Inheritance Tax Calculator

How does Inheritance Tax work in the UK?

Inheritance Tax (IHT) is a tax on the estate of someone who has died. It is charged at 40% on the value of the estate above the tax-free threshold, known as the nil rate band. The standard nil rate band has been frozen at £325,000.00 since 2009 and is expected to remain at this level until at least 2030. Everything you own at death, including property, savings, investments and personal possessions, counts towards your estate value. Gifts made within seven years of death are also added back into the estate, though taper relief can reduce the tax on gifts made between three and seven years before death.

Residence Nil Rate Band (RNRB) provides an additional £175,000.00 tax-free allowance if you leave your main home to direct descendants such as children or grandchildren. However, this allowance is tapered for estates worth more than £2,000,000.00, reducing by £1.00 for every £2.00 above this threshold. The RNRB is only available up to the value of the property being passed on.

Spouse and civil partner transfers are exempt from IHT entirely. If your spouse dies first and did not use their full nil rate band, the unused portion can be transferred to your estate, potentially doubling your tax-free allowance to £650,000.00 (or £1,000,000.00 including both RNRBs). Additionally, if at least 10% of your net estate is left to charity, the IHT rate is reduced from 40% to 36%.

Looking ahead to 2027: the Government has announced that from April 2027, unused pension funds and death benefits will be brought within the scope of IHT. This is a significant change that could increase tax bills for many families, especially those who had been using pensions as a vehicle for wealth transfer. It is important to review your estate planning in light of these changes and consider seeking professional advice.