Inheritance Tax planning begins with understanding the calculation. This guide walks through the IHT formula with worked examples for different estate sizes.
For broader IHT planning strategy, see Inheritance Tax UK — How to Reduce Your Bill.
How to Calculate an IHT Liability — Step by Step
Step 1 — Value the Estate
Total all assets at market value on date of death:
- Property (market value, not mortgage payoff)
- Bank and savings accounts
- Investments (shares, ISAs — note ISA status ends at death)
- Personal possessions (vehicles, jewellery, art)
- Business interests
- Pension funds (currently excluded; from April 2027 included)
Less: Debts — mortgage, loans, funeral expenses, credit cards
= Net estate value
Step 2 — Apply Exemptions
Immediate exemptions:
- Spouse/civil partner exemption: unlimited transfers to UK-domiciled spouse = £0 IHT on death
- Charity exemption: gifts to UK charities are fully exempt
Step 3 — Apply the Nil-Rate Band
Each individual has a nil-rate band (NRB) of £325,000.
Taxable estate = Net estate − NRB (−RNRB if applicable)
If transferring to spouse, their estate inherits any unused NRB from the first death.
Step 4 — Apply the Residence Nil-Rate Band
If the estate includes a main home left to direct descendants:
- Add RNRB of up to £175,000 per person
- Tapered: £1 reduction per £2 of estate above £2 million
Step 5 — Calculate the IHT
IHT = Taxable estate × 40%
(Reduced to 36% if 10% or more of net estate is left to charity)
Worked Examples
Example A — Single Person, Simple Estate
| Property value | £400,000 |
| Savings and investments | £120,000 |
| Mortgage outstanding | −£80,000 |
| Net estate | £440,000 |
| Nil-rate band | −£325,000 |
| Taxable estate | £115,000 |
| IHT at 40% | £46,000 |
Example B — Married Couple, Main Home Passes to Children
First death (all to spouse — no IHT due) Second death:
| Property value | £550,000 |
| Other assets | £350,000 |
| Net estate | £900,000 |
| NRB (own) | −£325,000 |
| Transferred NRB (from first death) | −£325,000 |
| RNRB (own) | −£175,000 |
| Transferred RNRB | −£75,000 (reduced — estate over £2m? No, £900k — full) |
Wait — estate is £900,000, under the £2m taper. Full RNRB applies to both.
| RNRB transferred | −£175,000 |
| Taxable estate | £900,000 − £1,000,000 = £0 |
| IHT | £0 |
The full £1 million threshold eliminates IHT entirely for this couple.
Example C — Estate Over £2 Million (RNRB Taper)
| Net estate | £2,400,000 |
| NRB × 2 (transferred) | −£650,000 |
| RNRB taper: £400,000 excess / 2 = £200,000 reduction | |
| RNRB available: £350,000 − £200,000 | −£150,000 |
| Taxable estate | £1,600,000 |
| IHT at 40% | £640,000 |