What your family will pay in inheritance tax.

Inheritance tax is the one tax you never pay yourself. Your family pays it after you die, on money you already paid tax on once while you were alive. That feels unfair, and it makes the tax easy to ignore until nobody can do much about it.

For most estates the bill is smaller than people fear. The rules give you sizeable allowances and several ways to use them. Most of those tools need years to run, so if you start planning at 60 you keep far more than if you start at 75.

This covers what the tax is, who pays it, and what you can do while you still have the time to change the answer. It is general information for the 2026/27 tax year, not personal advice.

i. How much can you leave tax-free?

You get a tax-free allowance called the nil-rate band: the first £325,000 of your estate passes on free of inheritance tax. If you leave your main home to your children or grandchildren, the residence nil-rate band adds up to £175,000 more. That gives one person up to £500,000, and a married couple or civil partners up to £1,000,000 between them. You can check the current figures on GOV.UK.

Above your allowances the rate is 40%. An estate of £700,000 that uses the full £500,000 of bands pays tax on the £200,000 over the line, a bill of £80,000. Leave 10% or more of your net estate to charity and the rate on the rest drops to 36%.

One fact drives more bills than any allowance. The government has frozen these thresholds and will hold them until 5 April 2031, with no rise for inflation or house prices — a freeze extended by a further year at the Autumn Budget in November 2025. Your home keeps gaining value while the £325,000 band sits where it has sat since 2009, so each year more families cross into paying. They are no richer in real terms. The band has not moved in over fifteen years.

You never pay this tax yourself. That is why it is so easy to leave for the people who will.

ii. Do you pay inheritance tax on money left to your spouse?

No. Between spouses and civil partners there is normally no inheritance tax, whatever the size of the estate. You can leave everything to each other. Any allowance the first partner does not use passes to the survivor, which is how a married couple reach that combined £1,000,000 before any tax falls due.

The spouse exemption defers the tax. It does not remove it. The money passes untaxed to the surviving partner, and then on the second death HMRC taxes the whole combined estate at once, after it has grown for several more years. Many couples treat the first death as the end of the problem. Their children meet the bill on the second.

iii. How does the 2027 pension change affect your estate?

Until now a pension has sat outside your estate, which made it one of the most tax-efficient things to leave behind. That ends on 6 April 2027. For deaths on or after that date, HMRC counts most unused pension funds and pension death benefits as part of your estate for inheritance tax, under the Finance Act 2026. Pensions passing to a spouse or civil partner stay exempt, and death-in-service benefits from a current employer are excluded. You can read the detail in the GOV.UK technical note.

One practical point that is widely misunderstood: reporting and paying the tax on those pension funds falls to your personal representatives, not to the pension scheme. The original consultation put it the other way round, and a lot of published commentary still says so.

If you planned to spend your other savings first and leave the pension untouched for your family, this changes the maths. A pot you expected to fall outside the net now counts inside it. Pensions remain an excellent way to save. The change affects the order you draw your money in retirement, and it rewards a review before the date arrives. I have written about it in full in the April 2027 change, in plain English, and it now sits at the centre of most retirement plans I build.

iv. How can you reduce your inheritance tax bill?

Several allowances cut the bill, and each one works better the earlier you start.

Give while you live. You can give away £3,000 each tax year free of inheritance tax, and if you skipped last year you can carry the allowance forward once. Separate gifts of up to £250 to any number of people are free too, though you cannot combine the two for the same person, and gifts on a wedding are free up to set limits. These sums look small in one year and add up across a decade.

Give from income you do not need. Regular gifts paid out of your surplus income, rather than your capital, fall free of inheritance tax right away, as long as you make them regularly and they leave your own standard of living intact. If your pension income runs well above what you spend, this moves money out of your estate every year you keep it up. It is the most under-used exemption in the rules, largely because it requires records that most people never keep.

Use the seven-year rule for larger gifts. Give away more than your allowances and the gift becomes a potentially exempt transfer. Survive seven years after making it and it leaves your estate for good. Die within seven years and it counts back in, though taper relief can cut the tax on gifts you made three to seven years before death. One point trips people up: taper relief only reduces the tax on the slice of your gifts above the nil-rate band, so on smaller gifts it changes nothing. The rule works, but slowly, which is the whole reason to start young.

Cover what is left with life cover in trust. Where a bill is unavoidable, a policy written in trust can meet it without adding to the estate itself, so your family are not forced to sell a house to pay HMRC. That sits with protection planning rather than gifting, but it belongs in the same conversation.

Two further reliefs exist for business and agricultural assets, and both changed materially on 6 April 2026. Full relief is now capped by a £2.5 million allowance per person, with 50% relief above it, and shares that are not listed on a recognised exchange — AIM shares among them — now attract 50% relief rather than 100%, whatever their value. If you own a business, a farm, or an AIM portfolio bought for inheritance tax reasons, the answer you were given before April 2026 is probably out of date.

v. Why does inheritance tax planning work best early?

Every worthwhile move here rewards an early start. A gift needs to outlive you by seven years to leave your estate. Gifting from income only counts if you keep it up over time. And while you wait, the frozen threshold pulls a growing share of your estate into the net. The earlier you start, the more of these tools you can still use.

None of this means giving away money you might need, or letting tax decide how you live. It means knowing your number, your allowances, and what you want to pass on, then acting while the tools still work. That is the work of inheritance tax planning, and a decade of runway beats a final year of scrambling. If you are on the receiving end rather than the giving one, I have also written about what to do when you have just inherited.

Work it out now, while the years are still on your side. The planning you do today is what your family inherits instead of the tax.

— Andrew

Andrew Daw is a Diploma qualified independent financial planner based in Bath, working with clients across Bath, Bristol and the South West. More about Andrew.