Inheritance Tax Calculator UK 2025

How Inheritance Tax Works

Inheritance Tax is a tax on the estate of someone who has died. It is charged at 40% on the value of the estate above the nil rate band. The estate includes everything the deceased owned at the date of death — property, savings, investments, personal possessions, and certain gifts made in the seven years before death — minus any debts, funeral costs, and exempt transfers.

HMRC collects Inheritance Tax directly from the estate before assets are distributed to beneficiaries. The personal representatives of the estate (usually the executors named in the will, or administrators if there is no will) are responsible for valuing the estate, completing the necessary IHT forms, and paying any tax due. In most cases, the tax must be paid within six months of the end of the month in which the death occurred. If the payment is late, HMRC charges interest on the outstanding amount.

It is worth understanding that inheritance tax is levied on the estate itself, not on the individual beneficiaries who receive the assets. This distinguishes it from some other countries where the recipients pay the tax. In practice, the amount each beneficiary receives is reduced by their proportional share of the IHT bill, unless the will specifies that certain legacies are to be paid free of tax, in which case the residuary estate bears the full burden.

The 40% rate is one of the highest estate taxes among developed nations, though the relatively generous nil rate band and the availability of various exemptions mean that only a small proportion of estates actually pay IHT. According to HMRC statistics, roughly 4% to 6% of deaths in England and Wales result in an IHT liability. However, rising property prices, particularly in London and the South East, have been drawing more estates above the threshold in recent years, which is one reason the residence nil rate band was introduced.

Nil Rate Bands Explained

The nil rate band (NRB) is the tax-free threshold below which no inheritance tax is charged. For the 2025/26 tax year, the nil rate band is £325,000. This amount has been frozen at £325,000 since April 2009, meaning its real value has been significantly eroded by inflation over the years.

In addition to the standard nil rate band, the residence nil rate band (RNRB) provides an extra £175,000 of tax-free allowance when the estate includes a home that is being passed to a direct descendant. Direct descendants include children, stepchildren, adopted children, grandchildren, and their spouses or civil partners. The RNRB was introduced in April 2017 and phased in gradually, reaching its current level of £175,000 from April 2020.

Together, the NRB and RNRB give an individual a total tax-free threshold of up to £500,000, provided the conditions are met. For a married couple or civil partners, the combined threshold can reach £1 million.

There is an important taper mechanism for larger estates. The residence nil rate band is reduced by £1 for every £2 that the estate exceeds £2 million. This means the RNRB is fully tapered away for estates worth £2.35 million or more. The standard nil rate band is not affected by this taper and always remains at £325,000. If you are close to the £2 million threshold, it is worth taking professional advice to see whether lifetime gifts or other planning measures could preserve the RNRB.

It is also worth noting that business property relief (BPR) and agricultural property relief (APR) can provide 50% or 100% relief on qualifying business assets and farmland. These reliefs are applied before the nil rate band, effectively reducing the taxable estate. Qualifying assets might include shares in unlisted trading companies, a sole trader business, or agricultural land used for farming purposes.

Married Couples and Transferable Allowance

One of the most important reliefs in the inheritance tax system is the spousal exemption. Transfers between spouses and civil partners are completely free of inheritance tax, whether made during lifetime or on death. This means when the first partner dies, the entire estate can pass to the surviving spouse without triggering any IHT liability.

When this happens, the first spouse's nil rate band is typically unused. The unused proportion — not the absolute amount — can be transferred to the surviving spouse's estate when they eventually die. If the first spouse used none of their NRB, the survivor gets an additional 100% of the nil rate band at the time of their death. If, say, the first spouse used 40% of their NRB on non-exempt gifts, the survivor would receive an extra 60%.

The same transferable principle applies to the residence nil rate band. If the first spouse did not use their RNRB (for instance, because the home passed to the surviving spouse rather than to children), the unused RNRB can also be claimed when the second spouse dies. In the most favourable scenario, this gives the surviving spouse's estate a combined tax-free threshold of £1 million: two nil rate bands of £325,000 each and two residence nil rate bands of £175,000 each.

To claim the transferred allowances, the personal representatives must complete additional IHT forms and provide evidence of the first death, including the original probate grant and details of how the estate was distributed. The claim must be made within two years of the end of the month in which the second spouse died, or within three months of the personal representatives first acting, whichever is later. It is essential to keep good records to support the claim.

Ways to Reduce Inheritance Tax

There are several legitimate strategies for reducing or mitigating an inheritance tax bill. While the details of estate planning can be complex, the most commonly used approaches are outlined below.

Lifetime Gifts

Gifts made during your lifetime can reduce the value of your estate for IHT purposes. Outright gifts to individuals become exempt from IHT if you survive for seven years after making them. There are also annual exemptions: you can give away £3,000 per tax year completely free of IHT (and carry forward one unused year's allowance). Small gifts of up to £250 to any number of recipients are also exempt, as are gifts on the occasion of a marriage (up to £5,000 from a parent, £2,500 from a grandparent, or £1,000 from anyone else).

Regular gifts made from surplus income are also exempt, provided they form part of a regular pattern, are made from normal expenditure (not capital), and do not reduce your standard of living. This exemption is particularly useful for people whose income exceeds their outgoings, as it allows potentially unlimited amounts to be given away free of IHT. Keeping detailed records of income and expenditure is essential to support a claim under this exemption.

Trusts

Placing assets into a trust can remove them from your estate for IHT purposes, though the rules are complex and there may be immediate or periodic tax charges depending on the type of trust and the value of the assets transferred. Discretionary trusts, for example, incur an immediate IHT charge of 20% on any amount above the nil rate band at the time of transfer, and a periodic charge of up to 6% every ten years on the value of the trust fund above the nil rate band.

Despite these charges, trusts remain a useful planning tool in certain circumstances — for example, to provide for vulnerable beneficiaries, to protect assets from future care home fees (though local authorities can challenge certain transfers), or to control when and how assets are distributed. Professional advice is strongly recommended before setting up a trust for IHT planning.

Charitable Giving

Leaving at least 10% of the net estate to a qualifying charity reduces the IHT rate from 40% to 36% on the remainder of the taxable estate. In some cases, this can result in beneficiaries receiving more in total, because the tax saving from the lower rate more than offsets the charitable donation. Even where it does not fully pay for itself, the reduced rate provides a meaningful incentive for charitable legacies.

Life Insurance

Taking out a whole-of-life insurance policy written in trust can provide funds to pay the IHT bill without reducing the estate further. Because the policy is held in trust, the payout does not form part of the estate and is not itself subject to IHT. The premiums are typically treated as gifts and may qualify for the regular gifts from income exemption. This approach does not reduce the IHT liability, but it ensures beneficiaries have the cash to pay it without having to sell property or other assets at short notice.

Example Calculations

The following examples show how inheritance tax is calculated at different estate values, using 2025/26 rates and allowances.

£400,000 Estate (Single Person, No RNRB)

A single individual leaves an estate worth £400,000 without passing a home to a direct descendant. The nil rate band of £325,000 is deducted, leaving a taxable estate of £75,000. At 40%, the inheritance tax due is £30,000. The effective rate of tax on the whole estate is 7.5%. If the deceased had instead been passing their home to a child, the RNRB of £175,000 would bring the total nil rate to £500,000, and no inheritance tax would be payable at all.

£750,000 Estate (Single Person, RNRB Applied)

An individual leaves an estate of £750,000, including a property worth £350,000 which passes to their daughter. The nil rate band is £325,000 and the residence nil rate band is £175,000, giving a total tax-free threshold of £500,000. The taxable estate is £250,000, and the inheritance tax is £100,000 at 40%. The effective rate across the whole estate is 13.3%. Without the RNRB, the tax would have been £170,000 — so the RNRB saves £70,000 in this scenario.

£1,500,000 Estate (Married Couple, Full Transferred Allowances)

A married couple has a combined estate of £1,500,000. The first spouse dies and leaves everything to the surviving partner under the spousal exemption, so no IHT is due at that point and the full nil rate band and RNRB are unused. When the surviving spouse dies and leaves the family home to their children, the estate can claim two nil rate bands (£650,000) and two residence nil rate bands (£350,000), giving a total tax-free threshold of £1,000,000. The taxable estate is £500,000, and the inheritance tax due is £200,000 at 40%. The effective rate is 13.3%. Without the transferred allowances, the bill would be £470,000 on a single allowance of £325,000.

Reporting and Paying Inheritance Tax

The personal representatives of the estate are responsible for reporting the estate to HMRC and paying any inheritance tax that is due. Even if no tax is payable, an IHT return may still be required if the estate exceeds certain reporting thresholds.

For most estates where IHT is due, the personal representatives must complete form IHT400 (the full inheritance tax account) and submit it to HMRC along with any supporting schedules. Payment is normally due within six months of the end of the month in which the death occurred. For example, if the death occurred on 15 March, the tax would be due by 30 September.

One important concession is that inheritance tax attributable to property (such as a house) can be paid in ten equal annual instalments, with interest charged on the outstanding balance. This can be helpful where the estate is asset-rich but cash-poor, as it avoids the need for a forced sale of the property to pay the tax bill in full immediately.

A grant of probate (or letters of administration in intestacy cases) is required before the personal representatives can access most of the deceased's assets, including bank accounts and property. However, HMRC typically expects at least some of the tax to be paid before the grant is issued, which can create a cashflow difficulty. Many banks will release funds directly to HMRC from the deceased's accounts under the Direct Payment Scheme, which can help resolve this.