How to Calculate Your Inheritance Tax in the UK (2024)

Last updated 28^th March 2024 by the SunLife Content Team
5 min read

When someone dies, inheritance tax (IHT) may need to be paid. How much depends on what the person has left behind, and who they left it to.

Working out your own IHT can help with financial planning. For example, to understand how much tax may need to be paid from your estate before your loved ones can inherit it.

For more information on inheritance, you can read our complete guide to inheritance.

Read on to find out how to calculate inheritance tax.

Before calculating inheritance tax

There are a few things to know about IHT before calculating it.

• You won't usually need to pay IHT if the estate’s value is below £325,000. This includes money, property and possessions. But, you still may need to report the value of the estate to the government.
• If everything above the £325,000 threshold is left to your spouse, civil partner, or a charity, there will normally be nothing to pay.
• The threshold can rise to £500,000 if you give your home to your children or grandchildren.
• Your unused threshold can be transferred(www.gov.uk opens in a new tab) to your spouse or civil partner.
• For example, say your partner dies and leaves £125,000 to your children and grandchildren. They would be £200,000 below the £325,000 threshold.
• When you die, you could add that to your own threshold. This means you could leave £525,000 that would not be subject to IHT. Let HMRC know within 2 years of your partner dying if you plan to do this.
• Tax thresholds and rates could change in future. This means that your estimations now might not be the same after you have died.

Calculating inheritance tax

The normal IHT rate in the UK is 40%. This applies to anything above the threshold.

For example, say you have a £400,000 estate and there are no factors affecting the threshold. The 40% tax rate is applied to the remaining £75,000 (£400,000 - £325,000).

40% of £75,000 is £30,000. So that would mean £30,000 owed in IHT.

To work out how much might need to be paid on your estate:

1. Add up the value of everything you own (your estate)
2. Minus any debts (these need to be repaid before any inheritance is given)
3. Decide how much you will leave to your spouse, children or grandchildren (this could affect your threshold)

You can then see whether your estate is worth more than the £325,000 threshold. And whether there are any other factors affecting your threshold.

How to calculate the total value of the estate

The first step in calculating IHT is to value your estate. That’s all your assets minus any debts.

1. Value all your assets

First you need to value of all your assets. Include your house, any other property, shares in companies, or items such as jewellery.

Also include any gifts you’ve given in the past 7 years. (There are a few exceptions – see the government website(www.gov.uk opens in a new tab)).

Your valuation will be double checked after you die in case anything has gone up or down in value. The executor of your will keeps a record of how your estate has been valued for up to 20 years after the inheritance is released.

If you’re unsure about valuing your estate, speak to a financial adviser. They can guide you through the process.

For detailed information on valuing your estate, check the government guide(www.gov.uk opens in a new tab).

Let’s use an example to calculate IHT. Starting with the value of the assets:

2. Minus debts

Now deduct any debts owed. Debts include mortgages, equity release loans, credit cards or other loans.

Sticking with the above example, let’s say there’s an outstanding loan of £50,000, but no other debts.

To work out the total value of the estate we can take the total value of the assets (£450,000) and minus the debt (£50,000).

This means that the total value of the estate is £400,000.

3. Apply the inheritance tax threshold

Now we can apply the IHT threshold. This is sometimes called the ‘nil-rate band allowance’.

If the final value is under £325,000, then there is likely no IHT owed.

Your threshold might be higher if:

• You are leaving inheritance to your spouse
• You are leaving your home to your children or grandchildren
• You have applied to transfer your spouse's unused threshold

Take the total value of the estate minus the threshold to see how much is taxable.

In our example, the estate value is £400,000. Deducting the £325,000 threshold leaves £75,000 of taxable inheritance.

Calculate inheritance tax due

The final step is to apply the 40% tax rate to the taxable inheritance. With our example, £75,000 will be taxed at 40%.

40% of £75,000 is £30,000. So £30,000 would need to be paid to HMRC from the estate.

You have to pay any IHT(www.gov.uk opens in a new tab) within 6 months of someone dying. It can be split into yearly payments to give you time to sell the assets.

If tax is due, you also have to submit the details to HMRC within 12 months. You’ll need a form called IHT400(www.gov.uk opens in a new tab). Accurate valuations are needed for this. So it’s worth getting a professional to value anything worth over £1,500.

Sometimes a report to HMRC is needed even if inheritance tax is not due. Find out more on the government website(www.gov.uk opens in a new tab).

Further reading

• What is considered a large inheritance?
• Why do people choose to leave an inheritance
• What to consider before agreeing to give an early inheritance

Learn more about how SunLife can help you plan for life after retirement:

• Guaranteed Inheritance Plan
• Equity Release
• Over 50s life insurance