Inheritance tax (IHT) is charged at 40% on the part of an estate above the tax-free thresholds. Each person has a £325,000 nil-rate band, and a further £175,000 can apply when a home passes to children or grandchildren, so up to £500,000 can be tax-free, or more when a spouse’s unused allowance transfers.
The main thresholds
- Nil-rate band: £325,000 per person, in place from 2009 and frozen until 5 April 2031.
- Residence nil-rate band: £175,000 per person, for a home left to direct descendants (children, grandchildren and their families). It is capped at the value of the home.
- Combined: £500,000 per person, and the unused share of either allowance passes to a surviving spouse or civil partner as a percentage.
- Taper: if the estate is over £2 million, the residence band is cut by £1 for every £2 over that figure.
- Rate: 40%, or 36% if at least 10% of the net estate is left to charity.
Everything left to a spouse or civil partner is exempt, which is why many couples pay nothing on the first death.
What counts as the estate
The estate is everything the person owned, such as property, savings, investments, vehicles and valuables, minus debts and funeral costs. Gifts made in the previous 7 years are brought into the calculation as well. From 6 April 2027, most unused pension funds and death benefits also become chargeable to inheritance tax. They are not part of the 2026/27 rules, so check GOV.UK for the current position.
Gifts and the 7-year rule
Gifts to individuals are normally free of tax if the giver lives for 7 years afterwards. If death happens sooner, the gift uses up the nil-rate band first, and any excess is taxed at a rate that falls with time:
| Time between gift and death | Tax on the gift |
|---|---|
| Under 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 years or more | 0% |
Some gifts are exempt regardless: £3,000 a year (with one year of carry-forward), small gifts up to £250 per person, wedding gifts (£5,000 from a parent, £2,500 from a grandparent and £1,000 from others) and regular gifts from surplus income. Check GOV.UK for the conditions.
Worked example
An estate is worth £650,000 with £10,000 of debts and funeral costs. £400,000 of it is a home left to the children, and £100,000 was given away five to six years ago.
- Net estate: £640,000
- The gift uses £100,000 of the £325,000 nil-rate band, leaving £225,000
- Residence nil-rate band: £175,000
- Taxable estate: £640,000 − £225,000 − £175,000 = £240,000
- Tax at 40%: £96,000, about 13% of the estate plus the gift
Without the gift and without a home passing to the children, the same estate would owe £126,000. If £80,000 were also left to charity, the charity share passes the 10% test, so the rate drops to 36% on a smaller taxable amount and the tax falls to £21,600.
Business and farm property
From 6 April 2026, business and agricultural property gets 100% relief on the first £2.5 million of combined value, and 50% relief above that. The allowance can pass between spouses. The rules about which assets qualify are detailed, so check GOV.UK. Our tool lets you enter the qualifying value as a single figure.
What the calculator leaves out
The calculator does not model trusts, lifetime transfers that were chargeable when made, residence band downsizing relief or non-domiciled spouses, and it treats all gifts as made on one date. For anything of that kind take advice. See UK income tax explained: bands, allowance and how it's worked out and Capital gains tax explained: rates, allowance and how to work it out for the taxes that can apply during life.
Note: This is general information, not tax or legal advice. Thresholds and rules change, so check GOV.UK.
Try the calculator
Use the Inheritance tax calculator to test your own estate, gifts and allowances, and the Capital gains tax calculator for gains while you are alive.
Open the free Inheritance tax calculator
Worked example 2: a couple, a home and an unused allowance
A widow’s estate is £900,000, of which £500,000 is the family home left to her children. Her late husband left everything to her, so on his death no tax was due and his nil-rate band and residence nil-rate band went unused. Because unused allowances pass to the survivor, she can claim them as well as her own.
| Without the transfer | With the unused allowances | |
|---|---|---|
| Nil-rate band | £325,000 | £650,000 |
| Residence nil-rate band | £175,000 | £350,000 |
| Taxable estate | £400,000 | £0 |
| Tax at 40% | £160,000 | £0 |
The £350,000 residence band is below the £500,000 value of the home, so the cap is not reached. The figures come from our inheritance tax calculator run with the allowances doubled, and a check by hand gives the same result: £900,000 less £650,000 less £350,000 is nil. If the first spouse had used their allowances up through gifts or bequests to others, the second estate would not have the full £650,000 and £350,000. Always confirm with the personal representatives and GOV.UK how much is left to claim.
Worked example 3: how a gift within 7 years uses up the nil-rate band
Gifts surprise many families because the tax can land on the estate, not the person who received the gift. Take an estate of £1,000,000 (home worth £400,000 left to children) and a lifetime gift of £200,000 made less than 7 years before death.
- The gift is below the £325,000 nil-rate band, so no tax is charged on the gift itself.
- It does use £200,000 of the band, leaving £125,000 for the estate.
- Taxable estate: £1,000,000 − £125,000 − £175,000 = £700,000
- Tax at 40%: £280,000
Without the gift, the estate would have the full band: £1,000,000 − £325,000 − £175,000 = £500,000, tax £200,000. The extra £80,000 is 40% of the £200,000 gift. If the giver survived 7 years, the gift would fall outside the calculation, and the full band would be available again. The taper table only reduces tax on a gift that is above the nil-rate band, which is why it does nothing here.
Step-by-step: how to estimate the bill
- Add up everything owned: property, savings, investments, vehicles and personal items.
- Subtract debts and funeral costs to get the net estate.
- Add gifts made in the last 7 years that are not covered by an exemption. Use them against the nil-rate band first.
- Work out the nil-rate band left: £325,000 less gifts, plus any unused band from a late spouse or civil partner.
- Work out the residence band: up to £175,000 (plus any unused share), capped at the value of the home passing to direct descendants, and reduced if the estate is over £2 million.
- Subtract both bands from the net estate. The remainder is taxable.
- Apply 40%, or 36% if at least 10% of the net estate goes to charity.
Common mistakes to avoid
- Assuming the £500,000 is automatic. The residence band needs a home that passes to children, grandchildren or other direct descendants.
- Forgetting the gift clock. The 7 years run from the date of each gift, and a gift can be remembered at the worst time.
- Overlooking exemptions. The annual £3,000 exemption, small gifts and regular gifts from surplus income can reduce what counts. Keep records, because the personal representatives will need to show them.
- Leaving paperwork too late. Wills, pension nominations and records of gifts are far easier to deal with while the giver is alive. Check what your own pension scheme says, especially given the planned change from 6 April 2027.
- Giving away a home but still living in it. Special rules can apply, so check GOV.UK or take advice before doing it.
For other taxes that can arise on assets you give away or sell during life, see Capital gains tax explained: rates, allowance and how to work it out, and for building up savings that will form part of an estate, see How long to reach a savings goal.
When to speak to a professional
Take advice from a solicitor or a qualified tax adviser if the estate is near or over £2 million, includes a business or farm, involves trusts, a spouse who is not UK-domiciled, or gifts that were large or made in several stages. The same applies if you are planning to downsize or give away a home. This guide uses the standard rules and the calculator simplifies them.
Frequently asked questions
Do I pay inheritance tax if I leave everything to my spouse?
No. Transfers to a spouse or civil partner are exempt, and their unused nil-rate bands can transfer to the survivor. Check GOV.UK for the exceptions.
Does the nil-rate band go up each year?
Not at present. It is £325,000 and frozen until 5 April 2031, and the residence band and its £2 million taper threshold are frozen too.
How long must I live after giving a gift?
Seven years for the gift to fall outside inheritance tax. Between 3 and 7 years, taper relief reduces the tax on any amount above the nil-rate band.
Who pays the tax?
The estate normally pays tax on the estate, and the personal representatives deal with HMRC. Tax on a gift made within 7 years is normally the responsibility of the person who received it.
What is the difference between the nil-rate band and the residence nil-rate band?
The nil-rate band is a general tax-free allowance of £325,000. The residence nil-rate band is an extra £175,000 that applies only when a home passes to direct descendants.
Are gifts to a spouse counted for the 7-year rule?
Gifts between spouses or civil partners are generally exempt. Check GOV.UK for exceptions, such as where the recipient is not UK-domiciled.
Does a life insurance payout count towards the estate?
It can, depending on how the policy is written. Some policies are placed in trust so the money sits outside the estate. Check the policy terms or take advice.
Do I need to keep records of gifts?
Yes. Note the date, amount and recipient of larger gifts, and evidence for exemptions such as regular gifts from surplus income. Your executors will need them.