Inheritance Tax Calculator 2026/27

Calculation runs based on standard HMRC rules.

Deductions are calculated and adjusted accordingly.

Detailed Inheritance Tax (IHT) Guide & Calculation Rules

How UK Inheritance Tax (IHT) Works

Inheritance Tax (IHT) is calculated based on the net value of a deceased person’s estate plus any non-exempt gifts made within 7 years of their death, minus all available tax-free thresholds. The standard IHT rate is **40%**, which is charged only on the value of the estate that exceeds the tax-free thresholds. If the total taxable estate is below your available allowance, no IHT is payable.

How We Calculate Inheritance Tax (Step-by-Step)

The calculation is performed in three distinct steps:

1. Asset Valuation: Sum all assets (property, cash, investments, personal belongings) and deduct any outstanding debts, liabilities, and funeral costs to calculate the net estate value. Add the value of any taxable gifts made within 7 years.
2. Threshold Application: Apply the standard Nil Rate Band (£325,000) and, if qualifying, the Residence Nil Rate Band (£175,000, subject to tapering if the estate exceeds £2 million). If the deceased was married and their partner passed away previously, transfer any unused percentage of their partner’s allowances (up to 100% transfer, doubling allowances up to £1 million).
3. Tax Calculation: Subtract the total allowances from the estate value. If there is a surplus, apply the standard tax rate of 40% (or the reduced rate of 36% if leaving 10% or more of the net estate to a registered charity).

Real-World Calculation Examples

Here are two detailed mathematical models showing how we calculate Inheritance Tax under different circumstances:

Example 1: Married Couple with Spouse Transfer (Estate: £1,200,000)

Let’s calculate the tax for a surviving spouse passing away in 2026/27, leaving their main home and other assets to their children. Their deceased partner made no prior gifts and left all assets to the surviving spouse tax-free.

• 1. Gross Estate Value: £1,200,000 (includes a main home worth £500,000).
• 2. Standard Nil Rate Band (NRB): £325,000 (Self) + £325,000 (100% Spouse Transfer) = **£650,000**.
• 3. Residence Nil Rate Band (RNRB): Since the home is passed to direct descendants, they qualify for RNRB. £175,000 (Self) + £175,000 (100% Spouse Transfer) = **£350,000**.
• 4. Total Allowances: £650,000 + £350,000 = **£1,000,000**.
• 5. Taxable Estate Value: £1,200,000 – £1,000,000 = **£200,000**.
• 6. Tax Due at 40%: £200,000 * 40% = **£80,000**.

Example 2: Wealthy Estate with RNRB Tapering (Estate: £2,200,000)

Let’s calculate the tax for a single individual leaving their home and assets to their children. Because their estate exceeds £2,000,000, their RNRB is tapered.

• 1. Gross Estate Value: £2,200,000 (includes a main home worth £600,000).
• 2. Apply Standard NRB: **£325,000**.
• 3. Apply Tapered RNRB: The standard RNRB of £175,000 is reduced by £1 for every £2 the estate exceeds £2,000,000.
  – Excess value: £2,200,000 – £2,000,000 = £200,000.
  – RNRB Reduction: £200,000 / 2 = £100,000.
  – Stated RNRB: £175,000 – £100,000 = **£75,000**.
• 4. Total Allowances: £325,000 (NRB) + £75,000 (Tapered RNRB) = **£400,000**..
• 5. Taxable Estate Value: £2,200,000 – £400,000 = **£1,800,000**.
• 6. Tax Due at 40%: £1,800,000 * 40% = **£720,000**.

Tax Expert Pro-Tips: Gifting and Trusts

David Vance, CTA FCA, recommends: “Inheritance Tax planning should begin early. Using lifetime gifting exemptions—such as the £3,000 annual exemption or the regular surplus income rule—allows you to shift substantial sums out of your estate tax-free. If you are purchasing life insurance to cover your estimated tax liability, ensure the policy is written in trust so the payout goes directly to your heirs outside your estate, avoiding the 40% tax charge.”

Frequently Asked Questions (FAQs)

Q: What is the Residence Nil Rate Band (RNRB)?
A: The Residence Nil Rate Band is an additional tax-free allowance of up to £175,000 per person when you pass a main home to direct descendants (children, grandchildren). It is tapered by £1 for every £2 the estate is worth over £2 million.

Q: How does the spousal exemption work?
A: Transfers of assets between spouses or civil partners are completely exempt from Inheritance Tax. Furthermore, any unused nil rate bands can be transferred to the surviving spouse, allowing them to pass up to £1 million tax-free.

Q: Does leaving money to charity reduce my tax rate?
A: Yes. Any donations to registered charities are completely IHT-free. Furthermore, if you leave at least 10% of your net estate to charity, the tax rate on the remainder of your taxable estate drops from 40% to 36%.

Q: What is the 7-year rule for gifts?
A: Gifts made to individuals during your lifetime are classified as Potentially Exempt Transfers (PETs). If you live for 7 years after the gift, it is tax-free. If you die within 7 years, it is added back to your estate, though taper relief can reduce the tax rate if you survive at least 3 years.

Q: Are pensions subject to Inheritance Tax?
A: Generally, no. Most pension pots are held outside your taxable estate and can be passed to your beneficiaries completely free of Inheritance Tax, making pensions one of the most efficient tax shelters in the UK.

Q: What is Business Property Relief (BPR)?
A: BPR provides up to 100% tax relief on active trading businesses, interests in a business, or shares in unlisted trading companies (including AIM shares) held for at least 2 years before death, protecting them from IHT.

Legislative References

• Inheritance Tax Act 1984 (IHTA 1984) – Primary statutory framework governing estate tax thresholds.
• HMRC Inheritance Tax Manual – Detailed guidelines on spousal transfers and asset valuations.