Inheritance Tax: the freeze, the allowances and what still works

Inheritance Tax has a reputation as a tax on other people. For most of its life that was fair: a small minority of estates paid it, and anyone with a decent adviser and a little notice could usually plan their way around the edges. Both halves of that sentence are now out of date. Receipts reached £8.5 billion in 2025/26, a fifth consecutive record, and the official forecast has them approaching £15 billion by 2031. That growth is not coming from a rate rise. The rate has not moved. It is coming from standing still.

The main threshold, the nil rate band, has been £325,000 since 2009 and is now fixed until April 2031, a freeze that will eventually span 22 years. Had it simply tracked inflation it would sit above £500,000 today. Every year the threshold stays put while house prices, portfolios and pension funds drift upwards, a new layer of ordinary estates crosses the line without anyone announcing a tax increase. Economists call it fiscal drag. Executors call it a surprise.

And while the thresholds stand still, everything around them keeps moving, which is why wills and plans written years ago are worth rereading against the tax as it stands today. The place to start is what an estate can pass on before the 40% rate begins.

What an estate can pass on tax free

The mechanics are simple at heart. Everything a person owns at death, less debts, is valued. The first £325,000 is taxed at nothing. If the estate includes a home, or the proceeds of one under the downsizing rules, left to children or grandchildren, a further residence allowance of up to £175,000 applies. Above the allowances, the rate is 40%.

Anything left to a spouse or civil partner is exempt without limit, and whatever allowances the first of a couple does not use pass to the survivor. That is how the familiar £1 million figure for a couple is built, and why the order of deaths and the drafting of wills matter so much.

The £1 million a couple can pass on, drawn to scale. It needs a home worth at least £350,000 going to direct descendants, and it erodes for larger estates.

Two catches sit inside that picture. The residence allowance tapers away by £1 for every £2 the estate exceeds £2 million, so it is gone entirely by £2.35 million for a single person and £2.7 million for a couple relying on both. And it only works where the home passes to direct descendants, so leaving everything into certain trusts, or sideways to siblings, can throw it away by accident. Wills written before 2017, when the residence allowance arrived, are worth rereading for exactly this reason.

Giving it away, and the myth about taper relief

The oldest planning tool is still the best one: give assets away and survive seven years, and they leave the estate entirely. Such gifts are potentially exempt transfers, which is the legislation's way of saying the clock decides. Die within seven years and the gift comes back into the reckoning, using up the nil rate band first and potentially creating tax of its own.

Here is the misconception that will not die. Taper relief does not reduce the value of a gift that is counted, it reduces the tax on a gift, and only where the gift itself exceeds the nil rate band. Someone who gives away £200,000 and dies five years later gets no taper at all, because a £200,000 gift sits within the £325,000 band and carries no tax to taper. What the gift does do is absorb the band, pushing more of the estate into the 40% zone. For larger gifts the taper is real: tax on the excess falls to 32% where death comes in the fourth year, then 24%, 16% and 8% through years five, six and seven.

Around the seven year clock sit the smaller exemptions, unchanged for so long they have become a museum exhibit. Each person can give £3,000 a year, a figure fixed since 1981, plus £250 to any number of separate recipients, plus wedding gifts of £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else. Modest, but they work immediately, with no seven year wait.

The gift that costs less than it gives

Everything left to charity is exempt, which is reason enough for many. But the system goes further: leave at least 10% of the taxed part of the estate to charity and the rate on the remainder drops from 40% to 36%. The interaction produces a result that surprises people every time it is run.

For the charities and trusts we work with, the same rules are the other side of the coin: legacies are among the most valuable income a charity receives precisely because they arrive free of this tax, and legacy campaigns that explain the 36% mechanism tend to resonate with exactly the supporters who have estates in scope.

Six months, then the meter runs

Inheritance Tax is due six months after the end of the month of death, and interest runs on anything unpaid after that, which is faster than probate often moves. The tax generally has to be paid, or at least arranged, before the grant of probate is issued, a sequencing problem that catches estates whose value sits in property rather than cash. The pressure valves are worth knowing: tax tied up in land, controlling shareholdings and business or farm property can be spread over ten annual instalments, and banks will often release funds from the deceased's accounts directly to HMRC before probate.

Executors carry the responsibility here personally, which is why valuations, lifetime gift records and the seven year history deserve care rather than guesswork. The gift record is the one that most often does not exist: nobody else can reconstruct what the deceased gave, to whom and out of what, and the surplus income exemption in particular lives or dies on the records kept during life.

Estimate the exposure on an estate