Understanding inheritance tax can feel overwhelming, especially during what is often an emotional and stressful time for families. The good news is that most estates in the UK do not pay inheritance tax at all — and even when they do, there are legal reliefs and exemptions that can significantly reduce the amount due.

This guide explains how inheritance tax is calculated, who pays it, the current thresholds that apply for 2026/27, and how you can estimate your own liability in minutes.

What Is Inheritance Tax?

Inheritance Tax (IHT) is a tax charged on the value of someone's estate when they die. An estate includes everything the deceased owned at the time of death:

• Property and land
• Savings and bank accounts
• Investments and shares
• Personal possessions and vehicles
• Business interests (subject to reliefs)

Any outstanding debts — including mortgages, loans, and funeral expenses — are deducted before the taxable estate is calculated. Not every estate pays inheritance tax. Whether tax is due depends on the total value and which allowances apply to that estate.

Who Pays Inheritance Tax?

Most people won't pay inheritance tax. Inheritance tax is only payable when the value of an estate exceeds the available tax-free allowances after all exemptions and reliefs have been applied. For many married couples and civil partners, allowances can be combined, allowing a significant amount to pass on before any tax becomes due.

Factors that affect whether — and how much — inheritance tax applies:

• The total value of the estate
• Whether the deceased owned their main home
• Who the assets are left to
• Gifts made during their lifetime
• Available tax reliefs (Business Relief, Agricultural Relief, etc.)
• Whether a spouse or civil partner has already died and left unused allowances

Every estate is different, which is why using a calculator provides a far more accurate estimate than relying on general examples.

How Is Inheritance Tax Calculated?

The calculation follows four steps.

Step 1 – Calculate the Gross Estate

Add together the value of all assets owned at the date of death: property, savings, investments, personal possessions, business assets, and any other property.

Step 2 – Deduct Liabilities

Subtract outstanding debts: mortgages, personal loans, credit card balances, and reasonable funeral costs. This gives the net estate value.

Step 3 – Apply Tax-Free Allowances

Several allowances may reduce the taxable amount, including the nil-rate band, residence nil-rate band, and any transferable allowances from a deceased spouse or civil partner.

Step 4 – Calculate Tax at 40%

Any amount remaining above the available allowances is generally taxed at 40%. This is the standard inheritance tax rate for 2026/27.

Current UK Inheritance Tax Thresholds (2026/27)

Understanding which allowances apply is the most important part of any inheritance tax calculation.

For a surviving spouse or civil partner leaving the main home to children or grandchildren, the combined tax-free threshold can reach £1,000,000: £325,000 + £175,000 from their own allowances, plus up to £500,000 transferred from their first spouse.

It is worth noting that the RNRB is tapered away for estates worth more than £2 million — reducing by £1 for every £2 above that threshold. Very large estates may therefore lose some or all of the residence allowance.

Worked Examples

Example 1 – Single Homeowner, Estate Worth £450,000

A single person leaves an estate valued at £450,000, including a main home worth £280,000, to their two children.

• Net estate: £450,000
• Nil-Rate Band: £325,000
• Residence Nil-Rate Band: £125,000 (capped at the value of the home share passing to direct descendants)
• Total allowances: £450,000
• Taxable amount: £0
• Inheritance tax: £0

In this case the combined NRB and RNRB cover the entire estate — no tax is due.

Example 2 – Married Couple, Combined Estate Worth £900,000

The second spouse to die leaves an estate of £900,000, including a main home, to their children. They can claim their own allowances plus the unused allowances transferred from their first spouse.

• Net estate: £900,000
• Own NRB: £325,000
• Transferred NRB: £325,000
• Own RNRB: £175,000
• Transferred RNRB: £175,000
• Total allowances: £1,000,000
• Taxable amount: £0
• Inheritance tax: £0

Again, no tax — the £1 million combined allowance covers the estate in full. This illustrates why a couple's total effective threshold is often described as £1 million.

Example 3 – Larger Estate Worth £1.6 Million

A single person leaves an estate of £1.6 million, including a main home, to their children.

• Net estate: £1,600,000
• Nil-Rate Band: £325,000
• Residence Nil-Rate Band: £175,000 (subject to tapering — the estate is under the £2m threshold so full RNRB applies)
• Total allowances: £500,000
• Taxable amount: £1,100,000
• Tax at 40%: £440,000

A substantial bill — and one where professional estate planning could make a meaningful difference. Business Relief, gifting strategies, or charitable giving could all reduce the taxable estate if planned in advance.

Does Your Home Count Towards Inheritance Tax?

Yes. Your home is included as part of your estate and is subject to inheritance tax in the normal way.

However, if you leave your main residence to direct descendants — children, grandchildren, stepchildren, or adopted children — an additional allowance (the Residence Nil-Rate Band) of up to £175,000 may apply. This is one of the most valuable reliefs available, and it is why two estates with identical total values can produce very different tax bills depending on who inherits the property.

The RNRB is only available for a main home — not buy-to-let properties or investment property. It is also tapered away for very large estates above £2 million.

What About Gifts?

Many people believe that giving away money automatically avoids inheritance tax. This is not always the case.

Certain gifts may still be counted when calculating inheritance tax, depending on when they were made, their value, and which exemptions apply. The well-known "seven-year rule" means that gifts made more than seven years before death usually fall outside the estate entirely — but those made within seven years may be added back in full (or in part, under taper relief) when working out the tax due.

Common gift exemptions that are immediately outside your estate include:

• The annual exemption: £3,000 per year (or £6,000 if the previous year's allowance was unused)
• Small gift exemption: up to £250 per person per tax year
• Wedding and civil partnership gifts (amounts vary by relationship)
• Gifts from surplus income as part of a regular pattern
• Gifts to a spouse or civil partner (unlimited, if they are UK-domiciled)

Larger gifts that fall outside these exemptions are called Potentially Exempt Transfers (PETs). They become free of inheritance tax after seven years, but if the donor dies within that window, they may still affect the tax calculation. Understanding the full gifting picture can be complex — our Gifting Strategy Planner can help you track and model the impact.

Can You Reduce Inheritance Tax Legally?

Yes. There are several legitimate ways inheritance tax may be reduced, depending on your circumstances:

• Gifting: Making use of annual exemptions and longer-term Potentially Exempt Transfers reduces the estate over time
• Leaving assets to a spouse or civil partner: These transfers are generally exempt from inheritance tax
• Charitable donations: Gifts to registered UK charities are completely exempt. Leaving at least 10% of your net estate to charity also reduces the IHT rate on the remainder from 40% to 36%
• Business Relief: Certain business assets may qualify for up to 100% relief — though rules tightened significantly from April 2026
• Agricultural Relief: Qualifying farmland and farm buildings may attract significant relief
• Trusts: Some trust arrangements can be used to pass assets outside the estate, though trust taxation is complex and professional advice is essential
• Life insurance in trust: A policy written in trust pays out outside the estate, providing beneficiaries with funds to meet any tax bill without adding to it

The most appropriate combination depends on individual circumstances, estate size, and family situation. Larger or more complex estates consistently benefit from professional review.

Frequently Asked Questions

Will my children pay inheritance tax?

Inheritance tax is normally paid from the estate before assets are distributed to beneficiaries. Your children receive their inheritance after the tax has been settled — they do not usually pay it directly from their own funds.

Is inheritance tax always charged at 40%?

The standard rate is 40% on the taxable portion of the estate above all available allowances. It reduces to 36% if at least 10% of the net estate is left to charity.

Does inheritance tax apply if everything is left to my spouse?

Assets left to a UK-domiciled spouse or civil partner are generally exempt from inheritance tax with no upper limit. In addition, any unused allowances can usually be transferred to the surviving spouse's estate.

Do I have to pay inheritance tax immediately?

Inheritance tax is usually due within six months of the end of the month in which the person died. For property or certain other assets, HMRC offers an instalment arrangement over ten years in some cases. The estate normally handles payment before probate is completed.

Should I use an inheritance tax calculator?

A calculator is a useful starting point. It provides an instant estimate, helps you understand whether tax may apply, and shows which allowances are relevant to your estate. It is not a substitute for legal or financial advice where an estate is complex, but for straightforward estates it gives a clear picture very quickly.

When Should You Seek Professional Help?

Many estates can be understood clearly with a calculator. However, professional guidance may be worthwhile if the estate includes:

• Multiple properties or a buy-to-let portfolio
• Overseas assets or property abroad
• Family businesses or farming land
• Trusts
• Significant lifetime gifts in the last seven years
• Disputes between beneficiaries
• High-value investment portfolios

Our free professional review connects you with experienced probate solicitors who can assess your specific circumstances. The initial review is free and without obligation — if you decide to instruct a solicitor, fees are always agreed before any work begins.