How to Calculate Inheritance Tax in the UK (2026/27 Guide)
What Is Inheritance Tax and When Does It Apply?
Inheritance tax (IHT) is a tax charged by HMRC on the estate of someone who has died. The estate includes all property, savings, investments, business interests, and personal possessions. In England, Wales, and Northern Ireland, IHT is charged at 40% on everything above your available tax-free threshold (Scotland follows the same UK-wide rules).
Most estates do not pay inheritance tax — HMRC estimates that roughly 4% of UK deaths result in an IHT charge. But for those that do, the bill can be substantial. With house prices rising and the nil-rate band frozen since 2009, the number of families affected is growing every year.
Inheritance tax is normally paid from the estate before any assets are distributed to beneficiaries. It must be paid to HMRC within six months of the date of death, otherwise interest begins to accrue.
Who pays IHT? The tax is paid by the estate — not by the beneficiaries personally. The executors or personal representatives of the deceased are responsible for calculating and paying the bill from the estate's assets before probate is granted.
How to Calculate Inheritance Tax: Step by Step
Calculating inheritance tax is a five-step process. Work through each step in order to arrive at your liability figure.
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1
Calculate the gross estate value
Add up the total value of everything owned at the date of death: property, cash, ISAs, investments, vehicles, jewellery, business interests, and any life insurance policies not written in trust.
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2
Subtract debts and liabilities
Deduct any outstanding mortgage balances, loans, credit card debts, utility bills, and reasonable funeral expenses. This gives you the net estate value.
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3
Apply exemptions
Remove any assets passing to a spouse or civil partner (fully exempt), assets passing to charity (fully exempt), and the value of any qualifying gifts already made in the seven years before death.
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4
Subtract your nil-rate band allowances
Deduct your nil-rate band (£325,000) and, if applicable, your residence nil-rate band (up to £175,000). If inheriting the unused allowance of a deceased spouse, apply the transferred amounts too.
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5
Apply the 40% tax rate
Whatever remains after your allowances is the taxable estate. Multiply this by 40% to get your inheritance tax liability. Note: if at least 10% of the net estate is left to charity, a reduced rate of 36% applies to the remainder.
Understanding the Nil-Rate Band Allowances
The most important part of any inheritance tax calculation is correctly applying the available allowances. Getting this wrong is one of the most common mistakes — either overstating the liability or understating it and facing a surprise bill at probate.
| Allowance | 2026/27 Amount | Conditions |
|---|---|---|
| Nil-Rate Band (NRB) | £325,000 | Available to everyone. Frozen until at least April 2030. |
| Residence Nil-Rate Band (RNRB) | Up to £175,000 | Only applies when leaving a qualifying home to direct descendants. Tapers away above a £2m estate. |
| Transferred NRB | Up to £325,000 | Unused NRB from a deceased spouse or civil partner transfers to the survivor. |
| Transferred RNRB | Up to £175,000 | Unused RNRB from a deceased spouse or civil partner transfers to the survivor. |
| Maximum combined (married couple) | £1,000,000 | Both NRBs + both RNRBs combined, where home is left to direct descendants. |
The RNRB taper: If the net estate exceeds £2 million, the residence nil-rate band is reduced by £1 for every £2 above that threshold. An estate worth £2.35 million would lose the entire £175,000 RNRB, leaving only the standard £325,000 NRB available.
Worked Examples: Calculating IHT
The best way to understand the calculation is to see it in action. Here are three scenarios covering the most common situations.
Example 1: Single person, no property to children
Example 2: Married couple, home left to children
Example 3: Large estate with RNRB taper
Note on example 3: At this estate size, proactive IHT planning — gifting, trusts, business property relief — could substantially reduce the liability. A specialist IFA or solicitor should be consulted as early as possible.
Get Your IHT Estimate in Minutes
Use our free inheritance tax calculator to instantly estimate your potential IHT liability using the current 2026/27 HMRC thresholds. Enter property, savings, and other assets to get your figure.
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How Gifts Affect the Inheritance Tax Calculation
Gifts made in the seven years before death may be brought back into the estate for IHT calculation purposes. These are called Potentially Exempt Transfers (PETs). Understanding how they interact with the nil-rate band is essential for an accurate calculation.
When gifts are made within seven years of death, they use up the nil-rate band first — reducing the amount of NRB available to shelter the remaining estate. This is known as the “seven-year cumulation rule.”
Example: If someone gave away £200,000 three years before death and then died with a £400,000 estate, the £200,000 gift uses up part of the nil-rate band first, leaving only £125,000 of the NRB to shelter the estate. The taxable estate would be £275,000, resulting in an IHT bill of £110,000 — significantly higher than if the gift had not been made so recently.
Gifts exempt from IHT regardless of timing
| Gift type | Exempt amount |
|---|---|
| Annual gift exemption | £3,000 per year (unused allowance can carry forward one year) |
| Small gifts | £250 to any number of individuals per year |
| Wedding gifts to a child | £5,000 |
| Wedding gifts to a grandchild | £2,500 |
| Regular gifts from surplus income | Unlimited (must be habitual, from income, not capital) |
| Gifts to spouse or civil partner | Unlimited |
| Gifts to UK registered charities | Unlimited |
How to Reduce Your Inheritance Tax Calculation
Once you have worked out your potential IHT liability, the next step is to explore legal strategies to reduce it. The earlier you act, the more options you have.
The main methods are: structured lifetime gifting (using annual allowances and the seven-year clock), regular gifts from surplus income, trust planning, life insurance written in trust to cover the bill, and — for business or farm owners — making full use of Business Property Relief and Agricultural Property Relief. For a full guide to these strategies, see our comprehensive IHT planning guide.
Frequently Asked Questions: Calculating Inheritance Tax
How do you calculate inheritance tax in the UK?
Add up the total estate value (property, cash, investments, possessions). Subtract debts, funeral costs, and any exempt assets (e.g. passing to a spouse). Subtract your nil-rate band (£325,000) and, if applicable, the residence nil-rate band (up to £175,000). The remainder is taxed at 40%. Use our free calculator for an instant estimate.
What is the inheritance tax threshold in 2026/27?
The standard nil-rate band is £325,000 per person and is frozen until at least April 2030. If you leave your main home to your children or grandchildren, an additional residence nil-rate band of £175,000 applies, giving you a total of £500,000. Married couples and civil partners can combine their allowances, giving a potential £1,000,000 threshold.
How much inheritance tax will I pay on a £500,000 estate?
It depends on your circumstances. As a single person with no qualifying home, you would subtract the £325,000 NRB from £500,000, leaving £175,000 taxable — an IHT bill of £70,000. If you are leaving your home to children, the RNRB would reduce or eliminate that bill. As a married couple survivor with full transferred allowances (£1m combined), you would pay nothing.
Is inheritance tax calculated on the gross or net estate?
Inheritance tax is calculated on the net estate — after deducting any debts, loans, mortgages, and reasonable funeral expenses. The gross value is reduced by these liabilities before the nil-rate bands are applied.
Does my ISA count towards inheritance tax?
Yes. ISAs lose their income and capital gains tax advantages on death, and their value is included in your estate for IHT purposes. The ISA wrapper does not provide any IHT exemption. However, ISAs inherited by a spouse benefit from an APS (Additional Permitted Subscription) allowance and can remain tax-efficient in that way.
How long do you have to pay inheritance tax?
Inheritance tax must generally be paid within six months of the end of the month in which the person died. If it is not paid by this deadline, HMRC charges interest on the outstanding amount. In some cases — particularly where the estate includes property that needs to be sold — you can pay in instalments over ten years.
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Disclaimer
This article is for general information only and does not constitute financial or legal advice. Tax rules can change and depend on individual circumstances. Always consult a qualified professional before making financial decisions.