Calculate UK Inheritance Tax (IHT) on estates. Find out if your estate exceeds the nil-rate band and how much tax your beneficiaries will pay. Includes residence nil-rate band for property left to direct descendants. Updated for 2026/27.
Inheritance Tax (IHT) is charged at 40% on estates valued above the nil-rate band threshold of £325,000 (frozen until 2030). The residence nil-rate band adds £175,000 (also frozen until 2030) if you leave your main home to direct descendants (children, stepchildren, adopted children, foster children, or grandchildren). Spouses and civil partners can inherit each other's entire estates tax-free, and any unused nil-rate band transfers to the surviving partner, potentially doubling their allowance to £650,000 or £1 million if both residence allowances apply. Gifts made more than 7 years before death are tax-free. Gifts made 3-7 years before death benefit from tapered relief reducing the tax charge gradually. Gifts to spouses, charities, and political parties are always tax-free regardless of timing. Certain assets including business property and agricultural land may qualify for relief reducing their taxable value. The estate executor must apply for a grant of probate and pay any IHT due before distributing assets to beneficiaries.
Several legitimate strategies can reduce IHT liability. Make gifts during your lifetime utilizing the £3,000 annual exemption which resets each tax year and can be carried forward one year if unused. Small gifts up to £250 per person to unlimited recipients are exempt. Wedding gifts to children (£5,000), grandchildren (£2,500), or anyone else (£1,000) are tax-free. Regular gifts from surplus income that don't affect your standard of living are immediately exempt with proper record-keeping. Larger gifts become tax-free if you survive 7 years after making them. Consider taking out whole-of-life insurance to cover the expected IHT bill, placing the policy in trust so payouts don't form part of your estate. Leave at least 10% of your net estate to charity which reduces the IHT rate on the remaining estate from 40% to 36%. Spend and enjoy your money — there's no IHT on money spent during your lifetime. Invest in Business Relief qualifying assets like AIM shares in trading companies or direct business ownership, which can be 100% exempt from IHT after 2 years ownership. Transfer assets into pension funds which fall outside your estate for IHT purposes. Make use of trust structures, though these have their own tax implications and complexity requiring professional advice. Review and update your will regularly ensuring your estate plan remains tax-efficient as circumstances and legislation change.
Estates must pay IHT within 6 months of death before obtaining probate and distributing assets. If the estate lacks sufficient liquid funds (cash, easily sold investments), executors face several options. Apply for IHT instalment payments spreading the bill over 10 years for illiquid assets like property or business interests, though interest accrues on outstanding amounts. Sell assets to raise funds, though this may involve selling property or investments at inopportune times potentially below market value. Arrange commercial bridging loans against estate assets to pay IHT upfront, then repay once probate is granted and assets can be sold properly. HMRC charges interest on late payment currently 7.5% annually, making delays expensive. Some banks offer probate loans specifically for this situation. Family members might contribute personal funds to pay IHT, which they recover once the estate is distributed. Life insurance policies written in trust provide tax-free lump sums outside the estate specifically to cover the IHT bill without creating liquidity problems. Many estates sell the family home to settle IHT bills, though this can be emotionally difficult for beneficiaries. Executors have personal liability for unpaid IHT, making it crucial to address the bill promptly. Professional estate planning during lifetime should always consider liquidity for IHT to avoid forcing fire sales of cherished family assets or businesses.
Yes, downsizing provisions protect the residence nil-rate band in certain circumstances. If you sell your home after July 2015, downsize to a less valuable property, or move into residential care, you may still claim the full £175,000 residence allowance provided the proceeds or replacement property are left to direct descendants. The relief also applies if you give away your home but continue living there while paying market rent. However, the residence band has complex qualifying conditions. It only applies to your main residence at death or the one sold/downsized from. Buy-to-let properties don't qualify. The property or its proceeds must pass to lineal descendants — siblings, nieces/nephews, friends, or partners (even long-term ones) don't qualify unless they're stepchildren or adopted children. The residence band tapers away for estates over £2 million at £1 for every £2 of excess value, disappearing entirely at £2.35 million (£2.7 million if claiming double allowance as surviving spouse). This means wealthy estates get no residence relief even if leaving property to children. Proving the downsizing exemption requires detailed records showing sale proceeds were retained and left to qualifying beneficiaries, making meticulous financial record-keeping essential. Given this complexity, anyone planning to downsize or sell their home should seek professional estate planning advice to ensure they don't inadvertently lose valuable IHT relief.
Estate value: £500,000. Nil-rate band: £325,000. No residence band (not leaving home to children). Taxable estate: £500,000 - £325,000 = £175,000. IHT at 40%: £175,000 × 0.40 = £70,000. Net estate to beneficiaries: £500,000 - £70,000 = £430,000. This demonstrates the significant 40% tax charge on amounts exceeding the basic allowance.
Estate value: £800,000. First spouse died leaving everything to surviving spouse (no IHT, unused allowances transfer). Surviving spouse's allowances: £325,000 × 2 = £650,000 nil-rate band, plus £175,000 × 2 = £350,000 residence band. Total allowance: £1,000,000. Taxable estate: £800,000 - £1,000,000 = £0. IHT: £0. Net estate: £800,000. This shows how married couples can pass £1 million tax-free to children.
Estate at death: £600,000. Gifts 4 years ago: £100,000 (within 7-year window, subject to taper relief). Potentially exempt transfer failed, so gift added back to estate. Combined estate: £700,000. Allowance: £325,000 + £175,000 residence band = £500,000. Taxable: £200,000. IHT on estate: £200,000 × 40% = £80,000. Gift 4 years ago qualifies for 40% taper relief, so tax on gift: £100,000 × 40% × 60% = £24,000. Total IHT: £104,000. This illustrates the importance of the 7-year rule and taper relief.
Start planning early as IHT strategies work best with decades of implementation time. Calculate your potential IHT liability using realistic estate valuations including property (current market value), investments, savings, life insurance payouts not in trust, pension death benefits, and business interests. Subtract debts like mortgages, loans, and funeral expenses. Consider annual gifting within exemptions to gradually reduce your estate over time without triggering IHT. Keep detailed records of all gifts including dates, amounts, recipients, and proof of surplus income for regular gifts exemption. Update your will regularly ensuring it's tax-efficient and reflects current wishes and family circumstances. Consider establishing trusts for grandchildren or to protect assets for vulnerable beneficiaries, though these have tax implications requiring professional advice. Discuss your plans with family members to avoid surprises and ensure beneficiaries understand any conditions or timing of inheritance. Use the family home's value efficiently ensuring you qualify for residence nil-rate band by leaving it correctly to direct descendants. Consider equity release or downsizing to access property wealth during life rather than leaving it taxable on death. Review pension beneficiary nominations as pensions are powerful IHT-free vehicles when left to anyone other than your estate. Consolidate and organize your financial affairs making it easier for executors to value your estate and identify all assets and debts. Finally, seek professional advice from estate planning solicitors or tax advisors for complex estates, business assets, or international elements as DIY mistakes can be extremely expensive for your beneficiaries.