Inheritance Tax explained
Inheritance Tax (IHT) is charged at 40% on the part of an estate above the tax-free allowances. This guide explains the bands, the spouse exemption, gifts and how to reduce a bill.
The 40% rate and the nil-rate band
IHT is charged at 40% on the value of an estate above the nil-rate band of £325,000. Everything below that is tax-free. The estate includes property, savings, investments and possessions, less debts. There's usually no IHT if the estate is below £325,000, or if everything is left to a spouse or civil partner (which is exempt).
The residence nil-rate band
If you leave your home to direct descendants (children or grandchildren), an extra residence nil-rate band of £175,000 applies. Combined with the standard band, an individual can pass on up to £500,000 tax-free. The residence band tapers away for estates over £2 million, reducing by £1 for every £2 above that threshold.
Transferable allowances
Anything left to a spouse or civil partner is exempt, and any unused allowances transfer to them. So a surviving spouse can have up to £650,000 of nil-rate band and £350,000 of residence band, a combined £1 million tax-free for a couple leaving their home to children. The calculator's "widowed" toggle doubles the allowances to reflect this.
The £1m couple allowance
The 7-year rule
Gifts made more than 7 years before death are usually free of IHT. Gifts within 7 years count against the nil-rate band, with taper relief reducing the tax on gifts made 3 to 7 years before death. You can also give away £3,000 a year (the annual exemption), small gifts, and regular gifts from surplus income, all IHT-free. Larger lifetime giving is a common way to reduce an eventual bill, but you must survive 7 years.
Other reliefs and planning
Leaving 10% or more of the estate to charity cuts the IHT rate on the rest from 40% to 36%. Business Relief and Agricultural Relief can remove qualifying assets from the estate (rules are changing from 2026). Pensions generally sit outside the estate. Trusts and whole-of-life policies written in trust are also used. IHT planning is complex and rules change, take professional advice.
Common mistakes
- Assuming the estate is below the threshold. Property values push many estates over £325k. Add everything up, including the home.
- Not using transferable allowances. A widow(er) can claim a late spouse's unused bands, worth up to £1m combined.
- Leaving gifts too late. Gifts only fully escape IHT after 7 years. Plan early.
- Ignoring the £2m taper. Large estates lose the residence band, factor this into planning.