Will your estate pay inheritance tax?

Common questions

How much can you inherit tax-free in the UK?

Each person has a £325,000 nil-rate band (NRB). If you leave a qualifying home to a direct descendant (child, grandchild, step-child, foster-child) you also get the £175,000 residence nil-rate band (RNRB) — so up to £500,000 in total. For couples, the unused NRB and RNRB pass to the surviving spouse, giving a couple a combined £1 million before any IHT is due, provided both meet the RNRB rules. The RNRB tapers above £2 million of estate (£1 lost for every £2 over), so very large estates lose it entirely above £2.35m.

What is the April 2027 inheritance tax change for pensions?

Announced in the 2024 Autumn Budget, from 6 April 2027 most unused defined contribution pension pots become part of the deceased's estate for inheritance tax purposes. Today these sit outside the estate completely, so a £500k DC pot passing to children is IHT-free. After April 2027 the same pot is added to the estate value and taxed at 40% above the nil-rate bands. The OBR forecasts that around 10,500 additional estates a year will pay IHT for the first time as a result, and a further ~38,500 estates will pay more. Defined benefit pensions, charitable bequests and transfers between spouses are not affected.

Do pensions count for inheritance tax in 2026?

No — unused defined contribution pension pots sit outside your estate for IHT under the rules in force until 5 April 2027. That makes the pension a deliberately tax-efficient place to leave wealth: passes to beneficiaries free of IHT, and free of income tax too if you die before age 75 (taxed at the recipient's marginal income tax rate after 75). From 6 April 2027 that changes — see the question above. Defined benefit "death-in-service" lump sums also currently sit outside the estate but the same April 2027 rules will bring most of them in.

How is inheritance tax calculated?

Add up your estate at the date of death (home, savings, investments, second properties, business assets after reliefs, and from April 2027, most unused pensions). Subtract any gifts to spouse/civil partner and to charity (both fully exempt), and any business or agricultural property relief. From the remaining figure, subtract your nil-rate band and (if you qualify) the residence nil-rate band. Whatever is left is taxed at 40% — or 36% if you leave at least 10% of the net estate to charity. Gifts made in the last 7 years can also count back into the estate on a sliding "taper relief" scale.

How can I reduce my inheritance tax bill?

The most-used levers: (1) Use the spousal exemption — leave everything to your spouse on first death so the full nil-rate bands transfer; (2) Use your £3,000 annual gift allowance plus small gifts of £250 to multiple people; (3) Make regular gifts out of surplus income — fully exempt if documented; (4) Survive 7 years after a large gift so it falls outside the estate; (5) Leave 10%+ of your estate to charity to cut the rate from 40% to 36%; (6) Spend the pension first if you're approaching the April 2027 change; (7) Take regulated estate-planning advice once your estate clearly exceeds £1m combined.

Will my children pay tax on my pension if I die?

It depends on when you die and (from April 2027) the size of your estate. Today: pension passes IHT-free; if you die before 75, beneficiaries take it income-tax-free; if you die at 75 or older, beneficiaries pay income tax at their own marginal rate when they withdraw. From April 2027: the pension counts towards your IHT estate, so it can be hit by both IHT (40% above the nil-rate bands at the estate level) AND income tax (at the beneficiary's marginal rate, on post-75 deaths). The Treasury has said the income-tax double-charge will not apply to the IHT-taxed portion, but the detailed regulations are still being finalised.