Inheritance Tax Calculator 2026-27

Inheritance Tax (IHT) is charged at 40% on the value of an estate above the nil-rate band of £325,000, a figure frozen until 5 April 2031. An additional residence nil-rate band (RNRB) of £175,000 is available when a home passes to direct descendants, meaning children or grandchildren, which takes the potential threshold to £500,000 per person. The RNRB cannot exceed the value of the home, or share of it, passing to them: a £600,000 estate leaving a £120,000 flat to the children gets only £120,000 of RNRB and pays £62,000. A £750,000 estate leaving a house worth £175,000 or more to children has £250,000 in charge once both bands are deducted, and £100,000 of tax to pay.

Married couples and civil partners can transfer unused nil-rate bands to the surviving partner, and with planning that lifts the combined threshold to £1,000,000, being £325k plus £175k doubled. The rate itself falls to 36% where at least 10% of the net estate is left to qualifying charities, and charitable gifts are exempt in their own right. Above a £2 million estate the RNRB is tapered by £1 for every £2 of value and is gone completely at £2.35m. The taper is measured on the whole estate less debts, before the spouse exemption or any other exemption or relief, so a £3m estate leaving £1m to a spouse loses the whole RNRB.

Gifts made more than 7 years before death sit outside the estate entirely. Gifts within that window are potentially exempt transfers, counted back into the estate if you die during the period, with taper relief reducing the charge by 8% a year from year 3. The full 100% applies in years 0 to 3, then 80% in year 4, 60% in year 5, 40% in year 6 and 20% in year 7.

Several gifts are exempt whatever happens afterwards. The annual allowance is £3,000 per person and one unused year can be carried forward. Small gifts of £250 per person per year fall outside the estate, as do wedding gifts of £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else. Using these year after year is the plainest way of reducing an estate without complicated structures.

Business Property Relief gives 100% IHT exemption on shares in private unlisted trading companies held for 2 years or more, and on sole trader and partnership assets. Agricultural Property Relief does the same for farmland used for agriculture for 2 years, or 7 where it is let. Both were reformed on 6 April 2026: the first £2.5m of combined BPR and APR keeps 100% relief, and above that the relief reduces to 50%, an effective IHT rate of 20%. Shares traded on a recognised stock exchange but designated as "not listed", such as AIM shares, now get 50% relief whatever their value and do not use up the £2.5m allowance, while shares in private unlisted trading companies still get 100% within it. Any unused part of the allowance can pass to a surviving spouse or civil partner. High-value family farms and businesses are the estates this bites.

Pensions are about to change position. Until 5 April 2027, defined contribution pensions sit outside the IHT estate and pass to nominated beneficiaries free of IHT, although income tax may apply if you die after 75. From 6 April 2027 most undrawn pensions will be included in the estate, one of the largest IHT changes in decades and one that reaches millions of pensions. Planning responses for those affected include drawing down earlier and gifting, buying annuities, and strategic use of trusts.

Discretionary trusts allow entry up to the nil-rate band of £325k in each 7-year period without triggering the immediate 20% charge. Life insurance written into trust pays out free of IHT and gives beneficiaries the liquidity to settle a bill without selling the house or the business first. None of this is territory for improvising: a STEP-qualified solicitor or chartered tax adviser is the sensible starting point, since mistakes here are expensive and often irreversible.