How inheritance tax is calculated on an estate

Inheritance tax on death is worked out by valuing everything the person owned at death, adding certain trust property and gifts made in the previous seven years, deducting debts and reasonable funeral costs, and taking out exempt and relieved amounts. Whatever is left above the available nil rate bands is taxed at 40%, or 36% where enough is left to charity.

What exactly is taxed when someone dies?

Section 4(1) of the Inheritance Tax Act 1984 (IHTA 1984) treats a person as making a transfer of value immediately before death equal to the value of their estate at that moment. Section 5(1) defines the estate as the aggregate of all property to which the person was beneficially entitled, but it leaves out excluded property, such as most foreign assets of someone who was not a long term UK resident (see excluded property for inheritance tax).

In practice HMRC expects executors to bring together three things:

• the assets the person owned on the day they died, including their share of jointly owned assets;
• gifts made in the seven years before death, including gifts they kept a benefit from (a gift with reservation);
• the value of any trust in which the person had a beneficial interest that counts as part of their estate.

Not every life interest counts. Section 5(1A) keeps most interests in possession created on or after 22 March 2006 out of the estate, but an immediate post death interest under a will still counts. Unused pension funds and death benefits will also be brought into the estate for deaths on or after 6 April 2027.

How are the assets valued?

Section 160 sets the basic rule: each asset is valued at the price it might reasonably be expected to fetch on the open market at the time, without assuming a reduction because everything is sold at once. Section 171 adds changes in value caused by the death itself, such as a life policy that pays out on death, as if they had happened just before it.

HMRC’s estate valuation guidance gives practical rules for joint assets. Property held as joint tenants with a spouse or civil partner is valued at half. Where property was held as joint tenants with other people, the value is divided by the number of owners and 10% is taken off the deceased’s share. Tenants in common are valued by reference to their actual share. HMRC suggests a professional valuation for anything worth over £1,500, and property can be valued by an estate agent or chartered surveyor. Our guide to valuing property for probate covers houses in more detail.

Which debts and costs can be deducted?

Section 5(3) allows liabilities to be taken into account when valuing the estate, but several rules narrow this down:

• Consideration. Under section 5(5), a debt the deceased took on voluntarily only counts if it was incurred for consideration in money or money’s worth. A promise to make a gift is not deductible.
• Charged debts. Under section 162(4), a debt secured on an asset, such as a mortgage, reduces the value of that asset first.
• Repayment. Section 175A only allows a liability if it is actually repaid out of the estate after death, unless there is a real commercial reason for leaving it unpaid and avoiding tax is not one of the main purposes.
• Financing relieved or excluded assets. Sections 162A and 162B make a loan used to buy excluded property, or to buy property that gets Business Relief or Agricultural Relief, reduce the value of that property first rather than the rest of the estate.

Section 172 allows reasonable funeral expenses. GOV.UK guidance lists the funeral director, a headstone or plaque and refreshments, and the Inheritance Tax Manual at IHTM10372 accepts reasonable spending on flowers for the church or coffin.

Where do exemptions and reliefs come in?

Once the net estate is known, anything passing to an exempt beneficiary drops out. The main ones are a spouse or civil partner (see the spouse and civil partner exemption), charities and community amateur sports clubs, and certain other bodies such as political parties and housing associations. Business Relief and Agricultural Relief reduce the value of qualifying assets.

HMRC’s manual at IHTM43002 confirms that assets passing as exempt transfers, or qualifying for 100% business or agricultural relief, do not use up the nil rate band. If at least 10% of the net estate is left to charity, Schedule 1A reduces the rate on the chargeable estate from 40% to 36% (IHTM45001).

How do lifetime gifts change the calculation?

Under IHTM14503, tax on the death estate is calculated by adding together the chargeable transfers made in the seven years before death. That includes immediately chargeable transfers, such as gifts into a discretionary trust, and potentially exempt transfers that have failed because the donor died within seven years. These earlier gifts take the nil rate band first, in date order, and the death estate gets only what is left.

Gifts are reduced first by any lifetime exemptions. The annual exemption is £3,000 per tax year, and any unused amount can be carried forward for one year only. If a gift itself exceeds the nil rate band and was made more than three years before death, taper relief reduces the tax on that gift. GOV.UK sets the rates at 32% for three to four years, falling to 8% for six to seven years. Taper reduces the tax, not the value of the gift, so it does not help the rest of the estate. The seven year rule page covers this in detail.

Which nil rate bands are available?

• Nil rate band. £325,000, fixed from 6 April 2009 until 5 April 2031 according to HMRC’s thresholds table.
• Residence nil rate band. Up to £175,000 for 2026 to 2027 where a home, or a share of one, goes to direct descendants. It reduces by £1 for every £2 the estate is worth over £2 million (see the residence nil rate band).
• Transferred bands. If a late spouse or civil partner did not use all of their bands, the unused percentage can be added. Under section 8B the personal representatives normally claim within two years from the end of the month of death (see transferring an unused nil rate band).

What does a full calculation look like?

Illustration only. Joan was single and died in 2026 to 2027. Four years earlier she gave her son £50,000 and made no other gifts that year or the year before. At death she owned a house worth £400,000, which she left to her children, plus savings and investments of £500,000. Her debts and funeral costs came to £20,000.

Step	Amount
Gift of £50,000 less two years’ annual exemptions (£6,000)	£44,000
Nil rate band left for the estate (£325,000 less £44,000)	£281,000
Gross estate	£900,000
Less debts and funeral costs	£20,000
Net estate	£880,000
Less residence nil rate band (home to children, estate under £2 million)	£175,000
Less remaining nil rate band	£281,000
Taxable estate	£424,000
Tax at 40%	£169,600

The gift falls within the nil rate band, so no tax is charged on the gift itself, but it still costs the estate £17,600 (40% of £44,000) because it uses part of the band. If Joan had left 10% of her net estate to charity, the reduced rate rules would need to be worked through.

When is the tax due and who pays it?

GOV.UK says inheritance tax must be paid by the end of the sixth month after the death, or interest is charged, and that the IHT400 account must be sent within 12 months where tax is due. Executors usually have to pay at least some of the tax before probate is granted (see paying inheritance tax before probate). Tax on assets that may take time to sell, such as a house, can be paid in equal annual instalments over 10 years, usually with interest. The estate normally pays the tax, but where gifts in the seven years before death exceed £325,000, GOV.UK says the people who received gifts pay the tax on them.

What mistakes come up most often?

• Leaving out gifts because they were made years ago, when they still use the nil rate band if made within seven years.
• Deducting a loan from a family member that will never be repaid, which section 175A normally prevents.
• Applying the 10% joint ownership discount to a home owned with a spouse, when HMRC’s guidance simply halves it.
• Claiming the residence nil rate band where the home goes to nieces, nephews or siblings, who are not direct descendants.
• Forgetting to claim a late spouse’s unused bands, which at current thresholds can save up to £200,000 of tax.

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Related Accountapedia entries

• The inheritance tax nil rate band
• Giving assets away now or leaving them in your will
• Excepted estates: when no IHT400 is needed
• Taper relief on lifetime gifts
• Which debts can be deducted from an estate for IHT
• Pensions and inheritance tax
• The 36% rate for charitable legacies
• The loss to the estate principle for inheritance tax
• IHT403: reporting gifts in an estate

Sources

• legislation.gov.uk: Act 1984 c. 51, section 4
• legislation.gov.uk: Act 1984 c. 51, section 5
• GOV.UK: Print
• legislation.gov.uk: Act 2026 c. 11, section 71
• legislation.gov.uk: Act 1984 c. 51, section 160
• legislation.gov.uk: Act 1984 c. 51, section 171
• legislation.gov.uk: Act 1984 c. 51, section 162
• legislation.gov.uk: Act 1984 c. 51, section 175A
• legislation.gov.uk: Act 1984 c. 51, section 162A
• legislation.gov.uk: Act 1984 c. 51, section 162B

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.