UK Inheritance Tax 2025/26: NRB, RNRB, Gifting & 2027 Pension Changes

Every estate gets the Nil-Rate Band (NRB) of £325,000 before any IHT is due. If you leave a home to direct descendants (children, grandchildren), you also get the Residence Nil-Rate Band (RNRB) of £175,000 on top. Both thresholds are frozen until April 2030.

Anything you leave to a UK-domiciled spouse or civil partner is completely IHT-free. Their unused NRB and RNRB also transfer to you on the second death, which is why married couples and civil partners effectively have up to £1 million before IHT bites.

The RNRB is removed at £1 for every £2 your estate exceeds £2 million. That creates a steep effective tax rate for estates between £2m and £2.35m:

A pound of extra estate value between £2m–£2.35m can cost 60p in eventual IHT. Gifts or charity legacies to drop below £2m can be very high-leverage.

You can give away as much as you like, but you must survive 7 years from the date of the gift for it to be completely outside your estate. Gifts made in the 7 years before death use up your NRB first.

• Years 0–3: 40% charge if estate above NRB.
• Years 3–4: 32% (20% taper).
• Years 4–5: 24% (40% taper).
• Years 5–6: 16% (60% taper).
• Years 6–7: 8% (80% taper).
• 7+ years: Completely outside estate.

Note: the taper applies to tax, not the gift's value. A £400,000 gift from someone with no NRB remaining made 5 years before death would be taxed at £400k × 40% × 40% taper = £64,000.

Certain gifts are exempt with no 7-year wait:

• £3,000 annual exemption — can carry forward one unused year only.
• £250 small gifts — unlimited recipients, each capped at £250.
• Wedding gifts — £5,000 to your child, £2,500 to a grandchild, £1,000 to others.
• Gifts to charity — completely exempt, no limit.
• Gifts from surplus income — regular gifts out of spare income (not capital) are immediately exempt. Keep records of income, expenditure and gifts.

This is the single biggest change coming. Historically, unused defined-contribution pension pots passed tax-free (or at marginal-rate income tax if over 75) outside the estate. From 6 April 2027, most unused pension pots will form part of the estate for IHT.

• Death before 75 — beneficiaries will still pay 0% income tax on withdrawals, but 40% IHT may apply first.
• Death after 75 — beneficiaries will pay income tax on withdrawals AND 40% IHT may apply on the pot. Effective rates can exceed 60%.
• Planning should focus on spending pensions first or using them for legitimate retirement income, rather than as IHT-free bequest vehicles.
• Bypass trusts and whole-of-life insurance are being reconsidered by advisors.

These reliefs can wipe out IHT on qualifying assets:

• Business Relief (BR) — 100% on unlisted trading business shares and sole-trader businesses held 2+ years. 50% on some assets used in a business.
• Agricultural Property Relief (APR) — 100% on farmland and farmhouses (owner-occupied or let since 1995).
• From April 2026: BR and APR combined cap at £1m of 100% relief; excess at 50%. AIM-listed shares specifically drop to 50% regardless of holding.

These rules tightened in the November 2024 Budget. Family businesses and working farms face meaningful IHT for the first time in decades.

• Use allowances every year — £3,000 annual exemption × two spouses × 20 years = £120,000 out of estate.
• Gift early — the 7-year clock only runs once. Start now, not later.
• Use normal-expenditure-out-of-income — regular gifts from surplus income are immediately exempt.
• Spouse-first will structures — simple "everything to spouse, then to children" wills transfer both NRB and RNRB efficiently.
• Charity legacies over 10% — drop the IHT rate from 40% to 36% on the taxable part.
• Whole-of-life insurance in trust — covers the IHT bill so beneficiaries don't need to sell illiquid assets.
• Downsizing addition — if you sold a more valuable home and downsized, you can still claim the full RNRB as if you still owned it.