 40% on estates over £325,000 — here's how it works, who pays, and how to legally reduce your bill to zero.

*Section: News — By Daily Junction Editorial Team (Newsroom) — Published July 18, 2026 — 7 min read*

Canonical URL: https://dailyjunction.org/news/uk-inheritance-tax-explained-2026
Tags: inheritance tax, IHT, estate planning, tax planning, death tax, nil-rate band, residence nil-rate band, UK tax

## Key takeaways

- Inheritance tax (IHT) charges 40% on estates over £325,000 (nil-rate band), or £500,000 if you leave your home to children (residence nil-rate band)
- Married couples can combine allowances for £1 million tax-free (£325k + £175k residence × 2), but only 4% of estates pay IHT (most are below threshold)
- IHT raised £7.5 billion in 2023-24 (1.3% of total tax revenue), paid by 27,000 estates, with average bill £275,000
- You can avoid IHT by: gifting money 7+ years before death, using annual gift exemptions (£3,000/year), leaving to spouse (tax-free), or giving to charity (tax-free)
- Business assets and farmland get 100% relief (tax-free), making IHT avoidable for the wealthy but unavoidable for middle-class homeowners with £500k-£1m estates

**Inheritance tax (IHT)** is a tax on the estate (property, money, possessions) of someone who has died. It charges **40% on estates over £325,000** (the **nil-rate band**), or **£500,000** if you leave your home to children (adding the **residence nil-rate band** of £175,000). Married couples can combine allowances for **£1 million tax-free** (£325k + £175k × 2). But only **4% of estates** pay IHT (most are below the threshold), and it raised **£7.5 billion in 2023–24** (1.3% of total tax revenue), paid by **27,000 estates** with an average bill of **£275,000**. IHT is controversial — critics call it a "death tax" that punishes savers and is easily avoided by the wealthy (business relief, trusts, offshore assets). Here is everything you need to know about inheritance tax — who pays, how much, and how to legally reduce your bill to zero.

## How Inheritance Tax Works

### What is taxed?

Inheritance tax is charged on your **estate** when you die. Your estate includes:

- **Property** (house, land)
- **Savings** (bank accounts, ISAs, Premium Bonds)
- **Investments** (shares, bonds, funds)
- **Possessions** (cars, jewellery, art, furniture)
- **Life insurance** (if not in trust)

Your estate does **not** include:

- **Pensions** (usually pass tax-free to beneficiaries)
- **Jointly owned property** (passes to surviving owner)
- **Gifts made 7+ years before death** (see below)

### The nil-rate band (£325,000)

The **nil-rate band** is the amount you can leave tax-free. It is currently **£325,000** (frozen since 2009).

If your estate is **below £325,000**, you pay **no IHT**.

If your estate is **above £325,000**, you pay **40% on the amount over £325,000**.

**Example**:

- Estate: £500,000
- Nil-rate band: £325,000
- Taxable: £175,000
- IHT: £70,000 (40% of £175,000)

### The residence nil-rate band (£175,000)

The **residence nil-rate band (RNRB)** is an additional allowance if you leave your home to your **children or grandchildren**. It is currently **£175,000** (introduced 2017, fully phased in 2020).

This increases the tax-free threshold to **£500,000** (£325,000 + £175,000).

**Conditions**:

- You must own a home (or have owned one and downsized/sold it)
- You must leave it to your **children or grandchildren** (not siblings, nieces, nephews, friends)
- If your estate is over **£2 million**, the RNRB is reduced by £1 for every £2 over (so it disappears at £2.35 million)

**Example**:

- Estate: £600,000 (including £400,000 home)
- Nil-rate band: £325,000
- Residence nil-rate band: £175,000
- Total tax-free: £500,000
- Taxable: £100,000
- IHT: £40,000 (40% of £100,000)

### Married couples and civil partners

Married couples and civil partners can **combine their allowances**, giving a total tax-free threshold of **£1 million** (£325,000 + £175,000 × 2).

**How it works**:

- When the first spouse dies, their estate passes to the surviving spouse **tax-free** (no IHT on transfers between spouses)
- The surviving spouse inherits the deceased spouse's **unused nil-rate band** and **residence nil-rate band**
- When the surviving spouse dies, their estate can use **both allowances**

**Example**:

- First spouse dies, leaves everything to surviving spouse (no IHT, unused allowances transferred)
- Surviving spouse dies with estate of £900,000
- Combined nil-rate band: £650,000 (£325,000 × 2)
- Combined residence nil-rate band: £350,000 (£175,000 × 2)
- Total tax-free: £1 million
- Taxable: £0
- IHT: £0

## Who Pays Inheritance Tax?

Only **4% of estates** pay IHT (27,000 out of 600,000 deaths per year). Most estates are below the threshold.

### Who pays?

IHT is paid by estates worth **over £325,000** (or £500,000 with residence nil-rate band, or £1 million for couples).

**Typical estates that pay IHT**:

- **London and South East homeowners** (house prices are high, so estates exceed £500,000)
- **Wealthy individuals** (savings, investments, second homes)
- **Business owners** (though business assets often get relief, see below)

**Who does not pay?**:

- **Most people** (96% of estates are below the threshold)
- **Married couples** (can combine allowances for £1 million tax-free)
- **People who give away their wealth** (gifts made 7+ years before death are tax-free)

## How Much Does Inheritance Tax Raise?

IHT raised **£7.5 billion in 2023–24** (1.3% of total UK tax revenue).

This is paid by **27,000 estates** (4% of deaths), with an average bill of **£275,000**.

### Why so little?

IHT raises relatively little because:

- **Most estates are below the threshold** (96% of estates pay nothing)
- **Married couples can combine allowances** (£1 million tax-free)
- **Business and farm relief** (see below) allows wealthy people to avoid IHT
- **Trusts and offshore assets** allow the very wealthy to avoid IHT

## How to Avoid Inheritance Tax

### 1. Leave everything to your spouse

Transfers between spouses are **tax-free** (no IHT). This defers IHT until the second spouse dies, and allows you to combine allowances (£1 million tax-free).

### 2. Give money away (7-year rule)

Gifts made **7+ years before death** are **tax-free**. If you die within 7 years, the gift is taxed (though **taper relief** reduces the rate after 3 years).

**Taper relief**:

- **0–3 years**: 40% IHT
- **3–4 years**: 32% IHT
- **4–5 years**: 24% IHT
- **5–6 years**: 16% IHT
- **6–7 years**: 8% IHT
- **7+ years**: 0% IHT

**Example**:

- You give £100,000 to your children
- You die 5 years later
- The gift is taxed at **24%** (taper relief)
- IHT: £24,000

### 3. Use annual gift exemptions

You can give away **£3,000 per year** tax-free (no 7-year rule). You can also carry forward one unused year (so £6,000 in one year).

Other exemptions:

- **£250 per person** (small gifts, unlimited recipients)
- **£5,000** to a child getting married
- **£2,500** to a grandchild getting married
- **£1,000** to anyone else getting married
- **Regular gifts from income** (e.g., paying a grandchild's school fees) are tax-free if they do not reduce your standard of living

### 4. Give to charity

Gifts to charity are **tax-free** (no IHT). If you leave **10%+ of your estate to charity**, the IHT rate on the rest is reduced from **40% to 36%**.

**Example**:

- Estate: £500,000
- Nil-rate band: £325,000
- Taxable: £175,000
- Give 10% to charity: £50,000
- Taxable (after charity): £125,000
- IHT at 36%: £45,000 (instead of £70,000 at 40%)

### 5. Business relief (100% tax-free)

**Business assets** get **100% relief** (no IHT) if you own them for **2+ years** before death. This includes:

- **Shares in an unlisted company** (e.g., family business)
- **Shares in AIM-listed companies** (Alternative Investment Market)
- **Business property** (e.g., factory, shop, farm)

This is a **massive loophole** that allows wealthy people to avoid IHT by investing in AIM shares or family businesses.

### 6. Agricultural relief (100% tax-free)

**Farmland** gets **100% relief** (no IHT) if you own it for **2+ years** and use it for farming. This is why wealthy people buy farmland to avoid IHT.

### 7. Trusts

**Trusts** can be used to reduce IHT, but they are complex and require professional advice. Trusts allow you to:

- **Give assets away** but retain some control
- **Protect assets** from creditors, divorce, or care home fees
- **Reduce IHT** by moving assets out of your estate

But trusts have their own tax rules (10-year charges, exit charges), so they are not always beneficial.

### 8. Life insurance in trust

**Life insurance** payouts are usually part of your estate (and taxed at 40%). But if you put the policy **in trust**, the payout goes directly to your beneficiaries (tax-free).

This is a simple way to cover your IHT bill without reducing your estate.

## The Debate

### Arguments for IHT

- **Taxes wealth, not work** — IHT taxes unearned wealth (inheritance), which is fairer than taxing earned income
- **Reduces inequality** — IHT prevents the concentration of wealth in a few families (dynasties)
- **Raises revenue** — £7.5 billion per year funds public services

### Arguments against IHT

- **Double taxation** — the money was already taxed when earned (income tax, capital gains tax)
- **Punishes savers** — people who save and invest are penalised, while people who spend everything pay nothing
- **Easily avoided by the wealthy** — business relief, trusts, and offshore assets allow the rich to avoid IHT, so it falls on the middle class (£500k–£1m estates)
- **Emotionally painful** — paying tax on a deceased parent's estate feels cruel
- **Discourages saving** — people spend their wealth to avoid IHT, rather than passing it on

### Should IHT be abolished?

Some argue IHT should be abolished because it raises little revenue (£7.5 billion, 1.3% of total tax), is easily avoided by the wealthy, and is unpopular.

Others argue it should be **strengthened** — close loopholes (business relief, trusts), lower the threshold, or increase the rate.

The Conservative Party has flirted with abolishing IHT, but it is politically difficult (it would benefit the wealthy and cost £7.5 billion per year).

## The Bottom Line

Inheritance tax (IHT) charges 40% on estates over £325,000 (nil-rate band), or £500,000 if you leave your home to children (residence nil-rate band). Married couples can combine allowances for £1 million tax-free (£325k + £175k residence × 2), but only 4% of estates pay IHT (most are below threshold). IHT raised £7.5 billion in 2023-24 (1.3% of total tax revenue), paid by 27,000 estates, with average bill £275,000. You can avoid IHT by: gifting money 7+ years before death, using annual gift exemptions (£3,000/year), leaving to spouse (tax-free), or giving to charity (tax-free). Business assets and farmland get 100% relief (tax-free), making IHT avoidable for the wealthy but unavoidable for middle-class homeowners with £500k-£1m estates. Inheritance tax is controversial — it taxes wealth, reduces inequality, and raises revenue, but it is easily avoided by the wealthy (business relief, trusts, offshore assets) and falls on the middle class. Most people do not pay IHT (96% of estates are below the threshold), but those who do pay a lot (average £275,000). If you are likely to pay IHT, plan ahead — give money away, use exemptions, put life insurance in trust, and take professional advice. The 7-year rule is the most powerful tool — give away your wealth and survive 7 years, and it is tax-free.

## Frequently asked questions

### Do I have to pay inheritance tax on my parents' house?

Only if their estate (house + savings + possessions) is over £325,000 (single) or £650,000 (couple), or £500,000 (single) / £1 million (couple) if they leave the house to children. If the estate is below the threshold, no IHT. If above, you pay 40% on the amount over the threshold. Example: £600,000 estate, £500,000 threshold (with residence nil-rate band) = £100,000 taxable, £40,000 IHT bill.

### Can I give my house to my children to avoid inheritance tax?

Yes, but you must survive 7 years after the gift for it to be IHT-free. If you die within 7 years, the gift is taxed (taper relief reduces the rate after 3 years). Also, if you continue living in the house after gifting it, it's a 'gift with reservation' and still counts as part of your estate (unless you pay market rent to your children).

### Is inheritance tax fair?

Debatable. Supporters say it taxes wealth, reduces inequality, and prevents dynasties. Critics say it's a 'death tax' that punishes savers, double-taxes income (already taxed when earned), and is easily avoided by the wealthy (business relief, trusts, offshore assets). Only 4% of estates pay IHT, but it raises £7.5 billion per year, so it's a significant revenue source.

## Sources

- [GOV.UK — Inheritance tax](https://www.gov.uk/inheritance-tax)
- [HMRC — IHT statistics](https://www.gov.uk/government/statistics/inheritance-tax-statistics)
- [Money Helper — Inheritance tax guide](https://www.moneyhelper.org.uk/en/family-and-care/death-and-bereavement/inheritance-tax)
- [Which? — Inheritance tax planning](https://www.which.co.uk/money/tax/inheritance-tax)

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