Inheritance tax on death

WAE.08 - Inheritance Tax on Death

The charge. Under IHTA 1984 s.4, death is treated as a transfer equal to the value of the deceased's estate immediately before death. Identify the IHT estate and allowable liabilities, then account for exemptions and reliefs before applying the available nil-rate bands and tax rate. Do not tax the gross estate first.

Core figures (2026/27)

• Nil-rate band (NRB): £325,000, taxed at 0%. Earlier chargeable transfers can use it before the death transfer.
• Death rate: 40% on the chargeable value above the available bands, subject to the charity-rate rules below.
• Transferable NRB (ss.8A-8C): the unused percentage from a predeceased spouse or civil partner can be claimed on the survivor's death. The increase is capped at 100%, giving a maximum NRB of £650,000 at current figures.

Residence nil-rate band

• RNRB: up to £175,000. Normally a qualifying residential interest must be closely inherited. The home must satisfy s.8H's residence test, including its deemed-residence rule for qualifying job-related accommodation and an intention to occupy the home. Entitlement is limited by the qualifying value inherited. Separate downsizing rules can preserve relief when a former home has been sold or replaced.
• Closely inherited (s.8K) includes children and remoter descendants, with statutory extensions for step, adopted and foster children and qualifying guardianship relationships. It also includes a descendant's spouse or civil partner, and their surviving spouse or civil partner who has not remarried or formed another civil partnership. Siblings, nephews and nieces do not qualify merely through that relationship. Where a trust is involved, check its type and terms rather than assuming relief.
• Brought-forward RNRB (s.8G): claim the unused percentage from a predeceased spouse or civil partner, capped at a 100% addition. This can give £350,000 before taper and the other eligibility limits. It is separate from the s.8A NRB claim, not an automatic doubling.
• Taper: reduce the default allowance (own RNRB plus any brought-forward amount) by £1 per £2 that the IHT estate exceeds £2,000,000, after allowable liabilities but before exemptions and BPR/APR. Apply the qualifying-value limit after this taper calculation. A £175,000 allowance is fully tapered at £2.35m; a full £350,000 combined allowance is fully tapered at £2.7m. The taper threshold itself remains £2m.
• RNRB applies to the death transfer, not lifetime gifts, including failed PETs.

Exemptions and the charity rate

• Spouse/civil partner (s.18): qualifying transfers are generally exempt. For transfers from 6 April 2025, the special cap applies where the transferor is a long-term UK resident but the recipient spouse or civil partner is not. The limit is the ordinary NRB at the transfer, currently £325,000, reduced by previous transfers using this exemption. A valid election to be treated as long-term UK resident can remove this restriction. Do not substitute the old domicile test.
• Charity (s.23): qualifying gifts are exempt and do not consume the NRB.
• 36% rate (Schedule 1A): test whether the charitable donated amount is at least 10% of the baseline amount for the relevant estate component. The reduced rate applies to that qualifying component, not automatically the entire estate; an election can merge components. Broadly, the baseline starts with the component's chargeable value after liabilities, exemptions and reliefs, deducts its share of the available ordinary NRB, then adds back the charity exemption. RNRB is not deducted in this baseline calculation.

BPR / APR from 6 April 2026

For deaths on or after 6 April 2026, the combined allowance for 100% business and agricultural property relief is £2,500,000, not £1m (IHTA ss.104, 116 and 124D-124F; Finance Act 2026 Schedule 12).

• The allowance covers property eligible for the 100% rate across both reliefs together. Otherwise-qualifying value above the available allowance receives 50% relief. Property restricted to the 50% category, such as qualifying AIM shares, does not become eligible for 100% relief. The underlying qualification and ownership/occupation conditions still matter.
• Qualifying chargeable lifetime gifts made on or after 30 October 2024 within seven years of death use the allowance before the death estate, in date order.
• An unused allowance from a predeceased spouse or civil partner can be claimed on the survivor's death, increasing the maximum to £5m. Where the first death was before 6 April 2026, its unused percentage is treated as 100%. This does not remove the surviving estate's own eligibility and prior-gift restrictions.

Lifetime gifts and PET ordering

An ordinary outright gift by one individual to another, with no retained benefit, is normally a potentially exempt transfer (PET) to the extent not already exempt (s.3A). It is assumed exempt while the seven-year outcome is pending. Survival for seven years or more makes it exempt; earlier death makes it chargeable, though the tax may be nil.

Apply the relevant seven-year cumulation in chronological order (s.7): earlier chargeable transfers, including failed PETs, use the NRB before later transfers and the death estate. There is no fresh NRB for each recipient. Cumulation does not itself put the gifted asset back into the death estate; gifts with reservation have separate rules.

Taper relief reduces tax on the gift, not its value or the NRB it uses. For a failed PET, taper starts only when the gift was more than three years before death. Exactly three years gives no reduction; where no tax is payable on the gift, taper gives no benefit.

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