Guide · Tax
Inheritance Tax in the UK: How to Work Out What's Owed
Only around 4% of estates pay Inheritance Tax — but with nil-rate bands frozen until 2030 and property values continuing to rise, more families are being caught in the net. Here is how to calculate the liability and reduce it legally.
How IHT is calculated
Inheritance Tax is charged at 40% on the value of a deceased person's estate above their available nil-rate band. The estate includes all assets (property, savings, investments, life assurance not written in trust) minus liabilities (debts, funeral costs).
The basic IHT formula
IHT = (Estate value − Nil-rate band) × 40%
Nil-rate bands in 2026/27
The Residence Nil-Rate Band (RNRB) applies when a qualifying residential property is left to direct descendants — children, stepchildren, or grandchildren. It tapers by £1 for every £2 above a £2 million estate value, disappearing entirely at £2.35 million.
When a spouse or civil partner dies first and does not use their full NRB, the unused percentage transfers to the surviving spouse's estate. This is called the "transferable nil-rate band."
Worked example
A widow leaves an estate worth £900,000 including her family home (value £450,000) to her two adult children. She inherits her late husband's unused NRB and RNRB:
| Item | Amount |
|---|---|
| Estate value | £900,000 |
| Standard NRB (own) | −£325,000 |
| Transferred NRB (spouse) | −£325,000 |
| Residence NRB (own) | −£175,000 |
| Transferred RNRB (spouse) | −£175,000 |
| Taxable estate | −£100,000 |
| IHT at 40% | £40,000 |
Despite a £900,000 estate, the IHT bill is £40,000 — because combined allowances shelter £1,000,000. Without RNRB (e.g. leaving to a sibling instead), the bill would be £100,000.
Reducing your IHT bill
- Annual gifting allowance — Give away up to £3,000 per year free from IHT immediately, plus £3,000 unused from the previous year.
- 7-year rule (PETs) — Larger gifts become exempt if you survive 7 years. Between years 3 and 7, taper relief reduces the IHT charge progressively.
- Regular gifts from surplus income — Gifts that are normal expenditure, made from income (not capital), and do not reduce your standard of living are immediately exempt — with no £3,000 cap.
- Life insurance in trust — Write a life insurance policy in trust so the payout goes directly to beneficiaries outside the estate.
- Business Property Relief (BPR) — Qualifying business assets (AIM shares, trading business interests) can attract 50–100% relief from IHT.
- Charitable giving — Leave 10%+ of the net estate to charity to reduce the rate from 40% to 36%.
Frequently asked questions
What is the nil-rate band for IHT in 2026/27?
The standard nil-rate band (NRB) is £325,000 — frozen until at least 2030. The residence nil-rate band (RNRB) adds a further £175,000 if you leave a qualifying residential property to direct descendants (children, grandchildren). A married couple or civil partnership can combine both allowances, giving a potential combined threshold of £1,000,000 before IHT applies.
What is the Inheritance Tax rate?
The standard IHT rate is 40% on the value above the nil-rate band. A reduced rate of 36% applies if you leave at least 10% of the net estate to charity. There is no IHT between spouses or civil partners — transfers between them are fully exempt, regardless of value.
What gifts are exempt from Inheritance Tax?
Several gifting exemptions apply: the annual £3,000 gift allowance (unused allowance can be carried forward one year), small gifts of up to £250 per person, wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else), and regular gifts from surplus income. Potentially Exempt Transfers (PETs) — larger gifts — become fully exempt if you survive 7 years after making them.
Does IHT apply to pensions?
Pension funds have historically been exempt from IHT, sitting outside the estate for IHT purposes. However, from April 2027, most unused pension pots will be brought into the IHT calculation. This makes pension planning a more significant IHT consideration than it has been historically.