Why More Families Are Paying Inheritance Tax Than Ever Before

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%. It falls to 36% where at least 10% of the baseline amount — broadly the estate after exemptions, reliefs and the nil-rate band — passes to charity

The nil-rate band was last increased in April 2009. The residence nil-rate band was introduced in April 2017 and reached its current £175,000 in April 2020. Both are frozen until 5 April 2031, as is the £2 million taper threshold.

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 runs to 5 April 2031, so the effect continues. HMRC's own estimate of the most recent one-year extension is that it adds 1,400 taxpaying estates in 2028 to 2029 and 2,900 in 2029 to 2030 compared with raising the thresholds by CPI — increases of 0.2 and 0.4 percentage points in the proportion of UK deaths on which inheritance tax is paid.

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

HMRC's annual receipts bulletin records inheritance tax receipts of £8.5 billion in 2025 to 2026, up from £3.5 billion in 2006 to 2007. The growth reflects the combination of frozen thresholds and rising asset values.

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:

1. Add up all the estate's assets: property, savings, investments, business interests, and (from April 2027) pensions
2. Subtract any outstanding mortgage or debts
3. Add any gifts made in the 7 years before death that exceed the annual exemptions
4. Compare the total to the available allowances (nil-rate band plus RNRB, plus any transferred allowances from a deceased spouse)
5. 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.

What determines the amount an estate pays

Most of what reduces an inheritance tax bill is fixed before death, not after it. If you are administering an estate, the work is calculating what is owed accurately and claiming the reliefs the estate is entitled to. The main provisions are:

• Lifetime gifts. Gifts made more than 7 years before death are outside the estate. The annual exemption (£3,000 a year), the small gifts exemption and gifts out of surplus income are exempt immediately.
• Charitable legacies. Where at least 10% of the baseline amount passes to charity, the rate on the rest of that component falls from 40% to 36%.
• Pensions. For deaths before 6 April 2027, unused pension funds are generally outside the estate. For deaths on or after that date they are brought within it, though benefits passing to a surviving spouse or civil partner remain exempt.
• Transferred allowances. A nil-rate band or residence nil-rate band unused on the death of an earlier spouse or civil partner can be claimed on the second death, but it is not applied automatically.
• Trusts. Assets settled into trust have their own inheritance tax regime, including ten-year and exit charges, and the treatment depends on the type of trust and when it was created.

This guide explains the rules; it does not recommend a course of action.

Not sure if your loved one's estate will face IHT? Use Farra's free IHT calculator