How to estimate your inheritance tax bill (UK 2025/26) | Tardi Group

Inheritance tax (IHT) in the UK is charged at 40% on the taxable portion of your estate, the part above your available allowances. For most estates, the starting calculation is straightforward, but the allowances, exemptions, and reliefs that reduce that figure are where real planning opportunities exist. [1]

This article explains how the calculation works, what counts in your estate, and which allowances are available to you.

The nil-rate band: the baseline threshold

Every UK estate benefits from a nil-rate band (NRB) of £325,000. No inheritance tax is charged on the first £325,000 of your estate. This threshold has been frozen since 2009 and is currently frozen until at least April 2030, which means rising property values push more estates into the taxable bracket each year. [1]

If you are married or in a civil partnership and your spouse predeceases you without using their full nil-rate band, their unused allowance transfers to your estate. A surviving spouse can therefore benefit from up to £650,000 of nil-rate band.

The residence nil-rate band: an additional £175,000

If you own a residential property that you have lived in at some point, and you leave it to direct descendants (children, grandchildren, or stepchildren), a further residence nil-rate band (RNRB) of £175,000 applies. [2]

Again, this transfers between spouses: a surviving spouse can benefit from up to £350,000 of RNRB, giving a couple a combined potential threshold of £1 million before any inheritance tax is due.

Important: The RNRB tapers by £1 for every £2 that your estate exceeds £2 million, and is fully withdrawn at £2.35 million (single) or £2.7 million (couple). If your estate is above these figures, the RNRB may not be available in full. [2]

What counts in your estate

HMRC includes the following in your taxable estate:

Property and land (valued at market rate)
Savings and cash
Investments and ISAs (ISA tax advantages do not survive death for IHT purposes)
Business interests (unless Business Property Relief applies)
Personal possessions, vehicles, jewellery, art
Life insurance proceeds (unless the policy is held in trust)
Outstanding gifts made in the past seven years

The following are deducted from your estate before tax is calculated:

Outstanding mortgages and secured debts
Unsecured debts owed at death
Funeral expenses (reasonable amounts)

The 40% rate and the 36% alternative

The standard IHT rate is 40% on the taxable estate. If you leave at least 10% of your net estate to a qualifying charity, the rate reduces to 36%. For larger estates, this can produce a meaningful saving even after the charitable gift. [1]

Gifts: the seven-year rule

Gifts made to individuals during your lifetime are called potentially exempt transfers (PETs). If you survive for seven years after making a gift, it falls outside your estate entirely. If you die within seven years, the gift is added back into your estate for IHT calculation, with taper relief reducing the effective tax rate. [3]

Years between gift and death	IHT rate on gift
0–3 years	40%
3–4 years	32%
4–5 years	24%
5–6 years	16%
6–7 years	8%

Annual exemptions allow you to give £3,000 per year without any IHT consequence, regardless of survival. Each individual can also give £250 to any number of people per tax year, and parents can give up to £5,000 as a wedding gift to a child.

Business Property Relief and Agricultural Property Relief

Business Property Relief (BPR) can reduce the taxable value of qualifying business assets by 100% or 50%, depending on the asset type. From 6 April 2026, significant changes apply: 100% relief is capped at £2.5 million for qualifying business or agricultural property, with excess qualifying property generally receiving 50% relief. Unquoted shares in a trading company and interests in a business partnership typically qualify for 100% relief up to the cap. The asset must generally have been owned for at least two years before death. [4]

Agricultural Property Relief (APR) operates similarly for farmland and farm buildings, with the same £2.5 million combined relief allowance applying from April 2026. [5]

A worked example

Consider a single person with the following estate:

Property: £600,000 (net of mortgage)
Savings and investments: £200,000
Total estate: £800,000

Available allowances:

Nil-rate band: £325,000
Residence nil-rate band (property left to children): £175,000
Total allowances: £500,000

Taxable estate: £800,000 − £500,000 = £300,000

IHT at 40%: £120,000

With professional planning, including structured gifting, pension planning, and potentially a trust, this liability can often be significantly reduced.

Frequently asked questions

What is the inheritance tax threshold in the UK? The standard nil-rate band is £325,000. If you own a home and leave it to direct descendants, an additional £175,000 residence nil-rate band applies, giving a potential threshold of £500,000 for a single person and £1 million for a married couple.

When does inheritance tax have to be paid? IHT is due within six months of the end of the month of death. Interest accrues after this point. The tax must generally be paid before probate is granted, which can create a cash flow challenge for estates with illiquid assets.

Do ISAs count for inheritance tax? Yes. The tax-free growth and income benefits of ISAs do not apply for IHT purposes. ISA holdings form part of your taxable estate on death.

Can I give my house to my children to avoid inheritance tax? Only if you no longer live in it. Gifts where you retain a benefit (such as continuing to live in the property) are treated as "gifts with reservation" and remain in your estate. This is a common and costly mistake.

Is a spouse exempt from inheritance tax? Assets passed between UK-domiciled spouses and civil partners are fully exempt from IHT. The surviving spouse also inherits the deceased's unused nil-rate band allowances.

This article provides general information only and does not constitute personal financial or tax advice. Thresholds and rates are based on current HMRC guidance and are subject to change. Tardi Group recommends seeking professional advice for your specific circumstances.