Inheritance Tax in 2026 — Nil-Rate Band and Residence Allowance

Inheritance Tax in 2026 — Nil-Rate Band and Residence Allowance

Inheritance Tax (IHT) hits more UK estates each year as house prices outpace allowances. In 2026 the rules are largely unchanged from prior years but the practical relevance has grown. Here’s where you stand.

The Two Allowances

• Nil-Rate Band (NRB): £325,000 per person. Estates below this owe no IHT.
• Residence Nil-Rate Band (RNRB): Additional £175,000 when leaving the main home to direct descendants (children, grandchildren).
• Combined per person: Up to £500,000.
• Per married couple: Up to £1,000,000 (transferable allowances).

Both bands are frozen until April 2030 — meaning more estates get pulled into IHT each year as house prices and assets grow.

The 40% Rate

Anything above the combined allowance is taxed at 40% for IHT purposes. If you’ve made certain charitable gifts of 10%+ of the net estate, the rate drops to 36%.

Worked Example: A Typical UK Couple

• Estate value at second death: £1,300,000
• House value: £700,000 left to children
• Combined NRB + RNRB: £1,000,000
• Taxable estate: £300,000
• IHT owed: £300,000 × 40% = £120,000

The 40% rate kicks in only on the excess — a common misconception is that the entire estate is taxed.

The RNRB Taper

The Residence Nil-Rate Band starts to taper at estates over £2 million. For every £2 of estate value above £2M, £1 of RNRB is lost. By £2.7M, the RNRB is fully gone.

This affects wealthy estates — many otherwise eligible families lose this £175k allowance.

Gifts and the 7-Year Rule

Lifetime gifts may reduce IHT — but only if you survive 7 years after making them. Gifts within 7 years of death are added back to the estate, subject to taper relief:

• 0–3 years before death: 100% of gift value added back (full IHT applies)
• 3–4 years: 80% (taper relief starts)
• 4–5 years: 60%
• 5–6 years: 40%
• 6–7 years: 20%

Gifts to spouses are exempt regardless of survival.

Annual Gift Exemptions

You can gift up to £3,000 per tax year free of any IHT consideration (no 7-year wait). Unused allowance from the previous year carries forward one year. So a couple who haven’t gifted in two years can gift £12,000 (£3k × 2 years × 2 people) immediately.

Small gifts up to £250 to as many people as you like also escape entirely.

Wedding gifts: £5,000 to each child, £2,500 to each grandchild, £1,000 to anyone else.

Trusts — When Useful

Trusts can shelter assets from IHT but are complex. Common uses:

• Discretionary trust for grandchildren’s education funding
• Bare trust for adult children inheriting at age 25+
• Life insurance written in trust — proceeds skip the estate entirely

Always seek professional advice before setting up a trust — costs typically £1,000–£5,000 to establish.

Life Insurance Solution

A common strategy: take out a whole-of-life insurance policy written in trust, with the sum insured roughly equal to your expected IHT bill. The payout doesn’t form part of the estate, so it provides the cash beneficiaries need to pay HMRC without selling property.

Bottom Line

IHT planning matters from about £700,000 combined estate value. Use annual gift exemptions every year, plan major gifts at least 7 years before death where possible, and consider a life-insurance-in-trust strategy for predictable estate sizes. For estates over £2 million, professional advice is essential due to the RNRB taper.