Inheritance Tax Calculator 2025/26

How Inheritance Tax Works

Inheritance tax (IHT) is a tax on the estate of someone who has died. The estate includes everything the person owned at the time of death — property, savings, investments, personal possessions, and any gifts made within the last 7 years. IHT is paid by the executor or personal representative of the estate before assets can be distributed to beneficiaries.

The tax is charged at 40% on the value of the estate above the nil-rate band (NRB) of £325,000. This means the first £325,000 of every estate is tax-free. Only the portion above this threshold is taxed. For a simple estate worth £500,000 with no other reliefs, IHT would be charged on £175,000 (£500,000 minus £325,000), resulting in a tax bill of £70,000.

However, the actual IHT liability depends on many factors including spouse exemptions, the residence nil-rate band, charitable gifts, business and agricultural property relief, and gifts made during the deceased's lifetime. Many estates pay no inheritance tax at all — HMRC statistics show that only around 4% of UK deaths result in an IHT charge. The majority of estates fall below the various thresholds or benefit from exemptions that eliminate the tax entirely.

It is important to understand that IHT is a tax on the estate itself, not on the people who inherit. The beneficiaries receive their inheritance after IHT has been paid. This is different from some other countries where the recipients pay tax on what they receive. The executor is personally liable for ensuring the correct amount of IHT is paid before distributing the estate.

IHT Nil-Rate Band — £325,000

The nil-rate band (NRB) is the threshold below which no inheritance tax is charged. For the 2025/26 tax year, the NRB is £325,000. This threshold has been frozen at £325,000 since the 2009/10 tax year and is set to remain frozen until at least April 2028. Because it has not increased with inflation, more estates are being brought into the IHT net each year as property values and asset prices rise — a phenomenon known as fiscal drag.

The NRB applies to every individual, regardless of their marital status or family circumstances. It is the basic threshold that everyone receives. When calculating IHT, the NRB is deducted from the net estate value (after liabilities and exemptions) to determine the taxable amount.

If the deceased was married or in a civil partnership and their spouse died before them, any unused portion of the first spouse's NRB can be transferred. This is known as the transferable nil-rate band. If the first spouse left everything to the surviving partner (which is exempt from IHT under the spouse exemption), 100% of their NRB was unused and can be claimed. This effectively doubles the NRB to £650,000 for the surviving spouse's estate.

Residence Nil-Rate Band — £175,000

The residence nil-rate band (RNRB) was introduced in April 2017 to help families pass on the family home without an IHT bill. It provides an additional £175,000 allowance on top of the standard NRB, but only when a main residence is passed to direct descendants — children, grandchildren, step-children, adopted children, or foster children.

The RNRB is capped at the value of the property being passed on. If the main residence is worth £100,000, the RNRB available is £100,000, not the full £175,000. The property must have been the deceased's residence at some point, though it does not need to be their residence at the time of death — this is important for people who move into care homes.

A key restriction is the RNRB taper. For estates with a net value exceeding £2 million, the RNRB is reduced by £1 for every £2 above the threshold. This means the RNRB is completely eliminated for estates worth £2.35 million or more (for a single person), or £2.7 million when including a transferred spouse's RNRB.

Like the NRB, any unused RNRB from a deceased spouse can be transferred to the surviving partner. This means a married couple could have a combined threshold of up to £1,000,000: two NRBs of £325,000 each (£650,000) plus two RNRBs of £175,000 each (£350,000).

Transferable Nil-Rate Band

The transferable nil-rate band allows unused NRB and RNRB from a deceased spouse or civil partner to be claimed by the surviving partner's estate. This is one of the most valuable IHT reliefs available and can double the tax-free threshold.

The transfer is not automatic — it must be claimed by the executor when filing the IHT return for the surviving spouse's estate. The claim is made using form IHT402 for the NRB and IHT436 for the RNRB. There is no time limit for making the claim, and it applies even if the first spouse died before the RNRB was introduced in 2017.

The amount transferred is based on the proportion of the NRB that was unused when the first spouse died, not the actual amount. For example, if the first spouse died when the NRB was £263,000 and used £131,500 of it (50%), the surviving spouse can claim 50% of the current NRB — which at £325,000 would be £162,500. This percentage-based approach means the transfer benefits from any increases in the NRB between the two deaths.

IHT on Property

Property is often the most valuable asset in an estate and is frequently the reason IHT becomes payable. The family home is included in the estate at its open market value at the date of death. If the property is jointly owned, only the deceased's share is included — typically 50% for joint tenants or their specific share for tenants in common.

The residence nil-rate band provides significant relief for property passing to direct descendants, adding up to £175,000 (or £350,000 for couples) to the tax-free threshold. However, the property must genuinely be the deceased's main residence. Buy-to-let properties, holiday homes, and investment properties do not qualify for the RNRB.

If the deceased had downsized or sold their property before death, a downsizing addition may be available. This allows the estate to claim part of the RNRB that would have been available had the original property still been owned, provided the proceeds or a replacement property of lesser value is left to direct descendants. This provision was included to ensure people are not penalised for moving to a smaller or less expensive home in later life.

An outstanding mortgage reduces the value of the property for IHT purposes. If the deceased had a £200,000 property with a £50,000 mortgage, only £150,000 would be included in the estate value. However, mortgage protection insurance policies that pay off the mortgage on death would increase the estate by the insurance payout.

Gifts and the 7-Year Rule

One of the most common IHT planning strategies involves making gifts during your lifetime. Under the 7-year rule, gifts become completely exempt from IHT if the person making the gift survives for at least 7 years after making it. These are known as potentially exempt transfers (PETs).

If the person dies within 7 years of making a gift, the gift is added back to the estate for IHT purposes. However, taper relief reduces the tax rate on gifts made between 3 and 7 years before death:

Taper relief reduces the tax rate on the gift, not the value of the gift itself. It only applies when the cumulative gifts exceed the nil-rate band. Gifts within the NRB are tax-free regardless of when they were made.

Certain gifts are always exempt regardless of the 7-year rule. These include gifts to spouses and civil partners (unlimited), gifts to registered charities and political parties, the annual exemption of £3,000 per tax year (which can be carried forward for one year if unused), small gifts of up to £250 per recipient per year, and wedding gifts (up to £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else).

IHT Exemptions

Understanding the available exemptions is crucial for inheritance tax planning. The main exemptions are:

• Spouse / Civil Partner Exemption: Assets passing to a surviving spouse or civil partner are completely exempt from IHT with no upper limit. This is the most important exemption and means that the first death in a married couple rarely triggers an IHT liability. However, this simply defers the tax to the second death unless proper planning is undertaken.
• Charity Exemption: Gifts to registered UK charities are exempt from IHT. Additionally, if at least 10% of the net estate (after deducting the nil-rate band) is left to charity, the IHT rate on the remaining taxable estate is reduced from 40% to 36%. This means that in some cases, leaving more to charity can actually increase the amount beneficiaries receive.
• Business Property Relief (BPR): Qualifying business assets can receive either 50% or 100% relief from IHT. A 100% relief applies to a business or interest in a business (sole trader or partnership), unquoted shares, and AIM-listed shares. A 50% relief applies to shares giving control of a listed company, land or buildings used by a partnership, and machinery used by a partnership or company.
• Agricultural Property Relief (APR): Agricultural land and buildings qualify for either 50% or 100% relief depending on the type of tenancy. The property must have been occupied for agricultural purposes for a qualifying period before death.
• Annual Exemption: Each person can give away £3,000 per tax year free from IHT. If the exemption is not used in one year, it can be carried forward to the next year (but only for one year), giving a potential £6,000 exemption.
• Normal Expenditure Out of Income: Regular gifts made from surplus income (not capital) are exempt if they form part of a pattern of giving and do not reduce the person's standard of living. This is a powerful but often overlooked exemption that has no upper limit.

How to Reduce Your Inheritance Tax

There are several legitimate strategies to reduce the inheritance tax that will be payable on your estate. The most effective approaches include:

Making Gifts: The simplest way to reduce IHT is to give assets away during your lifetime. Gifts become fully exempt after 7 years. Using the annual £3,000 exemption each year can remove significant sums from your estate over time. A couple giving away £6,000 per year for 20 years would remove £120,000 from their combined estates.

Charitable Giving: Leaving at least 10% of your taxable estate to charity reduces the IHT rate from 40% to 36%. Run the numbers carefully — in some cases, increasing a charitable bequest can actually leave more for family beneficiaries while also benefiting a charity. For example, on a taxable estate of £200,000, leaving £20,000 (10%) to charity reduces the IHT from £80,000 (40% of £200,000) to £64,800 (36% of £180,000), saving £15,200 in tax while only giving £20,000 to charity.

Pension Planning: Pension funds are typically outside the estate for IHT purposes. Drawing income from other sources and leaving pension funds untouched can be an effective strategy. Since the pension freedoms introduced in 2015, pension pots can be passed to any beneficiary free of IHT (though income tax may apply on withdrawals after age 75 death). Note: from April 2027, unused pension funds and death benefits will be brought within the scope of IHT under rules announced in the Autumn Budget 2024.

Life Insurance in Trust: Taking out a life insurance policy and writing it into trust can provide funds to pay the IHT bill without increasing the estate. A whole-of-life policy written in trust pays out directly to the trust beneficiaries, bypassing the estate entirely. This ensures beneficiaries have immediate access to funds for the IHT bill while the estate goes through probate.

Trusts: Placing assets into certain types of trust can remove them from your estate for IHT purposes. However, trust tax rules are complex and there may be immediate IHT charges when setting up a trust (at 20% on amounts above the NRB), plus periodic charges every 10 years (up to 6%). Professional advice is essential when considering trusts for IHT planning.

Business and Agricultural Relief: Investing in qualifying business assets or agricultural property can provide 50% or 100% relief from IHT. AIM-listed shares, for example, typically qualify for 100% Business Property Relief after being held for 2 years. However, these investments carry higher risk than traditional assets and should not be chosen solely for tax reasons.

Worked Examples

Example 1: Simple Estate — Single Person

A single person with an estate worth £500,000, including a property worth £250,000 left to their nephew (not a direct descendant):

• Estate value: £500,000
• Nil-rate band: £325,000
• RNRB: £0 (not passing to direct descendants)
• Taxable estate: £175,000
• IHT at 40%: £70,000
• Estate after tax: £430,000
• Effective rate: 14%

Example 2: Estate with RNRB — Passing Home to Children

The same estate, but the property is left to the deceased's children:

• Estate value: £500,000
• Property value: £250,000 (to children)
• Nil-rate band: £325,000
• RNRB: £175,000
• Total threshold: £500,000
• Taxable estate: £0
• IHT: £0

The RNRB eliminates the entire IHT liability in this case, saving £70,000 compared to Example 1.

Example 3: Married Couple — Transferred NRB

A surviving spouse with an estate of £900,000, including a property worth £400,000 left to children, and the deceased spouse's full NRB and RNRB available for transfer:

• Estate value: £900,000
• Property value: £400,000 (to children)
• Own NRB: £325,000
• Own RNRB: £175,000
• Transferred NRB: £325,000
• Transferred RNRB: £175,000
• Total threshold: £1,000,000
• Taxable estate: £0
• IHT: £0

The combined NRB and RNRB from both spouses creates a £1 million threshold, more than covering the £900,000 estate.

IHT Rates and Thresholds for 2025/26

The nil-rate band has been frozen at £325,000 since 2009 and is expected to remain frozen until at least April 2028. The residence nil-rate band has been at £175,000 since 2020/21. These freezes mean that rising property values and inflation are bringing more estates into the IHT net each year — HMRC reported that IHT receipts reached £7.5 billion in 2023/24, a significant increase from previous years.

Common Mistakes

1. Forgetting About the 7-Year Rule

Many people assume that gifts are immediately exempt from IHT. In reality, gifts only become fully exempt if the donor survives for 7 years. Large gifts made shortly before death are added back to the estate. If you are making significant gifts as part of IHT planning, start early to maximise the chance of surviving the 7-year period.

2. Not Claiming the Transferred NRB

The transferable nil-rate band from a deceased spouse is not applied automatically. The executor must actively claim it using form IHT402. Failing to make this claim can result in paying significantly more IHT than necessary. Always check whether any unused NRB from a predeceased spouse is available.

3. Assuming All Property Qualifies for RNRB

The residence nil-rate band only applies to the deceased's main residence when it passes to direct descendants. Buy-to-let properties, holiday homes, and investment properties do not qualify. Additionally, the property must pass to children, grandchildren, or other lineal descendants — siblings, nieces, nephews, and friends do not count.

4. Overlooking the RNRB Taper

For estates worth more than £2 million, the RNRB is reduced by £1 for every £2 over the threshold. An estate worth £2.35 million loses the entire RNRB of £175,000. This taper means that for wealthy families, the RNRB provides no benefit at all. Estate planning to reduce the value below £2 million before death can preserve access to the RNRB.

5. Not Keeping Records of Gifts

The executor needs to account for all gifts made in the 7 years before death. Without records, it can be difficult to prove when gifts were made and to whom. Keep a record of all significant gifts including the date, amount, recipient, and whether any exemptions were used. This makes the executor's job much easier and helps ensure the correct amount of IHT is calculated.