How Inheritance Tax is calculated in the UK
Inheritance Tax is levied on the net value of an estate after deducting outstanding debts, mortgages, and funeral expenses. Under current UK tax rules, estates benefit from a basic Nil-Rate Band (NRB) of £325,000 per person. Any taxable estate value exceeding your available allowances is taxed at the standard headline rate of 40%.
If an estate includes a qualifying residential home passed to direct descendants (children, grandchildren, or step-children), an additional Residence Nil-Rate Band (RNRB) of up to £175,000 can be claimed. Bequests left directly to a UK-domiciled surviving spouse or civil partner are 100% exempt from Inheritance Tax, and gifts left to registered UK charities are completely exempt from tax.
Worked example of UK Inheritance Tax
Consider an individual estate valued at £800,000, including a £450,000 family home left directly to children, with no outstanding debts or liabilities. The estate qualifies for the basic nil-rate band of £325,000 and the full £175,000 residence nil-rate band, giving a total tax-free allowance of £500,000.00. The taxable estate above the threshold is £300,000.00, resulting in an Inheritance Tax bill of £120,000.00 at 40%, an effective tax rate of 15.0%, and £680,000.00 passed to heirs.
Now consider a widowed surviving spouse with an estate of £1,200,000 and a £500,000 family home, claiming their deceased partner unused allowances. Both the basic nil-rate band (£650,000) and the residence nil-rate band (£350,000) are doubled, providing a £1,000,000.00 total tax-free threshold. Only £200,000.00 is taxable at 40%, generating £80,000.00 in Inheritance Tax, an effective tax rate of 6.7%, and leaving £1,120,000.00 to beneficiaries.
Residence nil-rate band and the 2 million pound taper
The Residence Nil-Rate Band (RNRB) provides up to £175,000 of additional tax-free allowance per individual (£350,000 for couples) when leaving a qualifying residential property to direct descendants. The allowance cannot exceed the market value of the residential property left to descendants.
Under Section 8D of the Inheritance Tax Act 1984, estates valued above £2,000,000 face a statutory taper. For every £2 that the net estate value (before exemptions) exceeds £2,000,000, the RNRB allowance is reduced by £1. For a single individual, the allowance tapers away completely at £2,350,000 (or £2,700,000 for a married couple with two full residence allowances).
Exemptions, gifts and the 36% reduced charity rate
Bequests to a surviving spouse or civil partner are 100% exempt from tax without upper limit. Furthermore, any unused percentage of the deceased spouse nil-rate band and residence nil-rate band can be transferred to the survivor estate upon their eventual death, enabling couples to pass on up to £1,000,000 entirely free of Inheritance Tax.
Gifts made to individuals during your lifetime are Potentially Exempt Transfers (PETs). If you survive for seven years after making the gift, it falls completely outside your estate for tax purposes. If death occurs between 3 and 7 years after the gift, taper relief reduces the tax charge payable on the gift. Additionally, if you leave 10% or more of your net estate to qualifying registered charities, Schedule 1A reduces your overall Inheritance Tax rate from 40% to 36%.
For tax on lifetime asset disposals and investment gains, use our Capital Gains Tax calculator.
To review annual income tax bands and allowances, visit the UK income tax calculator.
For a complete breakdown of income tax and National Insurance, see our UK tax and NI calculator.
Inputs for the inheritance tax calculator
Tax year
The applicable UK tax year for the estate valuation. Basic and residence nil-rate bands are frozen through 2030.
Total gross estate value
The total market value of all assets including residential property, savings, investments, cars and personal belongings.
Debts, mortgages & funeral expenses
Outstanding liabilities deductible from the gross estate, including mortgages, overdrafts, credit cards and reasonable funeral costs.
Marital status & spousal allowance
Indicates whether you can transfer 100% of an unused nil-rate band from a deceased spouse or civil partner.
Leaving home to direct descendants
Select yes if your qualifying main residence passes directly to children, grandchildren, step-children or adopted descendants.
Home value included in estate
The market value of the residential property included in the gross estate that passes to qualifying descendants.
Assets left to surviving spouse
Total value of bequests left directly to a UK-domiciled spouse or civil partner, which are 100% tax exempt.
Gifts left to registered charities
Donations left to registered UK charities, which are exempt from tax and can reduce your rate from 40% to 36%.
CALCULATOR QUESTIONS
UK inheritance tax calculator questions
What is the UK Inheritance Tax threshold?
The basic Nil-Rate Band is £325,000 per person. If you pass a family home to direct descendants, you can claim an additional Residence Nil-Rate Band of up to £175,000, bringing the individual tax-free threshold to £500,000.
How much can a married couple pass on tax-free?
A married couple or civil partners can pass on up to £1,000,000 tax-free. This combines two £325,000 basic nil-rate bands (£650,000) and two £175,000 residence nil-rate bands (£350,000) when leaving a qualifying home to descendants.
What is the Residence Nil-Rate Band (RNRB)?
The Residence Nil-Rate Band is an extra statutory allowance of up to £175,000 per person available when leaving a qualifying residential property to direct descendants (children, grandchildren, or step-children).
How does the 2 million pound estate taper work?
If an estate net value exceeds £2,000,000, the Residence Nil-Rate Band is tapered down by £1 for every £2 of estate value above £2,000,000. It tapers away completely at £2,350,000 for a single person.
What is the 7-year rule for gifts?
Gifts made to individuals during your lifetime become entirely tax-free if you survive 7 years from the date of the gift. Gifts made between 3 and 7 years before death qualify for sliding-scale taper relief.