Inheritance Tax 2026/27 Explained, and the 2027 Pension Change Coming
Inheritance Tax 2026/27 Explained, and the 2027 Pension Change Coming
Inheritance Tax (IHT) is one of the most disliked, and most misunderstood, UK taxes. For 2026/27 the headline thresholds are frozen exactly where they've been for years. But a change due in April 2027 will, for the first time in modern history, pull most unused pension pots into the estate for IHT. If you have a defined contribution pension you weren't planning to spend, this is the single most important thing to understand now.
This guide covers the 2026/27 rules in full, then explains what's coming and how people are planning for it.
Try it yourself: the Inheritance Tax Calculator estimates your potential IHT bill using both nil-rate bands and spouse transfers.
2026/27 IHT thresholds at a glance
| Allowance | 2026/27 | Notes |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Frozen since 2009 |
| Residence Nil-Rate Band (RNRB) | £175,000 | For a main home passed to direct descendants |
| Combined (individual) | £500,000 | NRB + RNRB |
| Combined (couple) | up to £1,000,000 | Both bands transferable to a surviving spouse |
Both bands are frozen until at least April 2030 (announced at the Autumn 2024 Budget). Because house prices and asset values keep rising while the thresholds stand still, "fiscal drag" pulls more estates into IHT each year. The figures above come from the gov.uk Inheritance Tax pages.
The 40% rate (and the 36% charity rate)
Anything in your estate above your available nil-rate bands is taxed at 40%.
There's one important discount: if you leave at least 10% of your net estate to charity, the rate on the rest falls from 40% to 36%. For larger charitable estates this can mean the charity gift costs the family far less than its headline value, because it cuts the tax on everything else.
Spousal transfers and the transferable nil-rate band
Transfers between spouses and civil partners are exempt from IHT, you can leave everything to your husband, wife or civil partner with no tax to pay. More valuable still, any unused nil-rate band passes to the survivor.
So if the first partner to die uses none of their £325,000 NRB (because everything went to the survivor), the survivor's estate can claim two NRBs, £650,000, plus potentially two RNRBs, for a combined £1,000,000. This is why married couples and civil partners can often pass on up to £1m tax-free, while a single person is limited to £500,000.
The Inheritance Tax Calculator lets you model both single and couple scenarios with the transferred bands.
RNRB tapering above £2m estates
The Residence Nil-Rate Band isn't available to everyone. It tapers away for larger estates: for every £2 your estate exceeds £2,000,000, you lose £1 of RNRB. That means an individual's £175,000 RNRB is fully gone once the estate reaches around £2.35m (and a couple's combined RNRB disappears at a higher figure).
This taper catches people who think of themselves as "comfortable" rather than wealthy, particularly where a valuable home sits inside a large estate. Reducing the estate below £2m, for example through lifetime gifting, can restore the full RNRB, which is itself worth up to £70,000 of tax (£175,000 × 40%).
The April 2027 pension–IHT change coming
Important, verify before acting. The following reflects the government's announced direction at the time of writing. The precise mechanics were subject to consultation, so confirm the final rules on gov.uk or with an adviser before making decisions.
Historically, money left in a defined contribution pension has sat outside your estate for IHT, one reason pensions have been such an effective way to pass on wealth. From 6 April 2027, the government has announced that most unused pension funds and death benefits will be brought within the value of the estate for Inheritance Tax.
For anyone who has been deliberately preserving a pension to pass on tax-free, this is a fundamental shift. Combined with frozen thresholds, it means estates that were comfortably under the IHT net could be dragged into it. Planning responses people are discussing include drawing pensions earlier to fund spending or gifting, reviewing the balance between pension and ISA wealth, and making greater use of the gifting exemptions below, all of which depend on the final rules.
The 7-year gift rule
Giving wealth away during your lifetime can reduce your estate, but the timing matters:
- The £3,000 annual exemption. You can give away £3,000 each tax year completely free of IHT, and carry forward one unused year (so up to £6,000 if you didn't use last year's).
- Small gifts and wedding gifts. Gifts of up to £250 per person per year, and larger wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone) are exempt.
- Gifts out of normal income. Regular gifts made from surplus income, not capital, that don't affect your standard of living can be exempt without limit, if properly evidenced.
- Potentially Exempt Transfers (PETs). Larger one-off gifts fall outside your estate entirely if you survive seven years. Die within seven years and the gift is counted back, though taper relief reduces the tax on gifts made between three and seven years before death.
Good record-keeping is essential, especially for gifts out of income, where HMRC expects evidence of the pattern and that it came from surplus.
Using trusts
Trusts remain a core estate-planning tool, though the rules are complex and have their own tax charges:
- Bare trusts, the simplest; the beneficiary is treated as owning the assets.
- Discretionary trusts, trustees decide how and when to distribute; flexible but subject to periodic and exit charges.
- Interest in possession trusts, a beneficiary has a right to income from the trust.
Trusts can remove assets from your estate and control how and when the next generation receives wealth, but they're not a DIY job, the tax interactions are genuinely intricate. Take advice.
Life cover in trust as a liquidity strategy
IHT is normally due within six months of death, often before the estate (and especially the family home) can be sold. That creates a liquidity problem: the tax falls due before the assets can be turned into cash.
A common solution is a life insurance policy written in trust, sized to cover the expected IHT bill. Because the policy is in trust, the payout falls outside the estate (so it isn't itself taxed) and reaches the beneficiaries quickly, giving them the cash to pay the IHT without a forced sale. Our Life Insurance Calculator can help you estimate the level of cover, including the Capital Needs Analysis method advisers use.
Business Property Relief and Agricultural Property Relief
Important, verify before acting. Reliefs for business and agricultural assets were announced to change from April 2026. Confirm the final detail on gov.uk before relying on it.
Business Property Relief (BPR) and Agricultural Property Relief (APR) have historically allowed qualifying business and farm assets to pass with up to 100% relief from IHT. From April 2026, the government announced that the 100% rate would be capped at the first £1m of combined agricultural and business property, with relief above that limited to 50%. For owners of trading businesses and farms above that threshold, this materially changes the planning picture, and professional advice is essential.
When to take professional advice
IHT planning rewards getting the basics right early: using your nil-rate bands, making use of the annual gift exemptions, keeping good records, and reviewing your position whenever the rules change, as they are about to in 2026 and 2027. But trusts, business relief, and the new pension rules are genuinely complex, and mistakes are expensive and hard to reverse. If your estate is near or above £500,000 (single) or £1m (couple), or you own a business or farm, speak to a solicitor or chartered tax adviser.
Frequently asked questions
What's the IHT threshold for 2026/27? £325,000 (Nil-Rate Band) plus up to £175,000 (Residence Nil-Rate Band) where a main home passes to direct descendants, so up to £500,000 for an individual and up to £1m for a couple.
Is my pension subject to Inheritance Tax? For 2026/27, most unused defined contribution pensions sit outside the estate. From April 2027, the government has announced this will change so that most unused pensions are brought into the estate, verify the final rules before acting.
How much can I give away tax-free each year? £3,000 under the annual exemption (plus one carried-forward year), small gifts of £250 per person, certain wedding gifts, and regular gifts out of surplus income. Larger gifts are exempt if you survive seven years.
Does leaving money to charity reduce IHT? Yes. Charitable gifts are exempt, and leaving at least 10% of your net estate to charity cuts the rate on the rest from 40% to 36%.
The bottom line
For 2026/27, IHT thresholds are frozen at £325,000 and £175,000, the rate is 40% (36% for charitable estates), and couples can pass on up to £1m. The big shift is coming in April 2027, when most unused pensions are set to fall inside the estate, so the long-standing strategy of preserving a pension to pass on tax-free needs a rethink. Model your position with the Inheritance Tax Calculator, and if you're using life cover to fund the bill, size it with the Life Insurance Calculator.
Related calculators and guides
- Inheritance Tax Calculator, estimate your IHT bill
- Life Insurance Calculator, size cover to pay an IHT bill from a trust
- Pension Calculator, review your pension in light of the 2027 change
- Capital Gains Tax Calculator, for lifetime gifting decisions
This article is for general guidance only and is not personalised tax or financial advice. Inheritance Tax is complex and forthcoming rules may change before they take effect. For advice tailored to your situation, speak to a qualified solicitor or tax adviser. Current-year figures are sourced from gov.uk.