How to calculate inheritance tax and our free IHT calculator

What is inheritance tax and how does it work?

• In the UK there has been some form of inheritance tax (formerly known as death duty tax) as far back as 1694
• Over the years there have been numerous inheritance tax changes
• Inheritance tax is calculated on the total deceased's estate, gifts made within 7 years, with tax paid on amounts over the 'nil rate band', also known as IHT threshold, applicable at the date of death
• The nil-rate band is currently £325,000, however those who own their own home and plan to give it to their direct descendants (i.e. children, grandchildren, stepchildren) can benefit from an additional £175,000 residence nil-rate band allowance
• Married couples and civil partners are allowed to pass on their assets tax-free and the surviving partner can, in addition, use any of their partner's unused nil rate allowance meaning married couples could give their children up to £1,000,000 inheritance tax free provided their estate is worth less than £2,000,000
• There are further tax-free allowances concerning gifts made by the deceased in their lifetime

Who has to pay inheritance tax?

• On death the deceased's total assets are calculated and the amount over the IHT threshold, relevant at the time of death, will be taxed at the rate applicable at the time of death
• Any inheritance tax due will normally be paid from the deceased's estate
• Any inheritance tax due on gifts made in the seven years prior to death must be paid by the recipients of the gifts
• If there is a will then the executor of the estate will arrange for any IHT to be paid
• If there is no will then the administrator of the estate will arrange for any IHT to be paid
• Inheritance tax has to be paid within 6 months of death, extra time can be allowed if assets are taking longer to sell (for example any inheritance tax on property)
• Any unpaid tax will incur interest charges

How is inheritance tax calculated?

• On death the total value of all the deceased's assets (property, money, investments & possessions) is calculated
• Each person has an inheritance tax-free allowance, also known as 'nil rate band' or 'IHT allowance'
• In the tax year 2024/25 the nil rate band is £325,000
• Married couples and civil partners can pass on assets to their spouses totally tax-free
• Any unused allowance following one partner's death can be used by the surviving partner on their death
• The value of your estate over the nil rate band is usually liable to IHT at the standard inheritance tax rate of 40%
• Each person gets a tax-free extra allowance of £175,000 (2024/25) to use against the value of their property if they are leaving their home to their direct descendants
• Any gifts made in the 7 years prior to death could be liable to inheritance tax using a sliding scale depending how much of the seven year period has expired - this is known as the inheritance tax 7 years rule
• In addition, there is a £3,000 annual gift allowance that is free of UK inheritance tax
• Gifts on the marriage of a child (£5,000 max.), grandchild/great-grandchild (£2,500 max.) or any other relative (£1,000 maximum) are free from inheritance tax. Additionally, you can give up to £250 each tax year to anyone you know without having to pay inheritance tax.
• Regular gifts from surplus income and to help with living costs of an ex-spouse, elderly dependent or a child in full-time education don't attract IHT and are a good way to pass money onto your children without paying inheritance tax
• Gifts to charity and political parties (under certain conditions) are also exempt from UK inheritance tax