Inheritance tax is calculated on the net value of a person's estate: add up the assets, subtract debts, take off exemptions and reliefs, deduct the tax-free nil-rate bands, then charge 40% on what is left. This page runs that sum on the rules for the 2026 to 2027 tax year, and shows where the taper relief myth trips families up (gov.uk, as at August 2026, subject to change).
What is the formula for calculating inheritance tax?
Inheritance tax follows a fixed order: value the estate, deduct liabilities, deduct exemptions and reliefs, deduct the nil-rate bands, then apply 40% to the remainder (36% where 10% or more goes to charity). Each step feeds the next, so the order matters as much as the numbers.
The executor works the sum in this sequence. Doing the steps out of order, for example applying the 40% rate before deducting reliefs, produces the wrong figure.
- Value the assets. Total everything owned at the date of death at open-market value: property, savings, investments, vehicles, possessions and payable life policies not held in trust.
- Deduct liabilities. Subtract debts the person owed, such as a mortgage, loans, outstanding bills and reasonable funeral costs. The result is the net estate.
- Deduct exemptions and reliefs. Take off anything left to a UK spouse, civil partner or registered charity, and apply business or agricultural relief to qualifying assets.
- Deduct the nil-rate bands. Subtract the £325,000 nil-rate band, plus up to £175,000 residence nil-rate band where a home passes to direct descendants, including any bands transferred from a late spouse.
- Apply the rate. Charge 40% on the value that remains above the bands, or 36% if at least 10% of the net estate is left to charity.
- Adjust for lifetime gifts. Add back gifts made in the seven years before death, which use the nil-rate band first and can carry taper relief on any tax due.
Our guide to how inheritance tax works covers each allowance in more depth.
What are the tax-free thresholds?
Every estate passes on the first £325,000 tax free (the nil-rate band). A residence nil-rate band of up to £175,000 is added when a main home is left to children, grandchildren or other direct descendants. That gives up to £500,000 for one person, and up to £1,000,000 for a married couple who combine both allowances.
The bands, and the £2,000,000 taper threshold that erodes them, are frozen until 5 April 2031, a freeze extended at the Budget on 26 November 2025 (gov.uk, as at August 2026, subject to change). Above £2,000,000, the residence band is withdrawn by £1 for every £2 of estate value.
| Allowance or rate | Amount | Condition |
|---|---|---|
| Nil-rate band | £325,000 | Every estate |
| Residence nil-rate band | Up to £175,000 | Main home left to direct descendants |
| Single person, combined | Up to £500,000 | Where the home condition is met |
| Married couple, combined | Up to £1,000,000 | Both sets of bands transferred and used |
| Standard rate | 40% | On value above the available bands |
| Reduced charity rate | 36% | 10% or more of the net estate to charity |
Source: gov.uk, as at August 2026, subject to change. See how much you can inherit tax free for the couple's calculation in full.
How do you work out the bill? A worked example
Take a widow who dies leaving a £700,000 home to her children, £250,000 in savings, a £20,000 funeral and debt bill, and £30,000 to charity. Her late husband left everything to her, so both his bands transfer. Running the six steps, the £1,000,000 of allowances covers the estate and no tax is due.
The example below follows the order above, using two nil-rate bands and two residence nil-rate bands because the husband's were unused.
Worked example: a widow leaving a home to her children
- Assets: £700,000 home plus £250,000 savings = £950,000.
- Less liabilities and funeral costs of £20,000 = £930,000 net estate.
- Less £30,000 left to charity (exempt) = £900,000.
- Less nil-rate bands: £325,000 + £325,000 (transferred) = £650,000. Less residence bands: £175,000 + £175,000 (transferred) = £350,000. Total bands £1,000,000, capped at the £900,000 remaining.
- Taxable estate: £900,000 minus £900,000 of bands = £0 before the charity check.
Here the £1,000,000 of allowances covers the whole estate, so no tax is due. Change one figure, savings of £500,000 instead of £250,000, and the sum shifts: assets £1,200,000, less £20,000 liabilities = £1,180,000 net estate, less £30,000 charity = £1,150,000, less £1,000,000 bands = £150,000 taxable. Because the £30,000 charity gift is under 10% of the estate, the 40% rate applies.
Revised bill: £150,000 × 40% = £60,000.
The lesson is that the bill turns on the order of the deductions, not on the headline estate value. A £1,200,000 estate here still pays only on the £150,000 that survives the bands.
How are gifts and the 7-year rule calculated?
Gifts made in the seven years before death are added back into the calculation. They are set against the nil-rate band first, in date order. Only where total gifts exceed the £325,000 band does taper relief apply, and it reduces the tax on the gift, not the gift itself. Live seven years and most gifts fall out of the estate entirely.
Some gifts are always exempt and never counted: the £3,000 annual exemption, small gifts of £250 per person, and normal gifts out of surplus income. Larger gifts are potentially exempt transfers, taxed only if death falls within seven years (gov.uk, as at August 2026, subject to change).
| Years between gift and death | Taper relief on the tax | Effective rate on the taxed gift |
|---|---|---|
| 0 to 3 years | 0% | 40% |
| 3 to 4 years | 20% | 32% |
| 4 to 5 years | 40% | 24% |
| 5 to 6 years | 60% | 16% |
| 6 to 7 years | 80% | 8% |
| 7 years or more | Gift exempt | 0% |
Source: gov.uk, as at August 2026, subject to change.
What people get wrong about taper relief
Families often expect taper relief on a £100,000 gift made four years before death. In most cases it gives nothing. Taper relief only reaches the part of a gift that sits above the £325,000 nil-rate band, because the band is used against the earliest gifts first.
A single £100,000 gift is covered by the band, so there is no tax to taper: the relief has nothing to reduce. Taper only bites where lifetime gifts add up to more than £325,000. It reduces the tax, not the value of the gift, which is why the table above shows falling rates, not falling gifts.
Our note on how taper relief works runs a full multi-gift example.
What reliefs and exemptions reduce the calculation?
Anything left to a UK spouse, civil partner or registered charity is exempt and never enters the taxable estate. Business and agricultural assets can attract relief, and a 10% charity gift cuts the rate to 36%. Two 2026 to 2027 changes reshape this step, so older guidance can overstate the relief available.
These are the deductions that reduce the sum at step three, each with conditions worth checking against your own position:
- Spouse and charity exemptions. Transfers to a UK spouse or civil partner are fully exempt, as are gifts to registered charities. Leaving 10% or more of the net estate to charity also lowers the rate on the rest from 40% to 36%.
- Business and agricultural relief. From 6 April 2026, business and agricultural property relief gives 100% relief on the first £2,500,000 of qualifying assets per person, transferable to £5,000,000 for a couple, with 50% relief above that (gov.uk, announced 23 December 2025, as at August 2026, subject to change). This replaced the previous uncapped 100% relief, so guidance citing an old £1,000,000 limit is out of date.
- Pensions, from April 2027. From 6 April 2027, most unused pension funds will be counted as part of the estate for inheritance tax (gov.uk, as at August 2026, subject to change). Sums that once passed outside the calculation will start to feed into it (see pensions and inheritance tax from 2027).
Bringing these levers together before death, rather than at probate, is the work of estate planning. Where the family home and future care are in the picture, planning for and limiting the impact of care fees can also change what remains in the estate.
Who does the calculation, and when is the tax paid?
The estate's executors, or administrators where there is no will, value the estate and work out the tax. Inheritance tax is due by the end of the sixth month after the person died, and often before probate is granted. Interest is charged on anything paid late.
Beneficiaries do not pay the tax themselves; it comes out of the estate before anything is shared. For larger estates the figures are reported to HMRC on form IHT400. Tax on property and some other assets can be paid in ten annual instalments, though interest still runs (gov.uk, as at August 2026, subject to change).
If you are the executor, our guide to what probate involves sets out where the tax calculation fits in the wider process.
Frequently asked questions
In short, inheritance tax is worked out on the net estate after debts, exemptions, reliefs and the nil-rate bands, then charged at 40%, or 36% where at least 10% of the net estate goes to charity. The questions below cover the points people ask about most when running the sum.
How much can you inherit before paying inheritance tax?
An estate passes on the first £325,000 tax free, rising to up to £500,000 where a main home is left to direct descendants, and up to £1,000,000 for a married couple who combine both allowances. Above the available threshold, the remainder is taxed at 40% (gov.uk, as at August 2026, subject to change).
What percentage is inheritance tax in the UK?
The standard rate is 40%, charged only on the part of the estate above its tax-free threshold, not the whole estate. The rate falls to 36% where 10% or more of the net estate is left to a registered charity (gov.uk, as at August 2026, subject to change).
How is inheritance tax calculated on a house?
The home is valued at open-market value at the date of death and added to the estate, with any mortgage deducted as a liability. If it passes to children, grandchildren or other direct descendants, the residence nil-rate band of up to £175,000 can apply on top of the £325,000 nil-rate band.
How is inheritance tax calculated on gifts?
Gifts made in the seven years before death are added back and set against the nil-rate band first, in date order. Only gifts above the £325,000 band are taxed, and taper relief then reduces the tax due, not the gift, on a sliding scale from three to seven years.
Who pays the inheritance tax bill?
The estate pays, through its executors or administrators, before anything is shared with beneficiaries. Tax is due by the end of the sixth month after death, often before probate is granted, with interest charged on late payment (gov.uk, as at August 2026, subject to change).