UK Inheritance Tax Calculator

How UK Inheritance Tax works

UK Inheritance Tax is charged at 40% on the value of your estate above a tax-free threshold. Your estate is everything you own at the date of death (property, investments, cash, vehicles, personal possessions) minus any debts and reasonable funeral expenses. Defined contribution pensions are usually outside the estate for IHT in 2026/27, which is one of the most useful planning facts in the UK system. HMRC publishes the full rules on the gov.uk Inheritance Tax page.

Two tax-free bands stack. The standard nil-rate band is £325,000 per person. The residence nil-rate band adds a further £175,000 per person, but only when a qualifying main home (or the proceeds of selling one) passes to direct descendants: children, grandchildren, stepchildren, or adopted children. That gives a single homeowner up to £500,000 of estate tax-free, and a married couple up to £1,000,000 combined when allowances transfer between spouses.

The residence band tapers away for larger estates. For every £2 the estate exceeds £2 million, the £175,000 residence band falls by £1, so it is fully gone at an estate value of £2.35 million. Above the combined threshold, every pound is taxed at 40%. The rate falls to 36% if 10% or more of the net estate is left to charity.

Spouse, charity, and direct-descendant rules

Anything you leave to a spouse or civil partner is 100% exempt from IHT, with no upper limit. Any unused nil-rate band and residence nil-rate band of the first spouse to die transfers to the survivor's estate, which is the mechanism that gets most homeowning couples to the £1 million combined threshold. The executor of the second estate has to claim the transfer, so keep paperwork from the first spouse's death.

Charity gifts are also fully exempt, and a 10%-plus charity bequest drops the rate on the rest of the taxable estate from 40% to 36%. The residence nil-rate band only applies to direct descendants, so leaving the family home to nieces, nephews, or close friends will not unlock it. If the goal is to use the £175,000 band, the will needs to name the right beneficiaries.

Lifetime gifts and the 7-year rule

You can give away unlimited amounts during your lifetime, but those gifts are not automatically free of IHT. Gifts made within seven years of death are added back to the estate for the IHT calculation. If the cumulative value of those gifts sits inside the £325,000 nil-rate band, no extra IHT is due. Above the band, the tax on the excess tapers based on how long ago the gift was made.

Smaller gifts are immediately exempt and never count towards the seven-year tally. The £3,000 annual exemption, the £250 small-gift allowance per recipient, wedding gifts (£5,000 to a child, £2,500 to a grandchild, £1,000 to anyone else), and regular gifts out of surplus income are all gone the moment you make them. Regular gifts out of surplus income are the most powerful and most underused exemption: unlimited in value, as long as the gift comes from income (not capital), does not reduce your standard of living, and forms part of a normal pattern.

Pensions, business relief, and agricultural relief

Defined contribution pensions sit outside the estate for IHT in 2026/27, which makes them the most tax-efficient asset to pass on. The standard sequencing advice is to spend ISA and general investment account money first in retirement and leave the pension untouched. The Treasury has announced that pensions will be brought inside the estate for IHT from April 2027, so this calculus changes for anyone planning more than a few years out. Pair this calculator with the life plan calculator if you want to model long-horizon drawdown alongside estate value.

Business Relief gives up to 100% IHT relief on qualifying unlisted shares (most AIM-listed companies still qualify) and 50% relief on certain other business assets, after a two-year holding period. Agricultural Property Relief covers qualifying farmland and farm buildings on a similar basis. The Autumn 2024 Budget capped the 100% rate at the first £1 million of qualifying assets from April 2026, with 50% relief above that, so anyone relying on these reliefs should check the current rules with a specialist. Capital Gains Tax planning often interacts with IHT planning during lifetime gifting; the UK CGT calculator helps quantify the trade-off when gifting investments rather than cash.

Worked examples

Why IHT is now a middle-class tax

The £325,000 nil-rate band has been frozen since 2009. Had it risen with CPI inflation over the same period, it would sit at roughly £500,000 today. The residence nil-rate band has been frozen since it was introduced in 2017. Both are scheduled to stay frozen until at least April 2030. Property prices and ISA values have done what they tend to do, so the proportion of estates dragged into IHT has risen sharply. The OBR expects HMRC to collect a record £9 billion a year in IHT by the late 2020s.

That is a deliberate policy choice. Inheritance Tax was originally pitched as a tax on large estates, and the political messaging around it still trades on that framing. Fiscal drag has turned it into a tax on people who bought a family home in London or the South East and held it long enough to see the price compound. If your estate is anywhere near the £500,000 single-person or £1,000,000 couple threshold, this stopped being a tax for someone else a while ago. Worth knowing which lever to pull and when.

IHT planning gets legally complex once you move past the basics of spousal transfers and annual gifting. Anyone with a likely IHT bill, a blended family, business assets, or international ties should pay for an hour with a Chartered Financial Planner or a STEP-qualified solicitor before relying on any specific structure. The cost of getting it wrong is usually larger than the cost of professional advice.

Frequently asked questions