What You Need to Know about Inheritance Tax

Inheritance Tax (IHT) is one of those topics that most of us prefer not to think about, but a little planning today can make a big difference in the future.

There has been a lot of coverage in the news and press about IHT and the changes that are coming in from 06 April 2026 to assets that qualify for Agricultural Property Relief and/or Business Property Relief and from 06 April 2027 for unused Pension pots.

Whether you’re thinking about your own estate and the impact now and in the future, or you’ve recently lost a loved one, understanding how IHT works can help you protect more of your assets for your family.

At Hegarty, we help clients navigate the complexities of IHT with clear advice and tailored estate planning strategies. Here’s our straightforward guide to the essentials.

What Is Inheritance Tax?

IHT is a tax on the estate – which includes property, money and possessions - of someone who has died. In the UK, the standard IHT rate is 40%, applied to the value of the estate above a certain threshold. This rate can be lowered to 36% if at least 10% of the net qualifying estate is left to charity.

The Inheritance Tax Threshold (Nil Rate Band)

For most estates, the IHT threshold is £325,000. This is known as the Nil Rate Band. There may be the availability of the Residence Nil Rate Band which can increase that value up to £500,000 in some circumstances as mentioned in the section below.

• If your estate is worth less than £325,000, usually there’s no IHT to pay but consideration needs to be given to the value of any gifts made in the 7 years before the date of death.
• If it’s worth more, tax is charged at 40% on the amount above the threshold.

The Residence Nil Rate Band (RNRB)

If you leave your home to direct descendants (e.g. your children and/or grandchildren), you may benefit from an additional allowance called the Residence Nil Rate Band.

For the 2025/26 tax year, this can be up to £175,000. This means that, in certain circumstances, a single person could pass on up to £500,000 without paying IHT, and a married couple or civil partners could potentially pass on up to £1 million.

Note that if your estate is in excess of £2 million the RNRB will usually be subject to tapering so the RNRB is reduced by £1 for every £2 your estate is over £2 million.

The £1 Million Allowance

From 6 April 2026, the Government announced that Business Property Relief (BPR) and Agricultural Property Relief (APR) at 100 percent will be capped to the first £1 million of qualifying assets and thereafter the relief will effectively reduce the IHT payable by 50 percent, i.e. a 20 percent tax rate on qualifying assets above £1 million.

They also confirmed that the £1 million would not be transferrable so it is important to consider “locking in” the £1 million allowance on death by leaving qualifying assets to a chargeable beneficiary rather than a spouse, civil partner or charity.

Spouses and Civil Partners

Transfers between spouses or civil partners are generally exempt from IHT. In addition, any unused threshold from the first spouse or civil partner to die can be transferred to the surviving spouse or civil partner, potentially doubling the available allowance. Added considerations arise where a spouse or civil partner is not domiciled in the UK and it is advisable that advice is sought if this applies to your circumstances.

Gifts and the Seven-Year Rule

You can give away assets during your lifetime to reduce the size of your estate. Most gifts are exempt from IHT if you live for at least seven years after making them. If you do not survive for at least seven years from the date of the gift then the recipient of the gifts may have to pay IHT if the value exceeds the available Nil Rate Band for the estate.

Any gift that exceeds the available Nil Rate Band for the estate is subject to IHT but “Taper Relief” may be available if more than 3 years have passed since the date of the gift, the rates then apply as follows: