IHT is charged at 40% on estates above £325,000 (or £500,000 for homes left to direct descendants). Thresholds are frozen until at least 2030. From April 2027, pension pots will be included in estate value for IHT purposes. HMRC collected a record £7.5 billion in 2024/25.
How IHT Works in 2025
Inheritance Tax is charged at a flat rate of 40% on the value of an estate above the nil-rate band (NRB) at the point of death. The standard NRB is £325,000 per person — unchanged since April 2009. On top of this sits the Residence Nil-Rate Band (RNRB) of up to £175,000, available where a home is left to direct descendants.
This means a single person leaving their home to children can pass on up to £500,000 free of IHT. For married couples and civil partners, any unused NRB transfers on death, meaning the surviving partner can in principle pass on up to £1 million — £650,000 in standard NRBs plus £350,000 in RNRBs.
The estate pays IHT, not the beneficiary. It is usually settled before probate is granted and before assets are distributed. HMRC charges interest on unpaid IHT at the Bank of England base rate plus 2.5 percentage points.
The RNRB begins tapering away for estates worth more than £2 million at the point of death, reducing by £1 for every £2 above the threshold. For very large estates (above £2.35 million), no RNRB is available at all.
What Changed in the 2024 Autumn Budget
The Autumn Budget confirmed that both the nil-rate band and the residence nil-rate band will remain frozen until April 2030. This extension — originally set to end in 2028 — means that with UK property values continuing to rise, more estates will be pulled over the IHT threshold through asset appreciation alone rather than any active policy change.
The Office for Budget Responsibility (OBR) forecasts that IHT receipts will rise from £7.5 billion in 2024/25 to approximately £9.7 billion by 2029/30 — a 29% increase over five years driven largely by frozen thresholds and rising asset values rather than a change in the rate.
Agricultural property relief (APR) and business property relief (BPR) were also substantially reformed. From April 2026, combined APR and BPR reliefs will be capped at £1 million per person. Assets above that cap will attract IHT at 20% (half the standard rate). This change is expected to affect farmers with significant land holdings and business owners who had structured their affairs in anticipation of unlimited BPR.
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Find an IHT specialist →Pension Pots and IHT from 2027
This is the single biggest structural change to IHT in a generation. From April 2027, unspent defined contribution (DC) pension wealth — including SIPPs, personal pensions, and most workplace DC pensions — will be included in the value of an estate for IHT purposes.
Currently, pension pots sit entirely outside the estate. Pension trustees hold the money and nominate beneficiaries, meaning HMRC cannot claim IHT on unspent pension wealth regardless of its size. This made DC pensions highly tax-efficient inheritance vehicles: many financial advisers have explicitly recommended clients spend other assets first and leave pension pots intact specifically because of this exemption.
From 2027, this changes. The estate's total IHT liability will include unspent pension wealth above the nil-rate band. The administration is complex — pension schemes will be required to pay the IHT directly to HMRC before releasing funds to beneficiaries. The change is expected to raise £1.46 billion per year for the Treasury by 2029/30 according to HMRC estimates.
The rule does not affect defined benefit (DB) pension income, only the fund value of DC pots. It also does not retrospectively affect pensions already in drawdown in a mechanical sense, but the unspent balance at death will be caught by IHT. Surviving spouses can still inherit pension pots tax-free — the change primarily affects non-spouse beneficiaries such as children.
Who Actually Pays IHT
Despite widespread public concern about IHT, it currently affects a relatively small proportion of deaths. In 2023/24, approximately 27,800 estates — around 4% of all UK deaths — resulted in an IHT charge. The average IHT bill for those estates was approximately £214,000.
However, the distribution is not uniform. IHT is heavily concentrated in London and the South East, where property values mean that even modest homes can push an estate above the threshold. ONS data suggests that a homeowner who bought in London in the 1990s and has a typical investment or savings balance is quite likely to breach the £500,000 threshold on their own, before any pension reform.
The proportion of estates paying IHT has risen from around 2.6% in 2009 to around 4% today and is expected to continue rising as thresholds remain frozen and asset values (particularly property) continue to grow in nominal terms.
The Nil-Rate Band Problem
The nil-rate band of £325,000 was set in April 2009. Since then, UK house prices have risen by approximately 80–100% in many parts of the country. The average UK house price now sits at around £285,000 nationally — but in London and the South East, average prices are above £500,000 and detached homes frequently exceed £750,000.
Had the NRB been indexed to house prices rather than frozen, it would now stand at approximately £585,000. Had it been indexed to CPI, it would be roughly £440,000. The gap between the frozen threshold and asset values is the mechanism by which more estates are drawn into IHT without any change to the stated rate — the classic definition of a stealth tax.
The IFS (Institute for Fiscal Studies) has calculated that if current trends continue and thresholds remain frozen to 2030, the number of estates paying IHT will rise to approximately 7–8% of deaths per year — nearly double current levels — by the end of the decade.
| Estate Value | IHT After NRB Only (£325k) | IHT With RNRB (£500k, home to children) | Couple — Both NRBs (£650k) | Couple — Both NRBs + RNRBs (£1m) |
|---|---|---|---|---|
| £400,000 | £30,000 | £0 | £0 | £0 |
| £600,000 | £110,000 | £40,000 | £0 | £0 |
| £800,000 | £190,000 | £120,000 | £60,000 | £0 |
| £1,000,000 | £270,000 | £200,000 | £140,000 | £0 |
| £1,500,000 | £470,000 | £400,000 | £340,000 | £200,000 |
IHT calculated at 40% after applicable nil-rate bands. Does not account for other reliefs, taper relief on gifts, or specific exemptions. Indicative only.
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Seven Legitimate Ways to Reduce Your IHT Bill
IHT planning is legal and widely practised. The following are all within HMRC rules as of 2026:
- Use your annual gift exemption: You can give away up to £3,000 per year free of IHT. Any unused allowance from the previous year can be carried forward once, giving a maximum of £6,000. Small gifts of up to £250 per person to any number of recipients are also exempt.
- Make potentially exempt transfers (PETs): Gifts to individuals fall outside your estate if you survive for seven years. There is no cap on what you can give — provided you survive, the gift is entirely free of IHT.
- Life insurance written in trust: A whole-of-life policy placed in a trust does not form part of your estate. The payout goes directly to beneficiaries and can be used to meet the IHT bill, preventing executors from having to sell assets to settle the liability.
- Spend your pension last: Until April 2027, this remains one of the most effective strategies. By drawing down other assets first (ISAs, savings, property equity release) and leaving pension wealth untouched, you can pass on more of your estate IHT-free. Review this strategy before April 2027.
- Business property relief: Qualifying business assets — including AIM-listed shares held for two or more years — attract up to 100% BPR, though the £1 million cap from April 2026 changes the picture for larger holdings.
- Charitable giving: Gifts to registered charities are fully exempt from IHT. If you leave 10% or more of your net estate to charity, the IHT rate on the remainder reduces from 40% to 36%.
- Deed of variation: Beneficiaries who inherit can redirect assets to others — including charities — within two years of death via a Deed of Variation. This can restructure an estate retrospectively for IHT purposes.
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