What is the inheritance tax rate in the UK?

The standard IHT rate is 40% on the value of the estate above the nil-rate band. A reduced rate of 36% applies when 10% or more of the net estate is left to qualifying charities. The standard IHT rate is 40%, applied to the value of the estate above the nil-rate band (and after reliefs and exemptions). For example, if the estate is worth £1 million and the nil-rate band is £325,000 (with no RNRB), IHT is charged at 40% on £675,000 = £270,000. A reduced rate of 36% applies when 10% or more of the net estate is left to qualifying charities. The 36% rate applies to the entire taxable estate (not just the portion above the 10% threshold). The 10% threshold is calculated based on the net estate (after exemptions and reliefs), and the calculation is complex. The IHT rate has been 40% since 1988, and there are no current plans to change it. Relevant legislation: Inheritance Tax Act 1984, Section 7 (rate of tax); Section 7A (reduced rate for charitable gifts). Example: An estate of £1 million (after reliefs and exemptions) with no charitable gifts: IHT = 40% of (£1 million - £325,000 NRB - £175,000 RNRB) = 40% of £500,000 = £200,000. If 10% of the net estate (£100,000) is left to charity: IHT = 36% of (£900,000 - £325,000 - £175,000) = 36% of £400,000 = £144,000. Saving: £56,000, plus the charity receives £100,000. Common mistake: Assuming the 36% rate is not worth pursuing because the charitable gift reduces the estate. On larger estates, the 4% rate reduction can save more than the amount gifted to charity.

How is inheritance tax calculated?

IHT is calculated by: determining the total estate value, deducting liabilities and exemptions, applying reliefs (BPR, APR), deducting the nil-rate band and RNRB, and applying the 40% (or 36%) rate to the remaining taxable estate. The IHT calculation follows these steps: (1) Total estate value — add up all assets, including property, investments, bank accounts, personal possessions, life insurance (if not in trust), and pensions (from April 2026). (2) Deduct liabilities — mortgages, loans, unpaid bills, funeral expenses. (3) Deduct exemptions — spouse exemption, charity exemption. (4) Apply reliefs — Business Property Relief, Agricultural Property Relief, quick succession relief. The result is the 'chargeable estate'. (5) Deduct the nil-rate band (£325,000) and residence nil-rate band (up to £175,000, if applicable and not tapered). (6) Apply the IHT rate — 40% (or 36% if 10%+ left to charity) to the remaining taxable estate. The result is the IHT payable. The calculation can be complex, especially for estates with business assets, foreign assets, or trust interests. The executors are responsible for the calculation and must file the IHT return (form IHT400) within 12 months of the end of the month in which the death occurred. Relevant legislation: Inheritance Tax Act 1984, Section 5 (chargeable estate); Sections 38-40 (liabilities); Sections 104-117 (reliefs). Example: An individual dies with: property £500,000, investments £300,000, bank accounts £100,000 (total £900,000). Liabilities: £50,000 mortgage. No exemptions or reliefs. NRB: £325,000. RNRB: £175,000 (property left to children). Chargeable estate: £900,000 - £50,000 = £850,000. Taxable estate: £850,000 - £325,000 - £175,000 = £350,000. IHT: 40% of £350,000 = £140,000. Common mistake: Forgetting to include all assets in the estate, especially life insurance (if not in trust), foreign assets, and pensions (from April 2026). Omitting assets can result in an incorrect IHT calculation and potential penalties.

How does the 36% reduced IHT rate work?

If 10% or more of the net estate is left to qualifying charities, the IHT rate on the remaining taxable estate is reduced from 40% to 36%. The 10% threshold is based on the net estate (after exemptions and reliefs). The 36% reduced rate (also called the 'charity rate') applies when 10% or more of the net estate is left to qualifying charities. The calculation works as follows: (1) Determine the net estate — the estate after liabilities, exemptions, and reliefs. (2) Determine the charitable gift — the amount left to qualifying charities. (3) Calculate the 'baseline amount' — the net estate minus the charitable gift. (4) Check the 10% threshold — the charitable gift must be at least 10% of the 'baseline amount' plus the charitable gift (i.e., 10% of the net estate). (5) If the threshold is met, the IHT rate on the taxable estate (after the nil-rate band and RNRB) is 36% instead of 40%. The calculation is complex, and the 10% threshold must be met exactly — being just below 10% means the full 40% rate applies. The 36% rate applies to the entire taxable estate, not just the portion above the 10% threshold. On larger estates, the 4% rate reduction can save more than the amount gifted to charity. Relevant legislation: Inheritance Tax Act 1984, Section 7A (reduced rate for charitable gifts). Example: An estate of £1 million (after reliefs and exemptions). Charitable gift of £100,000 (10% of the net estate). Taxable estate: £1 million - £100,000 (charity) - £325,000 (NRB) - £175,000 (RNRB) = £400,000. IHT at 36% = £144,000. Without the charitable gift: IHT at 40% of (£1 million - £325,000 - £175,000) = 40% of £500,000 = £200,000. The charitable gift saves £56,000 in IHT, and the charity receives £100,000. Common mistake: Leaving slightly less than 10% to charity and missing the reduced rate. The 10% threshold must be met exactly, and the calculation is based on the net estate, not the gross estate. Specialist advice is needed to ensure the threshold is met.

What assets are included in the estate for IHT?

The estate includes all assets owned at death: property, investments, bank accounts, personal possessions, life insurance (if not in trust), and pensions (from April 2026). Trust interests and certain lifetime gifts may also be included. The estate for IHT purposes includes: (1) All assets owned at death — property (including the main residence and any investment properties), investments (shares, bonds, ISAs), bank and building society accounts, personal possessions (cars, jewellery, art), and business assets. (2) Life insurance — if the policy is not written in trust, the payout is part of the estate. If it is in trust, the payout is outside the estate. (3) Pensions — from April 2026, unused pension funds and pension death benefits will be part of the estate for IHT purposes. (4) Trust interests — if the deceased was a beneficiary of a trust, the value of their interest may be part of the estate. (5) Lifetime gifts — gifts made within 7 years of death (PETs) are brought back into the estate for IHT purposes. (6) Foreign assets — for UK-domiciled individuals, foreign assets are part of the worldwide estate. The executors must identify and value all assets in the estate, and report them on the IHT return. Valuation can be complex for certain assets (e.g., business interests, unlisted shares, art), and professional valuations may be needed. Relevant legislation: Inheritance Tax Act 1984, Section 5 (chargeable estate); Section 3A (potentially exempt transfers); Finance Act 2024 (pension IHT changes). Example: An individual dies with: a house worth £500,000, investments worth £300,000, bank accounts £50,000, a life insurance policy for £100,000 (not in trust), and a pension pot of £200,000. The estate for IHT purposes (from April 2026) includes: £500,000 + £300,000 + £50,000 + £100,000 + £200,000 = £1,150,000. If the life insurance was in trust, the estate would be £1,050,000. Common mistake: Forgetting to include life insurance (if not in trust) and pensions (from April 2026) in the estate. These are commonly overlooked but can significantly increase the IHT bill.

Can IHT be paid in instalments?

Yes. For IHT on certain assets (including land, buildings, and unlisted shares), the tax can be paid in annual instalments over 10 years, with interest. This is useful for estates where assets are not being sold immediately. The instalment option allows IHT on certain types of assets to be paid in annual instalments over 10 years, rather than as a lump sum. The instalment option is available for: (1) Land and buildings — IHT on the value of land and buildings can be paid in 10 annual instalments. (2) Unlisted shares — IHT on unlisted shares (where the holding represents more than 50% of the estate) can be paid in instalments. (3) Other assets — certain other assets may qualify, depending on the nature of the asset. The first instalment is due on the normal IHT due date (6 months after the end of the month of death). Subsequent instalments are due annually. Interest is charged on the outstanding balance from the normal due date. The instalment option is useful for estates where the assets are not being sold immediately (e.g., a family business or a property that the family wants to retain). The executors can choose to pay some of the IHT in instalments and the rest as a lump sum. The instalment option must be elected on the IHT return. Relevant legislation: Inheritance Tax Act 1984, Section 227 (instalment option); Section 229 (interest on unpaid tax). Example: An estate includes a family business worth £1 million and liquid assets of £100,000. The IHT bill is £280,000. The executors do not want to sell the business. They elect to pay the IHT on the business (£250,000) in 10 annual instalments of £25,000, with interest. The IHT on the liquid assets (£30,000) is paid as a lump sum. The family retains the business while paying the IHT over 10 years. Common mistake: Not considering the instalment option for estates with illiquid assets. The instalment option can prevent the forced sale of family businesses or properties to pay IHT.

Who pays the inheritance tax?

IHT is payable by the executors of the estate. The tax is paid from the estate's assets before the estate is distributed to the beneficiaries. In some cases, beneficiaries may pay IHT directly (e.g., on lifetime gifts or trust distributions). IHT is generally payable by the executors (or administrators) of the estate. The executors are responsible for: (1) Calculating the IHT due. (2) Filing the IHT return (form IHT400). (3) Paying the IHT from the estate's assets. (4) Distributing the remaining estate to the beneficiaries. The IHT must be paid before probate is granted (before the estate's assets can be accessed and distributed). This can create cash flow problems for estates with significant property or illiquid assets. In some cases, IHT may be payable by beneficiaries directly: (1) Lifetime gifts — if the donor dies within 7 years of making a gift, the recipient of the gift may be liable for the IHT on the gift (if the estate cannot pay). (2) Trust distributions — the trustees may pay the exit charge on distributions from a discretionary trust. (3) Direct payments — in some cases, beneficiaries can agree to pay IHT directly on assets they receive. The executors should seek specialist advice to ensure the IHT is calculated correctly, paid on time, and allocated appropriately among the beneficiaries. Relevant legislation: Inheritance Tax Act 1984, Section 204 (persons liable for IHT); Section 214 (claims and elections). Example: An individual dies with an estate of £1 million and an IHT bill of £200,000. The executors file the IHT return, pay the £200,000 from the estate's liquid assets, and distribute the remaining £800,000 to the beneficiaries. If the estate does not have enough liquid assets, the executors may need to sell property or arrange a loan to pay the IHT. Common mistake: Assuming that beneficiaries pay IHT on their inheritance. In most cases, IHT is paid by the executors from the estate before distribution. However, recipients of lifetime gifts (PETs) may be liable if the donor dies within 7 years.

IHT Advisory › Allowances

IHT Rate & Calculation

The standard IHT rate is 40% on the estate above the nil-rate band. Understand how IHT is calculated, the 36% reduced rate for charitable gifts, and work through example calculations.

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Understanding how inheritance tax is calculated is the foundation of effective IHT planning. The standard rate is 40% on the estate above the nil-rate band, with a reduced rate of 36% available when 10% or more of the estate is left to charity. This guide explains the IHT calculation step by step, with worked examples for different scenarios.

The Standard IHT Rate

The standard IHT rate is 40% on the value of the estate above the nil-rate band (and after reliefs and exemptions). For example, if the estate is worth £1 million and the nil-rate band is £325,000, IHT is charged at 40% on £675,000 = £270,000. The residence nil-rate band can increase the tax-free amount, reducing the IHT payable.

The 36% Reduced Rate

If 10% or more of the net estate is left to qualifying charities, the IHT rate on the remaining taxable estate is reduced from 40% to 36%. This can save significant amounts on larger estates. The 10% threshold is calculated based on the net estate (after exemptions and reliefs), not the gross estate. The calculation is complex, and specialist advice is needed to ensure the threshold is met.

The IHT Calculation Process

The IHT calculation follows these steps: (1) Determine the total estate value (all assets, including property, investments, and personal possessions). (2) Deduct liabilities (mortgages, loans, funeral expenses). (3) Deduct exemptions (spouse exemption, charity exemption). (4) Apply reliefs (BPR, APR). (5) Deduct the nil-rate band and residence nil-rate band. (6) Apply the IHT rate (40% or 36%) to the remaining taxable estate. The result is the IHT payable.

Worked Examples

Example 1: A single individual with an estate of £600,000 (including a home worth £400,000 left to children). NRB: £325,000. RNRB: £175,000. Total allowance: £500,000. Taxable estate: £100,000. IHT: 40% of £100,000 = £40,000. Example 2: A married couple with a combined estate of £1.5 million. On the second death: combined NRB: £650,000, combined RNRB: £350,000. Total allowance: £1 million. Taxable estate: £500,000. IHT: 40% of £500,000 = £200,000.

Key Points

What You Need to Know

The standard IHT rate is 40% on the estate above the nil-rate band
The 36% reduced rate applies when 10%+ of the net estate is left to charity
IHT is calculated on the net estate after liabilities, exemptions, and reliefs
The nil-rate band and RNRB reduce the taxable estate
The calculation involves multiple steps and should be reviewed by a specialist

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Inheritance Tax Frequently Asked Questions

Detailed answers with legislation references, practical examples and common pitfalls.

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Nil-Rate Band & Residence Nil-Rate Band Business Property Relief (BPR)April 2026 IHT Changes Agricultural Property Relief (APR)Lifetime Gifting & the 7-Year Rule Trusts & Inheritance Tax IHT for Married Couples IHT on Property & Estates IHT for Business Owners IHT Exemptions & Reliefs IHT on Foreign Assets IHT Planning Strategies IHT Rate & Calculation

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