Finance⏱ 5 min read
How Inheritance Tax Is Calculated in the UK
Inheritance tax (IHT) is paid on estates above the nil-rate band. Here is exactly how the thresholds work, how the residence nil-rate band applies, and what reduces the bill.
Only around 4% of UK estates pay inheritance tax — but for those that do, the bill can be substantial. Understanding how IHT is calculated helps with estate planning decisions that can significantly reduce or eliminate the liability.
The Basic IHT Calculation
IHT Rate: 40% on the taxable estate
Nil-Rate Band (NRB): £325,000 (frozen until at least 2028)
Residence Nil-Rate Band (RNRB): up to £175,000 additional
Basic formula:
IHT = (Estate value - Available nil-rate band) x 40%
Example: single person, estate £500,000, no property left to children:
Taxable estate: £500,000 - £325,000 = £175,000
IHT: £175,000 x 40% = £70,000
If property (home) left to children/grandchildren:
Available NRB: £325,000 + £175,000 (RNRB) = £500,000
IHT: (£500,000 - £500,000) x 40% = £0
Transferable Nil-Rate Band (Married Couples)
When one spouse dies, their unused NRB transfers to the survivor.
Both NRBs and RNRBs can be combined on second death.
Couple, both NRBs and RNRBs unused on first death:
Combined NRB: £325,000 x 2 = £650,000
Combined RNRB: £175,000 x 2 = £350,000
Total threshold: £650,000 + £350,000 = £1,000,000
Estate of £900,000 (including family home) left to children:
Taxable amount: £900,000 - £1,000,000 = £0
IHT: £0
Estate of £1,200,000:
Taxable amount: £1,200,000 - £1,000,000 = £200,000
IHT: £200,000 x 40% = £80,000
RNRB Tapering (Large Estates)
The Residence Nil-Rate Band tapers away for estates above £2,000,000:
Taper: RNRB reduces by £1 for every £2 above the £2m threshold
Estate of £2,200,000:
RNRB reduction: (£2,200,000 - £2,000,000) / 2 = £100,000
Available RNRB: £175,000 - £100,000 = £75,000
Estate of £2,350,000:
RNRB reduction: (£350,000) / 2 = £175,000
Available RNRB: £175,000 - £175,000 = £0 (fully tapered)
For estates above £2,350,000 (single) or £2,700,000 (couple):
No RNRB available; only the standard NRB applies.
Key Exemptions and Reliefs
Spouse/civil partner exemption:
Gifts to UK-domiciled spouse: 100% exempt, no IHT
Charitable gifts: 100% exempt
Giving 10%+ of net estate to charity reduces IHT rate to 36%
Annual gifting exemption:
£3,000 per year per person (can carry forward 1 year: max £6,000)
Small gifts: £250 per recipient per year (any number of people)
Wedding gifts: £5,000 (parent), £2,500 (grandparent), £1,000 (other)
Potentially Exempt Transfers (PETs):
Gifts exceeding exemptions are PETs.
Survive 7 years: become fully exempt
Taper relief applies on years 3-7 if donor dies within 7 years:
3-4 years: 80% of IHT charge
4-5 years: 60% of IHT charge
5-6 years: 40% of IHT charge
6-7 years: 20% of IHT charge