How to Calculate Inheritance Tax in the UK: A Step-by-Step Guide with Worked Examples

Do You Need to Calculate Inheritance Tax?

If you're an executor or administrator of someone's estate, one of your first jobs is working out whether inheritance tax (IHT) is due. Many estates don't owe any tax at all — but you still need to do the calculation to be sure.

This guide walks you through the process step by step, with worked examples so you can see exactly how the numbers work.

The Basic Rule

Inheritance tax is charged at 40% on the value of an estate above the nil-rate band of £325,000.

But there are several allowances and reliefs that can significantly reduce or eliminate the bill. Let's work through them.

Step 1: Calculate the Gross Estate Value

Add up everything the deceased owned at the date of death:

Asset	Example Value
Main home	£350,000
Savings and bank accounts	£45,000
Investments and shares	£80,000
Personal possessions	£15,000
Life insurance (not in trust)	£50,000
Other property	£0
Gross estate	£540,000

You also need to add back any gifts made in the 7 years before death (these are called Potentially Exempt Transfers or PETs). More on this below.

Step 2: Deduct Liabilities

Subtract any debts and costs:

Liability	Example Value
Mortgage	£120,000
Credit cards and loans	£5,000
Funeral costs	£4,500
Total liabilities	£129,500

Net estate = £540,000 - £129,500 = £410,500

Step 3: Apply the Nil-Rate Band (£325,000)

Every individual has a nil-rate band of £325,000. The estate pays no tax on this amount.

If the deceased's spouse or civil partner died before them and didn't use all of their nil-rate band, the unused portion can be transferred. This can double the available nil-rate band to £650,000.

In our example, assume the deceased was widowed and their late spouse used none of their allowance:

Available nil-rate band = £325,000 + £325,000 = £650,000

Since the net estate (£410,500) is below £650,000: No inheritance tax is due.

Step 4: The Residence Nil-Rate Band

If the deceased owned a home and left it to direct descendants (children, grandchildren), there's an additional allowance called the residence nil-rate band (RNRB).

• Currently £175,000 per person
• Also transferable between spouses — up to £350,000 for a couple
• Tapers away for estates worth over £2 million (reduced by £1 for every £2 over the threshold)

Combined Allowances for a Couple

Allowance	Amount
Nil-rate band x 2	£650,000
Residence nil-rate band x 2	£350,000
Total tax-free threshold	£1,000,000

This is why you often hear that couples can pass on up to £1 million tax-free.

Worked Example: Estate That Owes Tax

Let's say Margaret died in 2026 as a single person (never married). Her estate:

Asset	Value
Home (left to her nephew)	£400,000
Savings	£120,000
Investments	£60,000
Car and possessions	£20,000
Gross estate	£600,000
Less: funeral costs	-£5,000
Net estate	£595,000

Margaret's allowances:

• Nil-rate band: £325,000
• Residence nil-rate band: £0 (her nephew is not a direct descendant — RNRB only applies when the home passes to children or grandchildren)
• No transferable allowances (never married)

Taxable amount = £595,000 - £325,000 = £270,000 IHT due = £270,000 × 40% = £108,000

Worked Example: Gifts Before Death

David made a gift of £100,000 to his daughter 4 years before he died. His net estate at death was £400,000.

The gift is a Potentially Exempt Transfer (PET). Because David died within 7 years of making it, it becomes chargeable:

1. The gift uses up £100,000 of David's nil-rate band
2. Remaining nil-rate band: £325,000 - £100,000 = £225,000
3. Taper relief applies because the gift was made 4-5 years before death (60% of the tax is due)
4. Tax on the estate: (£400,000 - £225,000) × 40% = £70,000

Note: The gift itself may also have a reduced tax charge thanks to taper relief.

Worked Example: Farm with APR Changes (From April 2026)

Robert died in June 2026 leaving a working farm valued at £3.5 million and £200,000 in savings to his son.

Under the new APR rules from April 2026:

Component	Value	Relief
Farm (first £2.5m)	£2,500,000	100% APR — £0 taxable
Farm (above £2.5m)	£1,000,000	50% APR — £500,000 taxable
Savings	£200,000	No relief — £200,000 taxable
Total taxable	—	£700,000

Less nil-rate band: £700,000 - £325,000 = £375,000 IHT due: £375,000 × 40% = £150,000

Robert's son can elect to pay this in 10 annual instalments of £15,000 — crucial when the wealth is tied up in land rather than cash.

The 10% Charity Reduction

If the deceased left 10% or more of the net estate to charity, the IHT rate drops from 40% to 36%. This can sometimes mean that leaving more to charity actually results in the beneficiaries receiving more overall.

What You Need to Report to HMRC

Even if no IHT is due, you may still need to report the estate to HMRC:

• Excepted estates (below the nil-rate band with no complications) — reported as part of the probate application
• Non-excepted estates — require a full IHT return (form IHT400) submitted to HMRC

Tax must normally be paid within 6 months of the end of the month of death. Interest is charged on late payments.

Common Mistakes to Avoid

• Forgetting gifts — All gifts in the last 7 years must be declared
• Ignoring joint assets — The deceased's share of jointly owned property counts
• Missing the RNRB — Many executors don't claim the residence nil-rate band
• Not claiming transferable allowances — If the deceased was widowed, check their late spouse's estate
• Undervaluing property — HMRC can challenge valuations. Get professional help for property, businesses, and shares

How GetPassage Helps

Working out inheritance tax can be daunting, especially when you're grieving. GetPassage guides you through the practical tasks of estate administration step by step — including knowing when you need professional tax advice and what information to gather before meeting an adviser.

Start by telling us about your situation, and we'll create a personalised task list to keep you on track.