Inheritance Tax: gifts, estates and tax planning explained for 2026/27

Inheritance Tax can affect the transfer of property, investments, business interests and other wealth when someone dies, as well as certain gifts made during their lifetime. Understanding how the rules work is important for people planning their estates and for beneficiaries dealing with assets they have inherited.

For most beneficiaries, receiving an inheritance does not itself create an immediate personal Inheritance Tax bill. Any tax due is normally dealt with by the deceased’s estate before assets are distributed. However, inherited assets can create future Income Tax or Capital Gains Tax liabilities depending on what happens after they are received.

The wider Inheritance Tax UK rules also cover lifetime gifts, trusts, business assets, agricultural property and gifts where the original owner continues to benefit from the asset. Effective Inheritance Tax planning therefore involves much more than simply considering the value of an estate at death.

This guide explains how Inheritance Tax works, who is responsible for paying it, the treatment of lifetime gifts, important Inheritance Tax exemptions, gifts with reservation of benefit and practical estate planning considerations for 2026/27. Inheritance Tax sits alongside the wider Income Tax and Capital Gains Tax rules covered in our ultimate guide to personal tax in the UK.

What is Inheritance Tax?

Inheritance Tax (IHT) is a tax that can apply when wealth is transferred following death and, in some circumstances, during a person’s lifetime.

An estate can include:

• Residential and commercial property.
• Cash and bank accounts.
• Shares and investment portfolios.
• Business interests.
• Land.
• Personal possessions.
• Certain lifetime gifts.
• Interests in some trusts.

Before determining whether Inheritance Tax is payable, the estate needs to be valued and allowable debts, exemptions and reliefs considered.

The detailed tax-free thresholds are covered separately because they can change and depend on individual circumstances. For estate planning purposes, it is equally important to understand which assets fall into the estate and which transfers may qualify for relief or exemption.

Who is responsible for paying Inheritance Tax?

When someone dies, the executors or personal representatives are generally responsible for dealing with the estate’s Inheritance Tax obligations.

Their responsibilities can include:

• Identifying the deceased’s assets and liabilities.
• Obtaining appropriate valuations.
• Reviewing lifetime gifts.
• Identifying available exemptions and reliefs.
• Submitting the necessary information to HMRC.
• Arranging payment of any tax due.
• Distributing the remaining estate to beneficiaries.

Beneficiaries do not normally pay Inheritance Tax simply because they receive money or property from an estate. However, the position can be more complicated where tax is attributable to certain lifetime gifts or where particular estate arrangements apply.

How Inheritance Tax is calculated

The calculation generally begins by identifying everything forming part of the deceased’s estate and establishing an appropriate market value at the date of death.

Allowable debts and liabilities are then considered, followed by any applicable exemptions, reliefs and available tax-free thresholds. This includes the residence nil rate band alongside the standard threshold, which together can significantly increase the amount that passes free of Inheritance Tax.

Complexity can arise where the estate includes:

• Lifetime gifts made shortly before death.
• Business interests.
• Agricultural property.
• Trust arrangements.
• Overseas assets.
• Property whose ownership is disputed or shared.

Accurate valuations are particularly important. Using unrealistic property, share or business valuations can result in an incorrect tax return and may lead to an HMRC enquiry.

Inheritance Tax exemptions

Several Inheritance Tax exemptions can allow assets to pass without an immediate IHT charge where the relevant conditions are met.

Transfers between spouses and civil partners

Transfers between spouses and civil partners are generally exempt from Inheritance Tax, although additional rules can apply where residence status differs between the parties. Any unused threshold from the first spouse to die can generally be carried over to the survivor, which is why transferring the nil rate band for Inheritance Tax is worth reviewing as part of estate planning for couples.

This exemption commonly allows an estate to pass to a surviving spouse or civil partner without an immediate IHT charge. Where a home is later passed to children or grandchildren, it’s also worth checking who can claim the IHT residence nil rate band, since eligibility depends on specific conditions.

Gifts to charities

Gifts to qualifying charities are generally exempt from Inheritance Tax.

Charitable legacies can also form part of wider estate planning, although the terms of the will and the amount passing to charity should be considered carefully.

Lifetime gift exemptions

Some lifetime gifts can fall within specific statutory exemptions. These can include certain small gifts, gifts made in connection with marriage or civil partnership, and qualifying regular gifts made from surplus income.

Because different conditions apply to each exemption, accurate records should be retained showing the amount, recipient, date and reason for the gift.

Lifetime gifts and the seven-year rule

Lifetime gifting is an important part of Inheritance Tax planning, but giving an asset away does not automatically remove it from consideration for IHT.

Many outright gifts from one individual to another are treated as Potentially Exempt Transfers, commonly referred to as PETs.

Broadly, if the donor survives for at least seven years after making a qualifying PET, the gift normally falls outside the donor’s estate for Inheritance Tax purposes.

If the donor dies within seven years, the gift may need to be taken into account when the estate is administered.

The order and timing of gifts can matter because earlier gifts generally use the available tax-free amount before later transfers are considered.

Potentially Exempt Transfers

A Potentially Exempt Transfer is generally an outright lifetime gift made by an individual to another individual that is not immediately chargeable to Inheritance Tax.

Common examples include:

• Giving cash to an adult child.
• Transferring an investment portfolio to a family member.
• Giving property outright to another individual.
• Transferring shares personally owned by the donor.

The tax outcome depends partly on how long the donor survives following the gift.

Where death occurs within the relevant seven-year period, the executors may need details of the gift, including its value at the date it was made and any exemption or relief claimed.

This is why keeping a lifetime gift register can be extremely useful. Without reliable records, executors may have difficulty reconstructing several years of financial transactions.

How taper relief works

Taper relief is often misunderstood. It does not reduce the value of a lifetime gift for Inheritance Tax purposes.

Instead, where the relevant conditions are met, it can reduce the tax payable on a gift where the donor dies more than three years but less than seven years after making it.

Taper relief is therefore not equivalent to a general discount simply because a gift was made several years before death.

The overall sequence of lifetime gifts and the amount of available tax-free threshold already used must be considered first.

Gifts with reservation of benefit

A particularly important anti-avoidance rule applies where someone gives an asset away but continues to benefit from it.

This is known as a gift with reservation of benefit.

A common example is a parent transferring ownership of their home to their children while continuing to live in it rent-free.

Even if the parent survives for more than seven years after making the gift, the property may still be treated as part of their estate because they continued to benefit from it.

Other examples can include:

• Giving away a valuable asset while retaining unrestricted use of it.
• Transferring an income-producing asset while continuing to receive the income.
• Arrangements where legal ownership changes but the donor’s practical enjoyment remains substantially unchanged.

Anyone considering giving away a major asset while continuing to use it should review the IHT consequences before completing the transfer.

Normal expenditure out of income

Regular gifts made from surplus income can provide an important estate planning opportunity where the relevant conditions are satisfied.

Broadly, the gifts should:

• Form part of the donor’s normal expenditure.
• Be made from income rather than capital.
• Leave the donor with sufficient income to maintain their normal standard of living.

This exemption can be particularly useful for individuals with income substantially above their normal expenditure who regularly support children or grandchildren.

Good documentation is essential. Bank statements, income records and a clear schedule of regular gifts can help executors support the exemption later.

Business and agricultural property

Business Relief and Agricultural Relief can reduce the Inheritance Tax value of qualifying business and agricultural property.

The rules changed from 6 April 2026. For deaths on or after that date, the combined 100% Agricultural Relief and Business Relief allowance is limited to £2.5 million, with qualifying value above the allowance generally receiving 50% relief.

Eligibility can depend on factors including:

• The nature of the business.
• How long the asset has been owned.
• Whether the activity is trading or mainly investment.
• The type of shares or business interest owned.
• How agricultural land and property are occupied and used.

Businesses whose activities are mainly investment-based may not qualify in the same way as genuine trading businesses.

Business succession should therefore be reviewed well before death or a lifetime transfer, particularly where a substantial part of family wealth is tied up in a company or agricultural operation.

How inherited assets are taxed after inheritance

Although beneficiaries generally do not pay Inheritance Tax merely because they receive an inheritance, other taxes can arise afterwards.

Income Tax

If an inherited asset produces income after it has been received, the beneficiary may need to pay Income Tax.

Examples include:

• Rent from an inherited property.
• Dividends from inherited shares.
• Interest from inherited savings or investments.

Capital Gains Tax

Capital Gains Tax may arise where an inherited asset subsequently increases in value and is later sold.

For CGT purposes, the beneficiary will generally use the relevant probate value at the date of death as the starting point when calculating the later gain.

This means Inheritance Tax and Capital Gains Tax are separate considerations. A property can pass through an estate and later create a CGT liability if its value rises before disposal.

Inheritance Tax and overseas assets

The UK rules governing overseas assets changed significantly from 6 April 2025.

The previous domicile-based framework was replaced with rules centred on long-term UK residence.

As a result, individuals who meet the long-term UK residence conditions may have overseas assets brought within the scope of UK Inheritance Tax.

This can affect:

• Overseas property.
• Foreign investment accounts.
• Shares in overseas companies.
• Certain offshore trust arrangements.

International estates should therefore be reviewed carefully rather than assuming assets located outside the UK automatically fall outside UK IHT.

Using trusts in Inheritance Tax planning

Trusts can form part of estate and succession planning, but they should not be viewed as a simple way to avoid Inheritance Tax.

Depending on the type of trust and assets transferred, IHT charges can arise:

• When assets are placed into the trust.
• Periodically while assets remain within the trust.
• When assets leave the trust.

Trust arrangements can nevertheless be useful for controlling how wealth is managed for children, vulnerable beneficiaries or future generations.

The tax treatment should be considered alongside the legal and family objectives before establishing a trust.

Keeping records for Inheritance Tax

Good record keeping is one of the most practical parts of Inheritance Tax planning.

Useful records include:

• A schedule of lifetime gifts.
• Dates and recipients of gifts.
• Evidence supporting normal expenditure out of income.
• Property valuations.
• Business and shareholding records.
• Trust documentation.
• Details of jointly owned assets.
• Previous estate planning advice.

These records can make estate administration considerably easier and help executors support reliefs and exemptions claimed to HMRC.

Worked example: planning lifetime gifts

Michael wants to begin transferring wealth to his adult children rather than leaving all of his assets to pass through his estate.

He starts by reviewing his regular income and expenditure and establishes that he has recurring surplus income each year.

He makes regular gifts from that surplus while maintaining his normal lifestyle and keeps detailed records showing:

• His annual income.
• Normal household expenditure.
• The amount and date of each gift.
• The recipient of each payment.

Michael also makes a larger outright gift of investments to his daughter. Because the larger transfer is treated differently from his regular gifts from income, he records it separately so the relevant seven-year period can be identified accurately.

This approach does not guarantee that every transfer will be exempt, but it gives Michael and his future executors clear evidence with which to establish the correct Inheritance Tax treatment.

Inheritance Tax planning strategies

Effective Inheritance Tax planning should focus on the individual’s objectives rather than simply trying to reduce tax.

Practical areas to consider include:

• Keeping an up-to-date will.
• Reviewing lifetime gifts.
• Using appropriate gift exemptions.
• Keeping clear gifting records.
• Reviewing business succession arrangements.
• Considering the ownership of property and investments.
• Reviewing trusts where appropriate.
• Checking the tax position following major family or financial changes.

Estate plans should also be revisited periodically because changes to legislation, family circumstances and asset values can alter the intended outcome.

Common Inheritance Tax mistakes

• Assuming beneficiaries personally pay IHT simply because they receive an inheritance.
• Giving assets away while continuing to benefit from them.
• Assuming every gift falls outside the estate after seven years without checking the rules.
• Failing to maintain records of lifetime gifts.
• Confusing taper relief with a reduction in the value of the gift.
• Assuming overseas assets are automatically outside UK Inheritance Tax.
• Relying on historic Business Relief or Agricultural Relief rules after legislative changes.
• Using trusts without considering their own Inheritance Tax regime.
• Allowing wills and estate plans to become outdated.

Key takeaways

Inheritance Tax planning involves considerably more than checking the value of an estate against current tax thresholds. Lifetime gifts, retained benefits, business interests, trusts, overseas assets and the tax treatment of inherited property can all materially affect the final position.

Understanding the wider Inheritance Tax UK rules and making appropriate use of Inheritance Tax exemptions can help individuals transfer wealth in a controlled and tax-efficient way while preserving sufficient resources for their own needs.

Good Inheritance Tax planning should combine an up-to-date will, accurate records and periodic reviews of family circumstances, business interests and lifetime transfers. This gives executors clearer information when administering the estate and reduces the risk of reliefs being missed or tax liabilities arising unexpectedly.

Case Study: Creating an Inheritance Tax Plan Before Passing on Family Wealth

A call enquiry was received by our Wimbledon office from a couple who wanted to review their estate before passing assets to their children. They were unsure how Inheritance Tax applied to lifetime gifts, business interests and investment assets, and wanted to understand which planning opportunities were available while remaining fully compliant with HMRC rules.

Our advisers reviewed the family’s assets, previous lifetime gifts, business interests and long-term estate planning objectives to identify the areas requiring attention. We explained how different types of gifts are treated for Inheritance Tax purposes, the importance of maintaining accurate records, and how future tax liabilities could affect beneficiaries. Alongside this review, we provided Inheritance Tax planning, personal tax advice, Capital Gains Tax planning, business succession planning, trust and estate planning guidance, and Self Assessment support to ensure the family’s wider tax position was considered. By planning ahead rather than waiting until later in life, the clients gained a clearer understanding of their options and were able to structure their estate more efficiently while helping future executors administer the estate with confidence.