Why More Families Are Paying Inheritance Tax Than Ever Before

Will my family have to pay inheritance tax?

1The inheritance tax nil-rate band (£325,000) and residence nil-rate band (£175,000) are frozen until April 2031
2With average house price growth, the OBR projects hundreds of thousands more estates will breach the threshold over the next five years
3IHT receipts hit £7.1 billion in the first 10 months of 2025/26 — a record high
4Families who never expected to pay IHT are now finding they do — particularly homeowners in London and the South East
5There are legitimate steps that can reduce the IHT your family will pay

It depends on the size of the estate. More families are paying inheritance tax than at any point in recent history — not because the tax rates have gone up, but because the thresholds have been frozen since 2009 in real terms, and are now confirmed frozen until April 2031. With house prices having risen significantly in the same period, many families who expected to be well below the threshold are finding they are not.

What is the inheritance tax threshold?

Inheritance tax applies to the value of an estate above the nil-rate band (NRB). The current rates are:

Nil-rate band: £325,000 per person— the first £325,000 of each person's estate is free from IHT
Residence nil-rate band: £175,000 per person — an additional allowance for passing the family home to direct descendants (children or grandchildren)
Married couples and civil partners can transfer their unused allowances to the surviving partner, giving a combined threshold of up to £650,000 (NRB only) or up to £1 million (with both NRBs and RNRBs)
The rate above the threshold is 40%, or 36% if at least 10% of the estate is left to charity

These thresholds were last meaningfully increased in 2009 (NRB) and 2017 (RNRB). They are now frozen until April 2031.

What is “fiscal drag” and why does it matter?

Fiscal drag is what happens when tax thresholds are not increased in line with inflation or asset price growth. The rate of tax stays the same — but more people are pulled into it as the value of their assets rises.

In the case of IHT, the mechanism is simple: if a family home was worth £280,000 in 2009 and is now worth £480,000, it has moved from below the nil-rate band to significantly above it — without a single policy change to IHT rates or allowances.

The freeze until 2031 means this effect will continue for another five years. The OBR projects that hundreds of thousands of additional estates will breach the IHT threshold over this period as a result of rising property and asset values.

Which families are most likely to pay IHT?

The greatest impact is felt by:

Homeowners in London and the South East — where average house prices frequently exceed the nil-rate band alone
People in their 70s and 80s who bought property in the 1980s and 1990s and have seen it increase in value by several multiples
Families where the deceased was not married — a surviving unmarried partner cannot benefit from the transferable nil-rate band
Estates close to but just below the threshold — where a moderate increase in house prices or the addition of savings tips the estate into the IHT net

IHT receipts reached £7.1 billion in the first 10 months of 2025/26 — a record level, up from £4.6 billion in the equivalent period just five years earlier. This growth is almost entirely driven by the combination of frozen thresholds and rising asset values.

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The residence nil-rate band — and why not everyone can claim it

The residence nil-rate band (RNRB) of £175,000 per person gives additional relief for estates that pass a qualifying home to direct descendants. However, it is not available in every situation:

The home must pass to a child, grandchild, or other direct descendant (not a sibling, friend or charity)
The RNRB is tapered for estates worth more than £2 million — it reduces by £1 for every £2 above £2 million, disappearing entirely at £2.35 million (single) or higher for couples
Unmarried surviving partners cannot inherit the transferable RNRB — it only transfers between spouses and civil partners
If the deceased sold their home before death, the RNRB may be lost unless it was downsized after July 2015

For a full explanation of the residence nil-rate band, see our guide on the residence nil-rate band.

How to check whether the estate will face IHT

To work out whether IHT applies, you need to:

Add up all the estate's assets: property, savings, investments, business interests, and (from April 2027) pensions
Subtract any outstanding mortgage or debts
Add any gifts made in the 7 years before death that exceed the annual exemptions
Compare the total to the available allowances (nil-rate band plus RNRB, plus any transferred allowances from a deceased spouse)
IHT at 40% applies to anything above the threshold

Use our free UK inheritance tax calculator for an instant estimate, or see our full IHT 2026/27 guide.

Ways to reduce the IHT your family will pay

There are several legitimate ways to reduce an IHT bill — but most require planning before death, not after. If you are administering an estate, the focus is on accurately calculating what is owed and claiming all available reliefs. For planning purposes, common approaches include:

Gifting during your lifetime. Gifts made more than 7 years before death are outside the estate. Annual exemptions (£3,000 per year) and small gift exemptions can also be used immediately.
Leaving money to charity. If at least 10% of the net estate is left to charity, the IHT rate on the remainder reduces from 40% to 36%. For larger estates, this can result in a significant saving even after the charitable gift.
Using pension contributions. Before April 2027, pensions are outside the estate. After April 2027, this benefit is removed for unspent pension funds.
Ensuring the nil-rate band and RNRB are fully used. Executors should check whether the deceased had a transferred nil-rate band from a previous spouse and ensure the RNRB is claimed where eligible.
Trusts and other structures. There are various trust arrangements that can reduce IHT — but these require specialist professional advice and must be set up well in advance of death.

This is not financial advice — for your specific situation, take professional advice from a solicitor or qualified financial adviser.

Not sure if your loved one's estate will face IHT? Use Farra's free IHT calculator, then let Farra help you manage every step of the estate administration — get started here.