Passing it on: inheritance tax in plain English
Inheritance tax is 40% on an estate above the tax-free bands. It’s often called a voluntary tax, because simple steps taken early can reduce it a lot, and a big change to pensions arrives in April 2027.
Figures checked 15 Oct 2026 for the 2026/27 tax year (6 April 2026 to 5 April 2027), for England, Wales and Northern Ireland; Scotland has its own income tax bands. Tax rules change, usually at each Budget. Next review: after the next Budget, and by 6 April 2027.
The tax-free bands
- £325,000 nil-rate band for everyone, frozen until April 2031.
- £175,000 residence nil-rate band when your home goes to your children or grandchildren; it’s reduced for estates over £2 million.
- Anything left to a spouse or civil partner is free of inheritance tax, and any unused bands pass to them, so a couple can leave up to £1 million tax-free.
Gifts
- £3,000 a year can be given away free of inheritance tax (plus last year’s if you didn’t use it), and gifts of up to £250 to any number of people.
- Regular gifts out of surplus income are exempt if they’re a pattern, come from income rather than savings, and leave your standard of living unchanged. Keep records.
- Larger gifts fall outside your estate if you live seven more years; if you die within seven years, tax on them is reduced after three.
Pensions from April 2027
Until now, pensions have usually been passed on free of inheritance tax, so a common plan was to spend ISAs and other savings first and leave the pension untouched. From 6 April 2027, most unused pension funds and death benefits will count as part of the estate for inheritance tax. Income tax can still apply to what beneficiaries draw if you die after 75. Anyone relying on the old approach should look at it again: spending or gifting from the pension may now make more sense.
Sources: GOV.UK: inheritance tax; gifts; inheritance tax on unused pension funds.