Published: June 2026 | Fact-Checked & Audited By: David Vance, CTA FCA (Chartered Tax Advisor & Accountant)
This guide is fully updated for the 2026/27 HMRC tax year. All calculations and tax rules have been audited against official UK legislation.
Inheritance Tax (IHT) is a tax levied on the estate of someone who has died, including their property, money, and personal possessions. With UK property prices rising, more families find their estates crossing the thresholds for IHT. However, with careful planning and an understanding of HMRC gifting rules, you can significantly reduce your family’s future tax burden. In this guide, we explain how the Nil Rate Bands work and outline the rules for tax-free gifting.
Understanding the Nil Rate Bands
Inheritance Tax is charged at a standard rate of **40%** on the value of your estate that exceeds your tax-free thresholds. There are two primary thresholds that determine your tax-free allowance:
- The Nil Rate Band (NRB): This is the baseline tax-free allowance, fixed at **£325,000** per individual.
- The Residence Nil Rate Band (RNRB): An additional allowance of up to **£175,000** if you pass your main home to direct descendants (children, grandchildren, or stepchildren). Note that the RNRB starts to taper off by £1 for every £2 that the estate’s total value exceeds £2 million.
Spousal Transfer: If you are married or in a civil partnership, you can pass your entire estate to your surviving partner completely tax-free. Additionally, any unused portion of your Nil Rate Bands transfers to your spouse. When the second spouse dies, their combined estate can have a tax-free allowance of up to **£1 million** (£325k + £175k multiplied by two).
HMRC Gifting Rules: How to Reduce Your Estate
Gifting assets while you are alive is one of the most effective ways to lower your estate’s value below the IHT thresholds. HMRC classifies gifts into three main categories:
1. Exempt Gifts (Immediately Tax-Free)
You can make several types of gifts that are immediately excluded from your estate for tax purposes, regardless of when you die:
- Annual Exemption: You can gift up to **£3,000** in total each tax year. Any unused allowance can be carried forward for one tax year (up to a maximum of £6,000).
- Small Gifts: You can make unlimited gifts of up to **£250** per person per tax year, provided they have not received any part of your £3,000 annual exemption.
- Gifts out of Normal Income: Regular gifts made out of your surplus income (like paying for a grandchild’s school fees) are exempt, provided they do not reduce your standard of living.
- Wedding Gifts: You can give tax-free gifts to couples getting married: up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to anyone else.
2. Potentially Exempt Transfers (The 7-Year Rule)
Any gift to an individual that exceeds your annual allowances is classified as a **Potentially Exempt Transfer (PET)**. These gifts only become fully tax-free if you survive for **7 years** from the date the gift was made. If you die within 7 years, the gift is added back to your estate and may be taxed. However, the tax rate on the gift decreases over time if you survive past year 3 (known as Taper Relief):
| Years Between Gift and Death | Inheritance Tax Rate on the Gift |
|---|---|
| Under 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% (Fully Exempt) |
To run your own estate value calculations, estimate potential tax liabilities, and model gifting timelines, check out our Inheritance Tax Calculator.
Frequently Asked Questions (FAQ)
Q: What counts as a gift for IHT purposes?
A: A gift is anything of value that you transfer to another person without receiving equivalent value in return. This includes cash, physical property, shares, or selling an asset to a family member for less than its market value (the difference counts as the gift).
Q: Can I gift my house to my children and continue living in it?
A: If you gift your house but continue living there rent-free, HMRC classifies this as a **Gift with Reservation of Benefit**. The property remains part of your estate for IHT purposes. To make it a valid gift, you must pay full market rent to your children and pay your share of utility bills.
Q: Who is responsible for paying Inheritance Tax?
A: The executor of your estate is responsible for filing the IHT return and paying the tax out of the estate funds before distributing inheritance to the beneficiaries. If a gift is taxed due to the 7-year rule, the person who received the gift is usually responsible for paying the tax.
Q: What is the Residence Nil Rate Band tapering limit?
A: If the net value of your estate exceeds £2 million, the Residence Nil Rate Band of £175,000 is reduced by £1 for every £2 over the threshold. For estates valued at £2.35 million or more, the RNRB is completely lost.
Q: Can I use trusts to reduce my IHT bill?
A: Yes. Placing assets inside a trust can remove them from your personal estate, making them exempt from IHT after 7 years. However, trusts have their own complex tax rules, including entry charges, 10-year anniversary charges, and exit charges, so expert advice is recommended.