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Contents

• Inheritance Tax Exemptions
  • Spouses/Civil Partners
  • Registered Charities 
  • Small Gifts 
  • The Annual Exemption 
  • Gifts out of Normal Expenditure 
  • Gifts in Consideration of Marriage 
  • Gifts to Political Parties 
  • Gifts for the National Purpose
  • Gifts to Housing Associations
• Pensions and IHT
• Inheritance Tax Reliefs
  • Quick Succession Relief 
  • Business Relief and Agricultural Relief
  • Business Relief
  • Qualifying business property
  • Ownership conditions
  • Excluded businesses
  • Interaction with the Residence Nil Rate Band (RNRB)
  • Agricultural Relief 
  • Qualifiyng agricultural property
  • Ownership and occuptaion conditions
  • Rates of Agricultural Relief
  • Future changes - pensions
     

Introduction

Where an individual’s estate (including lifetime gifts in the previous seven years) is less than the Nil Rate Band (NRB) of £325,000 (currently £325,000 and frozen until April 2031), there will be no IHT to pay. For estates that are valued over this amount there are some valuable exemptions and reliefs that can be used to reduce the amount of IHT liability.

If an individual is a long term-UK resident, they will be subject to IHT.
 

IHT Exemptions 

Some gifts are completely exempt from IHT whether they are made during lifetime or on death and others are exempt only if made during lifetime. 

Broadly speaking, for gifts made during lifetime, once the individual survives seven years after having made them, their value will not be counted as part of the estate on death and will be exempt from IHT. This is provided the donor has given up all rights to the gifted asset, otherwise this will be considered as a Gift With Reservation of Benefit and will fall back into their estate for IHT purposes, even though they may not be legal owner of the asset.

These lifetime transfers to individuals are called Potentially Exempt Transfers (PETs) and become totally exempt once the donor has survived for seven years from the date of the gift. PETs are covered in a separate overview.

If any gift is exempt from IHT, it will not be included in the estate when working out whether any IHT is due. The main IHT exemptions are as follows. 
 

Gifts between Spouses and Civil Partners

Gifts made between spouses/civil partners, during their lifetime or on death, are exempt from IHT, provided both of them are long term-UK resident. Where the recipient is not a long term-UK resident the amount that can be transferred without it being assessable to IHT is £325,000. Any value over this amount will be subject to IHT. Gifts made from a spouse/civil partner who is not a long term-UK resident to a spouse/civil partner who is a long term-UK resident will benefit from the full spouse/civil partner exemption. If they are not a long-term UK resident they are only subject to IHT on UK situs assets. 

This exemption is not available to individuals who are co-habiting or who may be co-parenting but not married or civil partnered.
 

Gift to Charities

The gift to charities exemption is available where an individual makes a gift either during their lifetime or on their death. The charity must be UK registered. In some cases this exemption can also apply to gifts made to certain EU charities. 

The IHT rate of tax reduces to 36% where at least 10% of an individual’s net estate is left to charity. 
 

Small Gifts

The small gift exemption allows an individual to make gifts of up to £250 each to an unlimited number of recipients, each tax year. The small gift exemption cannot be used when making a gift to an individual that has already benefitted from another IHT exemption (e.g. it cannot be used in addition to the annual exemption).This exemption applies during an individual’s lifetime. It cannot be claimed to reduce the value of the estate on death.
 

Annual Exemption

This covers gifts to the value of £3,000 each tax year, made during an individual’s lifetime – all or some of which can be rolled over to the following tax year, making it possible to gift up to £6,000 in one tax year. This means a couple could make gifts of up to £6,000 in one year; or £12,000 if they have rolled over the previous year’s exemption.
 

Gifts out of Normal Expenditure

Regular gifts of income can be made provided that the individual is left with sufficient income to maintain their usual standard of living. For example, the payment of school fees or premiums on a life policy for someone else’s benefit. 

For the exemption to apply, it must be shown that the transfer of value/gift meets three conditions: 

1. It formed part of the donor’s normal expenditure – normal includes standard, regular, typical, habitual, or usual.  All relevant factors must be considered (ie frequency and amount, the nature of the gifts, the identity of the recipients and the reasons for the gifts).
    
2. It was made from income (taking one year with another). Common sources of income are employment and self–employment, rents from property, pensions, interest and dividends.
   
   HMRC will initially look at the income of the year in which gifts were made to establish whether there was enough income available to make the gifts, before considering earlier years.
   
   Payments received regularly may appear to be income but are in fact capital in nature. An example would be withdrawals from an investment bond,  which are considered a return of capital and would not qualify as income for this exemption.
    
3. It left the transferor with enough income to maintain their normal standard of living. Gifts out of income will not qualify for exemption if the transferor had to resort to capital to meet their income needs. To claim this exemption, details of the deceased’s income and expenditure should be provided to HMRC using page 8 of form IHT403. 
    

Gifts in consideration of marriage

An individual can gift up to the following amounts to someone who is getting married or entering a Civil Partnership. The amount that can be gifted depends on the donor’s relationship with the recipient. Gifts can be made up to: 

• £5,000 to a child 
• £2,500 to a grandchild or great-grandchild 
• £1,000 to any other person 

The gift must be made on or shortly before the marriage or the registration of the civil partnership, it must be made in contemplation of the marriage or civil partnership, and the gift must be conditional on the marriage or civil partnership taking place. 

The gift can be combined with another exemption, such as the annual exemption (but not the small gift exemption). This means a parent could gift their child up to £8,000 (a £5,000 gift made in consideration of marriage plus the £3,000 annual exemption), or possibly up to £11,000 if they can carry forward a full unused annual exemption from the previous tax year. This also means both parents could jointly gift up to £22,000. 

The excess of any gift over the available exemptions is chargeable to IHT. 
 

Gifts to Political Parties

Gifts can be made to any UK political party as long as at the last general election it had either at least two MPs in the House of Commons, or one MP and received at least 150,000 votes. 
 

Gifts for National Purposes

These are national institutions (e.g. the National Gallery and British Museum) that exist for the purposes of preserving for the public benefit collections of scientific, historic or artistic interest. 
 

Gifts to Housing Associations

Gifts of land to registered housing associations are exempt. A registered housing association is a non-profit making body established for the provision or encouragement of housing. 
 

Pensions and IHT

Most pension death benefits currently fall outside the scope of IHT because UK pension schemes typically operate on a discretionary basis, meaning trustees decide who receives benefits rather than the member having a binding nomination.

From 6 April 2027, this will change. Most unused pension funds and lump sum death benefits will be included in the deceased’s estate for IHT, regardless of whether the scheme is discretionary. These amounts will count towards the NRB and may also affect eligibility for the main Residence Nil Rate Band. Exemptions will remain where the members spouse or civil partner or a charity are the beneficiary. 

A full overview of the pension and IHT changes from April 2027 can be found in Pensions and Inheritance Tax.

 

IHT Reliefs

Quick Succession Relief

Quick Succession Relief may be available on the death of an individual who had previously benefited from a will or intestacy. It gives some credit for the IHT that was paid on the estate of the person they inherited from. The amount of the relief is tiered and depends on the length of time between the first and second person’s death. The relief is deducted from the IHT liability on the estate of the second person to die. 

For relief to apply, there must have been IHT paid on the first death and, there must be an IHT liability on second death, and the second death must occur within five years of the first death. 

Quick Succession Relief is calculated on the first death using this formula:

net estate (after IHT is paid)             x IHT paid on the first death 
gross estate (before IHT is paid) 

The credit given on second death will always be less than the IHT paid on first death and is tapered as follows. 

If the period is precisely two years, 80% relief is given and so on.

Business Relief (formerly Business Property Relief) and Agricultural Relief (formerly Agricultural Property Relief)

From 6 April 2026, Business Relief and Agricultural Relief operate under a shared regime for IHT.

A single combined allowance of £2.5 million applies to the total value of assets qualifying for 100% Business Relief and/or Agricultural relief.  Any qualifying value above this allowance receives 50% relief, resulting in an effective IHT rate of 20% on the excess.

The allowance is transferable to a surviving spouse or civil partner even if the first death occurred before 6 April 2026. For lifetime gifts, the allowance refreshes every seven years and for trusts, it refreshes every ten years.
 

Business Relief

Ownership of a business, or shares in a business, is included in an individual’s estate for IHT purposes. Business Relief reduces the taxable value of qualifying relevant business property and is available for transfers made during lifetime and on death.
 

Qualifying business property

The following categories of property qualify for Business Relief, subject to the relevant rate of relief and the £2.5 million allowance. 

• A business or an interest in a business (e.g., sole trade or partnership share).
• Unquoted securities of a trading company giving control.
• Unquoted shares (not securities) in a trading company.

These assets receive 100% relief within the £2.5 million allowance; and 50% relief on any excess.

Assets that historically qualified for 50% relief will continue to receive the same amount of relief, regardless of the allowance position. These include:

• Quoted shares/securities giving control.
• Land, buildings, machinery or plant used wholly or mainly for a business carried on by a company controlled by the transferor or by a partnership of which they were a partner.
• Similar assets held as settled property with an interest in possession.

Shares admitted to trading markets designated as ‘not listed’, including the Alternative Investment Market (AIM) qualify for 50% relief only and cannot benefit from the 100% relief allowance.  
 

Ownership conditions

Business Relief is available only if the relevant business property:

• was owned by the transferor for at least the two years preceding the transfer, or
• replaced other relevant business property where the combined period of ownership was at least two out of the last five years. 

This allows up to three years to reinvest the sale proceeds into new qualifying business property without losing relief.

Business Relief may still be available where the two year ownership condition is not met, provided that:

• the property was acquired by gift;
• it qualified for Business Relief at the time of the acquisition; and
• either the earlier or current transfer was made on death
   

Excluded businesses

Business Relief is not available if the business consists wholly or mainly of:

• Dealing in securities, stocks and shares
• Dealing in land or buildings, or
• Making or holding investments (including land which is let)

Interaction with the Residence Nil Rate Band (RNRB)

Where business property qualifies for Business Relief, its gross value must still be included when calculating the total estate value for RNRB purposes. If the total estate exceeds £2 million, the RNRB will be tapered or lost completely.
 

Agricultural Relief

Agricultural Relief applies to gifts or transfers of property occupied for the purposes of agriculture, together with appropriate buildings and farmhouses used in conjunction with that land. It operates within the same £2.5 million combined allowance as Business Relief. 100% relief applies within the allowance where the asset otherwise qualifies for 100% relief. 50% relief applies to any excess and to assets that only qualify at the lower rate.

Similarly to Business Relief, the allowance is transferable to a surviving spouse or civil partner, even if the first death occurred before the rules changed on 6 April 2026.
 

Qualifying agriculture property

Agricultural property situated in the UK may qualify, including:

• Land or pasture that is used to grow crops or to rear animals intensively.
• Stud farms for breeding and rearing horses and grazing. 
• Trees that are planted and harvested at least every 10 years (short-rotation coppice). 
• Land not currently being farmed. 
• Some agricultural shares and securities. 
• Farm buildings, farm cottages and farmhouses:
  • Buildings must be of a nature and size appropriate to the farming activity.
  • The property is valued as if it could only be used for agricultural purposes. Any value over and above this agricultural value, such as the market price of a country residence, does not qualify
  • A cottage or farmhouse must be occupied by someone employed in farming or a retired farm employee, or the spouse or civil partner of a deceased farm employee.

Agricultural Relief applies only to the agricultural value of property and cannot be claimed on any enhanced value attributable to development potential of the land.
 

Ownership and occupation conditions

The property must have been owned and occupied for agricultural purposes immediately before transfer for:

• Two years – where occupied by the owner, a company controlled by the owner, or the owner’s spouse or civil partner.
• Seven years - if occupied by another person.
   

Rates of Agricultural Relief

Relief is available at 100% or 50% depending on the nature of the occupation or tenancy.

Relief is available at 100% (subject to the £2.5m allowance) where:

• the land was farmed by the owner;
• the land was used under a short‑term grazing licence; or
• the land was let under a tenancy beginning on or after 1 September 1995.

In all other cases relief is available at 50%.
 

Future changes – pensions

From 6 April 2027, pension assets will not be treated as business or agricultural property and will not qualify for Business Relief or Agricultural Relief when pension and IHT reforms take effect.

Business Relief and Agricultural Relief are complex, highly fact specific reliefs. In most scenarios, specialist advice will be required.