Inheritance tax was once seen as a concern mainly for the wealthy. That picture has shifted. With thresholds frozen and property values rising in many areas, more families may find themselves affected each year. Understanding the 2026 thresholds can be a useful first step when thinking about how your estate might pass to your family.
The nil-rate band explained
Every individual can pass on up to £325,000 free of inheritance tax. This is known as the nil-rate band. Anything above it may be taxed at 40%, depending on the circumstances. For married couples and civil partners, any unused portion transfers to the surviving partner, so a couple may be able to combine allowances to pass on up to £650,000 before the residence allowance is considered.
The residence nil-rate band
An additional allowance applies when you leave your main home to direct descendants, such as children or grandchildren. This residence nil-rate band is £175,000 per person. Combined with the standard nil-rate band, a couple may be able to pass on up to £1 million before inheritance tax applies, subject to the conditions being met.
There is an important catch. The residence nil-rate band tapers away for larger estates. For every £2 your estate exceeds £2 million, you lose £1 of the residence allowance. As a result, larger estates may lose some or all of this allowance.
Why the freeze matters
Thresholds have not risen in line with inflation or property prices. With both allowances frozen until 2030, the real value of your tax-free estate shrinks every year. This phenomenon, sometimes called fiscal drag, means families who never considered themselves wealthy are increasingly liable.
The freeze does the work of a tax rise without the headline. Each year of frozen thresholds quietly pulls more estates above the line.
How families reduce their exposure
With early, considered advice, some families may be able to reduce a future liability. Whether any of this applies depends entirely on your circumstances. Options that are sometimes considered include:
- Lifetime gifting, using annual exemptions and the seven-year rule to move assets out of your estate.
- Trusts, placing assets in trust to control how and when they pass while reducing the taxable estate.
- Business and agricultural relief, valuable reliefs for owners of qualifying businesses and farmland.
- Pension planning, using pensions strategically as part of a wider estate plan.
Each of these carries conditions and trade-offs, and none is suitable for everyone. What may be appropriate depends entirely on your circumstances, which is why individual advice tends to be more useful than an off-the-shelf document.
Your next step
If your estate, including your home, pension and investments, is approaching or above £325,000 per person, it is worth understanding your exposure now rather than later. The earlier you plan, the more options remain open, particularly the seven-year gifting rule.