How Inheritance Tax is worked out
Inheritance Tax is charged at 40% on the part of an estate above the tax-free allowances. The estate is everything the person owned at death, including their share of the home and of jointly owned assets, less debts, any mortgage and reasonable funeral costs. Anything left to a spouse or civil partner, or to a UK charity, is exempt and comes off before tax is worked out.
For deaths in the 2026/27 tax year the allowances are:
| Allowance | Amount | Notes |
|---|---|---|
| Nil-rate band | £325,000 | Available to every estate; used first by gifts made in the 7 years before death |
| Residence nil-rate band | £175,000 | Only where a home passes to children, grandchildren or other direct descendants |
| Transferred from a late spouse | Up to 100% of each band | The unused percentage is applied to today's bands |
| Residence band taper | Above £2 million | Reduced by £1 for every £2 the estate is worth over £2 million |
A married couple or civil partners can therefore pass on up to £1 million tax-free between them, provided the first to die leaves everything to the survivor and the home eventually goes to direct descendants.
The residence nil-rate band
The extra £175,000 is limited to the value of the home (or the share of it) that passes to direct descendants, after any mortgage. A £100,000 flat left to a son gives £100,000 of residence band, not £175,000, although the unused part can pass to a surviving spouse. Stepchildren, adopted and fostered children and their spouses count as direct descendants. Nephews, nieces and siblings do not.
The taper uses the estate after debts but before exemptions and reliefs, so leaving most of a £2.3 million estate to a spouse does not protect the band. An estate of £2.35 million or more loses the whole £175,000, and more where a late spouse's band has been transferred.
Gifts in the 7 years before death
Gifts to individuals are free of Inheritance Tax if the giver survives for 7 years. If they die sooner, the gifts are added back oldest first and use up the £325,000 nil-rate band before the estate does. Tax on the part of any gift above the band is paid by the person who received it, at a rate that depends on when it was made:
| Time between gift and death | Rate of tax on the gift |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
Taper relief reduces the tax on a gift, not the gift's value, so it only helps when gifts in total exceed the nil-rate band. Enter gifts after the exemptions that apply to them: the £3,000 annual exemption (with one year's carry-forward), small gifts of up to £250 per person, wedding gifts of up to £5,000 to a child, and regular gifts out of surplus income.
The 36% rate for leaving to charity
If at least 10% of the baseline amount goes to charity, the rest of the estate is taxed at 36% instead of 40%. The baseline amount is the chargeable estate after exemptions and the nil-rate band, with the charity gift added back. The residence nil-rate band is not deducted. In HMRC's example, a £750,000 estate leaving £50,000 to the National Trust has a baseline of £425,000, so the gift clears the 10% test and the tax falls from £150,000 to £135,000.
Business and Agricultural Relief from April 2026
For deaths on or after 6 April 2026, 100% relief on qualifying business and agricultural property is capped at a combined £2.5 million. Relief on value above that is 50%. Any allowance a late spouse did not use can be transferred, giving up to £5 million. Shares on markets such as AIM get 50% relief and do not use the allowance. Qualifying lifetime gifts made since 30 October 2024 use the allowance first, which this calculator does not model.
Worked example
A widow dies leaving an estate worth £900,000, including a home worth £400,000 that goes to her two children. Debts and funeral costs total £10,000, and she made no gifts in the last 7 years.
- Estate after debts. £900,000 − £10,000 = £890,000;
- Residence nil-rate band. The lower of £175,000 and the £400,000 home, so £175,000;
- Nil-rate band. £325,000;
- Taxable estate. £890,000 − £175,000 − £325,000 = £390,000;
- Inheritance Tax. 40% of £390,000 = £156,000.
If her husband had died first and left everything to her, 100% of both his bands would transfer. Her allowances would then total £1 million and no tax would be due. Leaving at least £56,500 to charity would instead bring the rate down to 36%.
Pensions from April 2027
Most unused pension funds and pension death benefits will count towards the estate for deaths on or after 6 April 2027, under Finance Act 2026. For a death in 2026/27, most pensions are still outside the estate, so the calculator does not ask for them. If you are planning ahead, add the expected value of your pension to the estate to see the effect.
What this calculator does not cover
- Trusts. Transfers into trusts, ten-year and exit charges, and settled property are taxed under separate rules. Budget 2026 announced tighter rules, to be legislated in Finance Bill 2026-27, on when liabilities relating to trust property can reduce the value charged, for deaths and other chargeable events from 28 October 2026;
- Gifts with reservation. A home given away but still lived in rent-free stays in the estate at its value on death;
- Older gifts. Chargeable transfers made 7 to 14 years before death can reduce the nil-rate band available to later gifts;
- Joint property and the charity rate. Property passing by survivorship forms a separate component for the 10% test;
- Other reliefs. Quick succession relief, woodland and heritage relief, and fall-in-value relief are not applied;
- Non-UK residents. Someone treated as based abroad pays only on UK assets.
Getting it right
The order in which allowances are used, the treatment of gifts and the wording of a will can move an Inheritance Tax bill by tens of thousands of pounds. Our inheritance tax planning team reviews estates and gifting strategies, and our probate service prepares the IHT400 account and claims transferred allowances after a death. If you are selling assets as part of a plan, see the capital gains tax calculator.