Inheritance Tax Calculation UK: How It Works in 2026

A client came to Apex Accountants earlier this year after inheriting her late father’s house and modest savings. She was convinced the estate was far too small to attract any tax. It turned out her father had also gifted a large sum to her brother four years before he died, something she knew nothing about until the executors began pulling the paperwork together. That gift changed the whole calculation. It is a scenario we see often, and it is why inheritance tax calculation UK guidance matters before families assume an estate is too small to attract tax. 

With thresholds frozen for years and property values still climbing, the inheritance tax has quietly become one of the most talked about taxes in the country. Below, we answer the questions clients ask us most, in the order the calculation actually follows.

What is the basic tax-free allowance?

Every individual has a nil rate band of £325,000. The nil rate band has been fixed at that level since 2009 and, following Budget 2025, will remain frozen until 5 April 2031. Anything left within this threshold passes free of tax.

Is there anything else?

Yes. Where a main home is left to children, grandchildren or other direct descendants, an additional residence nil rate band of £175,000 can apply, taking a single person’s threshold to £500,000. This allowance is not automatic. It only applies to the value of a qualifying home passing to direct descendants and does not extend to lifetime gifts.

What about married couples?

Any part of the nil rate band or residence nil rate band that is left unused on the first death can be transferred to the surviving spouse or civil partner. In practice, this means a couple can often pass on up to £1 million between them before tax becomes due, provided the family home goes to children or grandchildren.

Does the residence allowance taper away for larger estates?

It does. For estates worth more than £2 million, the residence nil rate band is reduced by £1 for every £2 above that threshold. Once an estate reaches £2.35 million, the residence allowance disappears completely, leaving only the standard £325,000 threshold.

What rate do inheritance tax accountants UK apply above the thresholds? 

The standard rate is 40%, charged only on the portion of the estate above the available allowances. If at least 10% of the net estate is left to charity, the rate on the taxable remainder drops to 36%, which is worth factoring in at the will drafting stage rather than after the event.

How did the gift affect the inheritance tax calculation UK families had to make? 

This is the part people underestimate most. Gifts made in the seven years before death are generally pulled back into the estate for tax purposes. This is often called the seven-year rule. If a person survives seven years after making a gift, it falls outside the estate entirely. If they do not, the gift is added back, using up the nil rate band before the rest of the estate is assessed.

Where gifts made in that seven-year window exceed the nil rate band, taper relief can reduce the rate charged, but only on the portion of tax due, not on the value of the gift itself. The reduction runs on a sliding scale: full tax applies to gifts made within three years of death, then the effective rate steps down the longer the person survived afterwards, reaching its lowest point for gifts made between six and seven years before death.

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Are any gifts exempt from the start?

Several are, and they sit outside the seven-year rule altogether, as set out in GOV.UK’s guidance on gifts:

• An annual exemption of £3,000 per tax year, which can be carried forward one year if unused
• Small gifts of up to £250 per person, provided no other exemption was used on that person in the same year
• Wedding gifts, with limits depending on the relationship to the giver
• Regular gifts made from surplus income, provided the giver’s standard of living is unaffected
• Gifts between spouses or civil partners, and gifts to UK-registered charities

Is there anything on the horizon that could change these calculations?

Yes, and it is significant. From 6 April 2027, most unused pension funds and pension death benefits will be brought within the value of a person’s estate for inheritance tax purposes, following legislation confirmed in the Finance Act 2026. Pensions have historically sat outside the estate altogether, so this change will bring a meaningful number of estates into scope for the first time and increase the liability for others. Anyone relying on their pension as a tax-efficient way to pass on wealth should review that plan with accountants for inheritance tax planning well before the change takes effect. 

Where do we come in? 

For a reliable inheritance tax calculation UK families can act on, work out the full picture before assuming an estate is too small to matter. Add together the value of the home, savings, investments, and any gifts made in the past seven years, then apply the allowances in the right order. Getting the sequence wrong, or missing a lifetime gift, is one of the most common reasons families are caught out, and it is exactly the kind of detail inheritance tax accountants UK are asked to unpick once HMRC has already raised a question. 

The better approach is to work through the calculation properly before that happens. If you are unsure how your estate would be assessed, get in touch with Apex Accountants, accountants for inheritance tax planning, for a clear, professional review. It is a straightforward conversation now, rather than a complicated one later.