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UK Inheritance Tax Explained
Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died. Not everyone has to pay it. It's only payable if the total value of the estate exceeds certain thresholds, known as nil-rate bands.
How is Inheritance Tax Calculated?
The basic calculation involves several steps. First, the total value of the estate is established. From this, you deduct any assets left to a surviving spouse or civil partner, or to registered charities – these are exempt from IHT. The remaining value is the 'chargeable estate'.
Next, you apply the available tax-free thresholds. Everyone has a standard nil-rate band (£325,000 for 2026/27). An additional residence nil-rate band (£175,000) may be available if the deceased's main home is passed on to their direct descendants (children, grandchildren, etc.).
These thresholds can be reduced by the value of any substantial gifts the deceased made in the seven years before they died. Gifts made within three years of death are taxed in full, but those made between three and seven years before death benefit from a 'taper relief', which reduces the amount that counts towards the threshold.
After subtracting the available thresholds from the chargeable estate, you arrive at the 'net chargeable estate'. If 10% or more of this net amount is left to charity, the IHT rate on the rest drops from 40% to 36%. The final tax liability is calculated by applying the correct rate to the taxable amount.
A Worked Example
Consider an estate valued at £850,000. The main home is left to the children, so the residence nil-rate band applies. Gifts of £50,000 were made in the last 7 years, and 12% of the net estate is left to charity.
- Total Estate: £850,000
- Spouse/Charity Exemption: £0
- Chargeable Estate: £850,000
- Total Tax-Free Threshold (NRB + RNRB): £325,000 + £175,000 = £500,000
- Tapered Gifts (assuming 7-year rate): £50,000 * 20% = £10,000
- Threshold After Gifts: £500,000 - £10,000 = £490,000
- Net Chargeable Estate: £850,000 - £490,000 = £360,000
- Charitable Legacy (12%): £43,200
- Taxable Amount: £360,000 - £43,200 = £316,800
- Tax Rate (as charity legacy >10%): 36%
- Estimated IHT: £316,800 * 36% = £114,048
Common Scenarios and Planning
For married couples and civil partners, leaving everything to the surviving partner means no IHT is due on the first death. The unused portion of the first partner's nil-rate band can often be transferred to the survivor, effectively doubling their threshold on the second death.
Making gifts during your lifetime can be an effective way to reduce the future value of your estate. However, you need to survive for seven years after making the gift for it to fall completely outside of your estate for IHT purposes.
Next Steps: Preparing a Will
Having a clear, legally valid Will is the most important step in estate planning. It ensures your assets are distributed according to your wishes and can help your beneficiaries manage the IHT liability. Our Last Will and Testament template provides a structured framework to outline your final wishes, appoint executors, and make specific gifts or charitable legacies.