Inheritance Tax Exemptions & Reliefs

Inheritance tax is charged at 40% on death, but a large slice of most estates never reaches that rate. The reason is the network of exemptions and reliefs in the Inheritance Tax Act 1984 (IHTA 1984). An exemption takes a transfer out of charge altogether; a relief reduces the taxable value of an asset. Knowing which applies, and stacking them in the right order, is most of the practical work of estate planning.

This page is your working map of that network. For how IHT is calculated, cumulation, and the seven-year clock, see Inheritance Tax - An Overview; for the tax-free bands those exemptions sit on top of, see The Nil-Rate Band & Transferable Nil-Rate Band and The Residence Nil-Rate Band.

Exemptions on death#

Spouse and civil partner exemption#

Transfers between spouses or civil partners are exempt without limit, whether made in life or on death (IHTA 1984 s 18). Leave everything to your spouse and no IHT arises on the first death. This is the single most-used exemption, and it is why a will leaving everything to the survivor defers tax to the second death.

Note one refinement: there is a cap where the recipient is not a UK long-term resident. Since the residence-based reform of 6 April 2025, IHT scope turns on long-term residence (broadly, UK-resident in at least 10 of the previous 20 tax years) rather than domicile. Where a long-term resident leaves assets to a spouse who is not a long-term resident, the exemption is capped at £325,000 (the figure that replaced the old £55,000 limit in 2013). That spouse may elect to be treated as a long-term resident, making the exemption unlimited but bringing their worldwide estate within IHT. Where both spouses share the same status, the exemption is unlimited as normal.

Charity exemption and the 36% reduced rate#

Gifts to a UK (and qualifying EU/EEA) registered charity are wholly exempt (IHTA 1984 s 23). There is no upper limit.

There is also a reward for generosity. Where at least 10% of the net estate passes to charity, the rate of IHT on the rest of the estate falls from 40% to 36% (IHTA 1984 Sch 1A). "Net estate" here means the baseline amount - the estate after deducting other exemptions, reliefs and the nil-rate band. The arithmetic often means the charity is funded largely at the taxman's expense (see the worked example below).

Lifetime gift exemptions#

These exemptions apply to gifts made during life. They matter because a gift covered by one of them is exempt immediately - there is no seven-year wait and no need to survive.

Annual exemption - £3,000#

Each person may give away £3,000 per tax year free of IHT (IHTA 1984 s 19). Any unused annual exemption can be carried forward one year only, so the most that can be sheltered in a single year is £6,000 (this year's £3,000 plus last year's). The current year's allowance is used first; the carried-forward amount second.

Small gifts - £250#

You may give up to £250 to any number of different people each tax year, entirely exempt (IHTA 1984 s 20). The catch: it is all-or-nothing per recipient. Give someone £300 and the small-gifts exemption is lost for that person - you cannot exempt the first £250. It also cannot be combined with the annual exemption for the same recipient.

Gifts on marriage or civil partnership#

Gifts made in consideration of a marriage or civil partnership are exempt up to (IHTA 1984 s 22):

• £5,000 if the donor is a parent of a party;
• £2,500 if the donor is a grandparent or remoter ancestor, or one of the parties themselves;
• £1,000 for anyone else.

The gift must be made on or shortly before the ceremony, and conditional on it going ahead.

Normal expenditure out of income#

This is the quietly powerful one, because it has no monetary ceiling (IHTA 1984 s 21). A regular gift is exempt immediately - no seven-year clock - if it satisfies three conditions:

1. it forms part of the donor's normal (habitual) expenditure;
2. it is made out of income, not capital; and
3. after all such gifts, the donor is left with enough income to maintain their usual standard of living.

"Normal" means a settled pattern - a standing order of regular premiums or payments to a child or grandchild is the classic case. Because it is judged over time, good record-keeping (an income-and-expenditure schedule) is what wins the argument with HMRC after death. Used consistently, it can move far more out of an estate than the annual exemption ever will.

Political parties, the nation and heritage#

Gifts to a qualifying political party are exempt (IHTA 1984 s 24), as are gifts for national purposes - to bodies such as the National Trust, museums, universities and the like - and gifts of heritage property to approved bodies (s 25 and Sch 3).

Potentially exempt transfers and taper relief#

Most outright lifetime gifts to individuals that are not already covered above are potentially exempt transfers (PETs). A PET becomes fully exempt if the donor survives seven years from the date of the gift. Die within seven years and it becomes chargeable, eating into the nil-rate band first.

Where the donor dies between three and seven years after the gift, taper relief reduces the tax payable (not the value of the gift) on a sliding scale - from a 20% reduction at 3–4 years up to 80% at 6–7 years. A common trap: taper only helps once the gift's value exceeds the available nil-rate band, because it reduces tax, not the transfer.

This page only summarises the mechanics. For the full treatment of PETs, chargeable lifetime transfers, the seven-year clock and how gifts cumulate against the band, see Inheritance Tax - An Overview and The Nil-Rate Band & Transferable Nil-Rate Band.

The major reliefs: Business and Agricultural Property Relief#

Reliefs work differently from exemptions: they reduce the taxable value of a qualifying asset, at either 100% or 50%.

Business Property Relief (BPR)#

BPR (IHTA 1984 ss 103–114) reduces the value transferred of relevant business property:

• 100% - an interest in an unincorporated trading business, and unquoted shares in a trading company;
• 50% - a controlling shareholding in a quoted company, and land, buildings, plant or machinery used by a business the transferor controls or by their partnership.

The business must be mainly trading; investment businesses (letting property, holding investments) do not qualify. The asset must generally have been owned for at least two years before the transfer (s 106).

Trusts are often built specifically to hold and protect qualifying assets while preserving the relief across generations - see Business Property Relief Trust.

Agricultural Property Relief (APR)#

APR (IHTA 1984 ss 115–124) reduces the transfer of the agricultural value of agricultural property - farmland, pasture, and appropriate farmhouses and buildings:

• 100% - where the transferor farmed the land themselves, or let it on a tenancy beginning on or after 1 September 1995;
• 50% - most older let land.

The ownership tests are stricter than BPR's: two years if the owner occupied it for agriculture, or seven years if someone else (a tenant) did. APR covers only the agricultural value; development or "hope" value above that may still need BPR to shelter it. See Agricultural Property Relief Trust.

The reform from 6 April 2026 - read this carefully#

The reliefs have been sharply curtailed. From 6 April 2026, an individual's combined APR and BPR is capped at £2.5 million of 100% relief per estate; value above that threshold receives relief at only 50%.

Note the figure. The reform was originally announced at a £1 million cap, but the Government confirmed on 23 December 2025 that the 100% allowance would instead be set at £2.5 million, effective 6 April 2026. Key features of the current rules:

• the £2.5m allowance is transferable between spouses and civil partners, so a couple can shelter up to £5 million at 100%;
• the allowance refreshes every seven years (relevant to lifetime transfers into trust);
• shares not listed on a recognised stock exchange - notably AIM-quoted shares - drop from 100% to 50% relief, and this reduced rate does not benefit from the £2.5m allowance.

For a large trading business or farm this converts a full exemption into a partial one: above the cap an effective 20% charge now bites (40% on the unrelieved half).

Other reliefs#

• Quick succession relief (IHTA 1984 s 141) - where the deceased inherited assets and paid IHT on them within the previous five years, a credit reduces the tax on the second death, on a sliding scale (100% within one year, falling to 20% in the fifth). It prevents the same wealth being fully taxed twice in quick succession.
• Woodlands relief (ss 125–130) - a deferral, not an exemption: the value of growing timber is left out of the death estate until the timber is sold and taxed then. Often overtaken by BPR where the woodland is run as a business.
• Heritage / conditional exemption (ss 30–35) - pre-eminent works of art, historic buildings and land of scenic or scientific interest can be conditionally exempt if the owner gives undertakings on preservation and public access. Breach the undertakings and the deferred tax crystallises.

How exemptions interact with the residence nil-rate band#

Exemptions are applied before the nil-rate bands, and that order matters for the The Residence Nil-Rate Band (RNRB). The RNRB is only available where a qualifying residence passes to direct descendants. Leaving the home to a spouse is exempt under s 18 but does not itself use the RNRB - the band transfers to the survivor to be claimed on the second death instead.

Beware the taper: the RNRB is reduced by £1 for every £2 by which the estate exceeds £2 million. Crucially, that £2m test is measured before BPR and APR, so a business-heavy estate can lose its RNRB even though little tax is ultimately due. Both the £325,000 nil-rate band and the £175,000 RNRB are frozen until April 2031.

Quick reference#

Exemption / relief	Limit	Authority	Notes
Spouse / civil partner	Unlimited	IHTA 1984 s 18	Capped at £325,000 if recipient not a UK long-term resident (unless they elect)
Charity	Unlimited	s 23	10%+ of net estate to charity cuts the death rate to 36% (Sch 1A)
Annual exemption	£3,000/year	s 19	One year's unused amount carries forward (max £6,000)
Small gifts	£250 per person/year	s 20	All-or-nothing; not combinable per recipient
Marriage / civil partnership	£5,000 / £2,500 / £1,000	s 22	Parent / ancestor or party / anyone else
Normal expenditure out of income	No limit	s 21	Must be habitual, out of income, leaving usual living standard
Political parties, national, heritage	Unlimited	ss 24–25, Sch 3	Qualifying recipients only
PET (survive 7 years)	No limit	s 3A	Taper relief on tax for deaths 3–7 years after gift (s 7)
Business Property Relief	100% / 50%	ss 103–114	2-year ownership; £2.5m 100% cap from 6 Apr 2026
Agricultural Property Relief	100% / 50%	ss 115–124	2- or 7-year test; shares £2.5m cap from 6 Apr 2026
Quick succession relief	Sliding 100%–20%	s 141	Second death within 5 years of first
Woodlands	Deferral	ss 125–130	Tax on later sale of timber
Heritage / conditional exemption	Conditional	ss 30–35	Undertakings on preservation and access

Worked examples#

Annual exemption with carry-forward. Ravi made no gifts last tax year. This year he gives his daughter £6,000. He uses this year's £3,000 plus last year's carried-forward £3,000 - the whole gift is immediately exempt, with nothing left to carry forward.

Normal expenditure out of income. Margaret has pension and dividend income of £60,000 a year and spends about £40,000 living. She sets up a standing order of £500 a month to her grandchildren. Because the payments are habitual, come from surplus income, and leave her able to maintain her lifestyle, each is exempt on the day it is made - no seven-year wait.

The 36% charity rate. An estate has a taxable value of £500,000 after the nil-rate band. Taxed at 40%, IHT is £200,000 and heirs receive £300,000. Instead the will leaves 10% (£50,000) to charity: that gift is exempt, and the remaining £450,000 is taxed at 36% = £162,000. Heirs now receive £288,000 and £50,000 goes to charity. The charity is funded at a net cost to the family of just £12,000.

BPR under the new cap. Ffion dies on 1 May 2026 owning unquoted trading-company shares worth £4 million. The first £2.5m attracts 100% relief; the remaining £1.5m attracts 50%, leaving £750,000 chargeable. At 40% that is £300,000 of IHT - where before 6 April 2026 the whole £4m would have passed tax-free.

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This page is general guidance for professionals, not legal or tax advice. Thresholds, rates and reliefs change - the APR/BPR reforms above are a recent example - so confirm the current position before advising or acting.