How Inheritance Tax Is Calculated, Step by Step

Inheritance tax is not a single percentage applied to a single number. It is the result of a defined sequence of steps, and the order matters because each step changes what the next one works on. Getting the sequence right is what separates an accurate estimate from a guess.

This article walks through that sequence in plain terms. It forms part of our Inheritance Tax: A Complete UK Guide. The thresholds referred to here are explained in full in our separate article on the 2026/27 inheritance tax thresholds, and if you want the calculation run for your own estate we can handle it through /services/inheritance-tax-planning.

Step one: value the estate

The first step is to establish the value of everything the deceased owned at the date of death. This includes property, savings, investments, vehicles, personal possessions, business interests, and the proceeds of certain life policies if they are not written in trust. Each asset is valued at its open-market value on the date of death, which for property usually means a professional valuation.

Jointly owned assets are included according to the share owned. Assets held abroad are included where the deceased was UK-domiciled. The result of this step is the gross value of the estate.

Step two: deduct debts, liabilities, and the funeral

From the gross value, allowable deductions are taken. These include outstanding mortgages, loans, credit balances owed, unpaid bills, and reasonable funeral expenses. The result is the net value of the estate. Deductions must be genuine liabilities of the deceased; informal or unevidenced debts can be challenged.

Step three: apply reliefs and exemptions

Next, reliefs and exemptions are applied. The most significant are spouse exemption, charity exemption, business relief, and agricultural relief. Anything passing to a UK-domiciled spouse or civil partner is exempt. Anything passing to a qualifying charity is exempt. Business and agricultural assets may attract relief at 100 per cent or 50 per cent, subject to the rules covered in our business relief and succession service at /services/business-succession.

These exemptions reduce the chargeable estate before any threshold is applied, so they are extremely valuable. A large estate left wholly to a spouse can have no inheritance tax to pay at all on the first death.

Step four: add back gifts made within seven years

Gifts made in the seven years before death are brought back into the calculation. These are set against the available nil-rate band first, in date order, oldest first. Where cumulative gifts exceed the nil-rate band, tax can fall due on the excess, and taper relief may reduce that tax. The mechanics of this are covered in detail in our lifetime gifting service at /services/lifetime-gifting and in our gifting guide.

This step is why early gifting matters: a gift made more than seven years before death usually falls out of the calculation entirely.

Step five: apply the thresholds

The available nil-rate band of £325,000 and any residence nil-rate band of up to £175,000 are then applied, together with any allowances transferred from a late spouse. The thresholds reduce the chargeable estate to the amount that is actually taxable.

Step six: apply the rate

The taxable amount is charged at 40 per cent, or at the reduced rate of 36 per cent where 10 per cent or more of the net estate is left to charity. The result is the inheritance tax due on the estate. Where lifetime gifts have used up the nil-rate band, tax on those gifts is calculated separately and may be the responsibility of the person who received the gift.

A worked example

Consider an unmarried individual with a home worth £400,000 left to their child, savings and investments of £250,000, and a £30,000 outstanding loan, who made no gifts in the seven years before death and left nothing to charity. The calculation runs as follows.

The figures are illustrative. A married person with a transferable nil-rate band and residence nil-rate band could have substantially more available, and a larger estate could lose part of the residence nil-rate band to the taper above £2,000,000.

When the tax is due

Inheritance tax is due by the end of the sixth month after the month in which the person died. So for a death in January, the tax is due by the end of the following July. Interest runs on any tax paid late. Tax on property and certain other assets can be paid in instalments over ten years, but interest still applies.

• The personal representatives are responsible for valuing the estate and reporting it.
• Some inheritance tax often has to be paid before probate is granted, which can create a timing problem.
• Banks may release funds directly to pay inheritance tax under the Direct Payment Scheme.
• Tax on lifetime gifts that have become chargeable is usually due from the recipient of the gift.

Common questions

Does every estate have to do this calculation?

Every estate has to be valued, but many fall below the thresholds and pay no tax. Even where no tax is due, the personal representatives often still have to report the estate, particularly where allowances are being transferred from a late spouse.

Who actually pays the inheritance tax?

Tax on the estate itself is paid by the personal representatives from the estate before it is distributed. Tax on lifetime gifts that have become chargeable is generally the responsibility of the person who received the gift.

Can the calculation change after probate?

Yes. If asset values are revised, further assets come to light, or reliefs are agreed differently with HMRC, the figure can be adjusted. This is one reason careful valuation at the outset is important.