How to Calculate Inheritance Tax: A Step-by-Step Guide (2026)

Inheritance tax is charged at 40% on the value of an estate above the nil-rate band threshold. But the number you actually owe depends on a set of layered allowances that most people have never had reason to understand until they are in the middle of dealing with someone’s estate. This guide walks through the calculation from scratch, using the 2026/27 rates confirmed by HMRC, so you know exactly where your estate stands.

Step 1: Work out the value of the estate

The estate is everything owned at the date of death. That includes property valued at open market value, bank accounts, savings and cash, investments and shares, personal possessions, vehicles, jewellery, and business interests. From that total you subtract liabilities: outstanding mortgage balance, other debts, and funeral costs. What remains is the net estate, and that is the number you work with.

One thing to be aware of: pension pots are currently excluded from the estate for IHT purposes. That changes from 6 April 2027, when most defined contribution pensions will be drawn into the estate. If you are planning for an estate that will be assessed after that date, include pension funds in your total. Our guide to the 2027 pension IHT changes covers what this means in practice.

Step 2: Apply the nil-rate band

Every individual has a nil-rate band of £325,000 for 2026/27. This is the portion of the estate on which no inheritance tax is charged. If the net estate is worth £325,000 or less, there is no inheritance tax to pay. If it exceeds £325,000, the excess is taxed at 40%.

A simple example: an estate worth £500,000 with no other allowances in play.

• Estate: £500,000
• Nil-rate band: £325,000
• Taxable amount: £175,000
• IHT at 40%: £70,000

Step 3: Check whether the residence nil-rate band applies

If the deceased owned a home and left it to direct descendants — children, stepchildren, grandchildren — an additional allowance of up to £175,000 applies. This is the residence nil-rate band, introduced in 2017. Combined with the standard nil-rate band, a single person leaving a home to their children can pass up to £500,000 free of inheritance tax. For a married couple or civil partners, the combined threshold can reach £1 million.

The home must go to direct descendants. Leaving the home to a sibling, niece, nephew, or friend does not qualify. Leaving it to a spouse passes the unused allowance on, but the home still needs to eventually reach direct descendants to unlock it.

The taper for large estates. The residence nil-rate band reduces by £1 for every £2 the estate is worth above £2 million. At a net estate of £2.35 million the residence nil-rate band is gone entirely for a single person. For a couple, the combined threshold before the taper kicks in is £2.7 million.

Working through the same £500,000 example but assuming the deceased left a £300,000 home to their children: the combined nil-rate band and residence nil-rate band reaches £500,000, which equals the estate exactly. IHT is £0. The residence nil-rate band has eliminated the bill entirely.

Step 4: Account for spouse or civil partner transfers

Assets left to a surviving spouse or civil partner are exempt from inheritance tax entirely, regardless of value. When the first spouse dies, any unused portion of their nil-rate band and residence nil-rate band is transferred to the surviving spouse. The percentages are transferred, not the fixed amounts — so if a spouse died in 2015 having used none of their nil-rate band, 100% of the current £325,000 transfers to the survivor, not the historical amount that applied at the time of the first death.

A couple who have planned carefully can pass up to £1 million to their children free of inheritance tax: two nil-rate bands at £325,000 each, plus two residence nil-rate bands at £175,000 each. Executors must claim the transferred allowances from HMRC, usually on form IHT402. They have two years from the date of death to make this claim.

Step 5: Deduct gifts made in the seven years before death

Gifts to individuals made during the deceased’s lifetime are classed as potentially exempt transfers. They become fully exempt from inheritance tax if the person survives for seven years after making them. If they die within those seven years, the gifts are added back into the estate for tax purposes. The gifts are applied against the nil-rate band in chronological order, oldest first.

For gifts made between three and seven years before death, taper relief reduces the tax rate on the gift portion:

One important detail: taper relief only applies if the value of the gift exceeds the nil-rate band. If someone gave away £200,000 and had their full £325,000 nil-rate band available at death, no tax would be due on the gift regardless of when it was made — it sits within the threshold. Taper relief only reduces the rate on the excess above the band.

Certain gifts are exempt entirely regardless of timing. The main ones are: the £3,000 annual exemption (which can be carried forward one year if unused, allowing a combined £6,000 in the first year after a gap), gifts of up to £250 per person to any number of individuals, wedding gifts up to £5,000 from a parent and £2,500 from a grandparent, and regular gifts made out of surplus income where they do not reduce the donor’s standard of living.

Step 6: Apply any other reliefs

Business property relief. Business assets including shares in unlisted companies can qualify for up to 100% relief from inheritance tax. From 6 April 2026, this relief is capped: the first £2.5 million of qualifying business and agricultural assets combined is fully relieved, but assets above that threshold receive only 50% relief, producing an effective IHT rate of 20% on the excess.

Agricultural property relief. Land and buildings used for agricultural purposes qualify for relief at 100% or 50% depending on how the property is occupied. The same £2.5 million combined limit with business property relief applies from April 2026.

Charity exemption. Gifts to registered charities are fully exempt from inheritance tax. If 10% or more of the net estate is left to charity, the rate on the taxable remainder drops from 40% to 36%.

Step 7: Calculate what is owed and who pays it

Once you have the taxable estate, the calculation is straightforward: taxable amount multiplied by 40% equals the bill. The tax is normally paid by the estate before assets are distributed to beneficiaries. It must be paid within six months of the end of the month in which the person died. HMRC charges interest on late payment.

For property that cannot be sold quickly, HMRC allows the tax attributable to that property to be paid in ten equal annual instalments. Gifts made in the seven years before death are handled separately — if the total gifts exceed the nil-rate band, the recipients may be liable for the tax on them rather than the estate. Executors can become jointly liable if the tax remains unpaid a year after the date of death. They will also typically need to file an income tax return for the deceased’s final tax year, covering earnings and investment income up to the date of death.

A worked example with multiple elements

Consider an estate with the following: net estate including property of £850,000, a home worth £350,000 left to two adult children, a spouse who died two years ago leaving 100% of both nil-rate bands to the surviving partner, and a gift of £150,000 made to a child four years before death.

With transferred spouse allowances:

• Two standard nil-rate bands: £325,000 + £325,000 = £650,000
• Two residence nil-rate bands: £175,000 + £175,000 = £350,000
• Total tax-free threshold: £1,000,000
• The £150,000 gift sits within the combined nil-rate band — no tax due on it
• Estate of £850,000 is below the £1,000,000 threshold
• IHT: £0

The same person as a single individual with no transferred allowances:

• Standard nil-rate band: £325,000
• Residence nil-rate band: £175,000
• Total threshold: £500,000
• The £150,000 gift uses £150,000 of the nil-rate band, leaving £175,000 of the standard band for the estate
• Estate taxable amount: £850,000 minus £175,000 (remaining NRB) minus £175,000 (RNRB) = £500,000
• IHT at 40%: £200,000

The difference between the two scenarios is £200,000. That is the value of the spouse’s transferred allowances in a straightforward case like this.

What changes from April 2027

From 6 April 2027, most defined contribution pension pots will be included in the estate for IHT purposes. This is the single biggest change to inheritance tax in a generation for anyone who has accumulated significant pension wealth. Someone with a £500,000 pension, a £400,000 home they plan to leave to children, and £100,000 in savings sits well within all current thresholds as a single person. Once the pension is included, their estate is £1 million and the IHT exposure is material.

If your estate planning was done before this change was announced, it is worth revisiting the numbers now. The full guide to pension IHT changes from 2027 covers the detail, including what you can do before the April deadline.

This article is for informational purposes only and does not constitute financial advice. Tax rules depend on individual circumstances and may change. If you are unsure how these rules apply to your situation, speak to a qualified financial adviser or tax professional.