How to Calculate Inheritance Tax: Step-by-Step Guide 2025

Calculating inheritance tax doesn't have to be complicated. While HMRC's forms can seem daunting, the basic calculation follows a simple five-step process. This guide walks you through each step with clear examples. If you are preparing the estate for probate, our IHT400 guidance explains when the full account and supporting schedules are required.

Step 1: Calculate Your Total Estate Value

Start by listing everything you own. This is your "gross estate value".

Assets to include:

  • Property: Main home at market value (£_______)
  • Other property: Buy-to-let, holiday homes (£_______)
  • Savings: All bank and building society accounts (£_______)
  • Investments: Stocks, shares, ISAs, bonds (£_______)
  • Pensions: Some types are included (£_______)
  • Life insurance: If not in trust (£_______)
  • Personal items: Jewelry, art, vehicles (£_______)
  • Business assets: If you own a business (£_______)

GROSS ESTATE TOTAL: £_______

Step 2: Deduct Debts and Liabilities

Not everything can be deducted, but these can:

Allowed Deductions:

  • Mortgage balance: £_______
  • Personal loans: £_______
  • Credit card balances: £_______
  • Utility bills (unpaid): £_______
  • Funeral expenses (up to reasonable amount): £_______

TOTAL DEBTS: £_______

NOT allowed:

  • Inheritance tax itself
  • Future potential expenses
  • Informal loans without evidence

NET ESTATE CALCULATION:

  • Gross estate value: £_______
  • Minus total debts: £_______
  • NET ESTATE VALUE: £_______

This is the figure you'll use for tax calculation.

Step 3: Apply Tax-Free Allowances

Now we calculate what's actually taxable.

Nil Rate Band (Standard Allowance)

Everyone gets: £325,000

Residence Nil Rate Band (Property Allowance)

Additional if leaving home to children/grandchildren: £175,000

Do you qualify for residence nil rate band?

  • ☐ Yes - you own your main home
  • ☐ Yes - you're leaving it to children/grandchildren/stepchildren
  • ☐ Yes - your estate is under £2 million

If you ticked all three: Add £175,000 to your allowance. Total allowance: £500,000

Transferred Allowances (if widowed)

If your spouse died and didn't use their full allowances:

  • Unused nil rate band from spouse: £_______ (up to £325,000)
  • Unused residence NRB from spouse: £_______ (up to £175,000)

Maximum possible combined allowance: £1,000,000

Exemptions

  • Amount left to spouse/civil partner: £_______ (FULLY EXEMPT)
  • Amount left to charity: £_______ (FULLY EXEMPT)

TAXABLE ESTATE CALCULATION:

  • Net estate value: £_______
  • Minus spouse exemption: £_______
  • Minus charity exemption: £_______
  • Minus nil rate band: £325,000
  • Minus residence NRB: £_______ (£175,000 if applicable)
  • Minus transferred allowances: £_______
  • TAXABLE AMOUNT: £_______

If this number is ZERO or negative: No inheritance tax to pay!

If this number is POSITIVE: Continue to Step 4

Step 4: Calculate the Tax

Standard Rate: 40%

  • Taxable amount: £_______
  • Multiply by 0.40 (40%)
  • TAX OWED: £_______

Reduced Rate: 36% (if 10%+ left to charity)

To qualify:

  • Net estate minus exemptions = £_______
  • 10% of this amount = £_______
  • Amount left to charity = £_______

If charity amount ≥ 10% threshold: Use 36% rate instead

  • Taxable amount: £_______
  • Multiply by 0.36 (36%)
  • TAX OWED (REDUCED RATE): £_______

If you would like a guided estimate after working through these steps, use our free UK Inheritance Tax Calculator.

Real Examples

Example 1: Single Person, Home Owner

Estate:

  • House: £450,000
  • Savings: £45,000
  • Personal belongings: £15,000
  • Car: £5,000
  • Total: £515,000

Debts:

  • None
  • Net estate: £515,000

Allowances:

  • Nil rate band: £325,000
  • Residence NRB (home to daughter): £175,000
  • Total allowances: £500,000

Taxable amount: £515,000 - £500,000 = £15,000

Tax owed: £15,000 × 40% = £6,000

Example 2: Married Couple Planning

First spouse leaves everything to survivor: £0 tax

Allowances transfer to survivor

When survivor dies:

  • Estate: £900,000
  • Less allowances: £650,000 (NRB) + £350,000 (Residence) = £1,000,000
  • Taxable: £0

Tax owed: £0

Common Mistakes to Avoid

Mistake 1: Forgetting the residence nil rate band

Many people only use the £325,000 allowance and miss the extra £175,000

Mistake 2: Including jointly-owned property at full value

Usually only 50% counts (unless tenants in common with unequal shares)

Mistake 3: Not claiming transferred allowances

Widows/widowers often forget they inherit unused spouse allowances

Mistake 4: Undervaluing the estate

HMRC will investigate. Be realistic.

Mistake 5: Forgetting recent gifts

Gifts within 7 years must be included

The Bottom Line

Calculating inheritance tax isn't as hard as it seems, but it is detailed. Follow these five steps:

  1. Total your estate value
  2. Deduct allowed debts
  3. Apply your allowances
  4. Calculate tax at 40% (or 36%)
  5. Apply any relief for gifts

Or save yourself the headache and use our free calculator - it does all of this for you automatically.