Short answer: inheritance tax is 40% of whatever your estate is worth above your allowances. Everyone has a £325,000 nil-rate band; if your home passes to children or grandchildren there is an extra £175,000 residence allowance; a married couple or civil partners can pass any unused allowance to the survivor, so a couple leaving a family home can shelter up to £1,000,000. Above that, 40%. The bands are frozen until April 2031, so as house prices and pensions grow, more estates cross the line each year.
The sums, step by step
- Add up the estate. Home, savings, ISAs, investments, the car, anything else you own, less debts and the mortgage. From 6 April 2027 unused pension pots count too — see pensions in the estate.
- Take off the nil-rate band: £325,000. Gifts you made in the seven years before death use this band up first (see gifts and the seven-year rule).
- Take off the residence nil-rate band: up to £175,000, but only if a home you lived in passes to direct descendants — children, stepchildren, grandchildren. It cannot be more than the home's value, and it shrinks by £1 for every £2 the whole estate is worth above £2,000,000, disappearing at £2.35m for one person.
- Anything left to a spouse or civil partner, or to charity, is exempt.
- Tax what remains at 40% — or 36% if at least 10% of the net estate goes to charity.
A worked example
Single person, aged 65, no gifts in the last seven years, home worth £650,000 left to their daughter, savings and ISAs of £320,000, a pension of £500,000 (counted from April 2027).
| Step | £ |
|---|---|
| Estate | 1,470,000 |
| Nil-rate band | −325,000 |
| Residence nil-rate band (estate under £2m, home to a child) | −175,000 |
| Taxable | 970,000 |
| Tax at 40% | 388,000 |
Their daughter receives £1,082,000. If the same person were married and everything passed to the spouse first, there would be no tax on the first death and up to £1,000,000 of allowances on the second.
What changes the bill most
- Being a couple. Unused bands transfer, so the survivor's estate gets both sets. A couple with a £1.2m estate and a home to the children can pay nothing.
- Gifts made in time. A gift made more than seven years before death is outside the estate entirely; between three and seven years the tax on it tapers. Regular gifts out of surplus income are exempt straight away.
- Pensions until April 2027. Money left in a pension is outside the estate today. From 6 April 2027 it is inside it, which is why so many more estates will pay.
- The £2m taper. An estate of £2.2m loses £100,000 of residence allowance; at £2.35m a single person has none. Gifts that bring the estate under £2m can restore it.
- Charity. Leaving 10% to charity cuts the rate on the rest from 40% to 36%.
Money Horizon works all of this out for the age you choose, year by year, with gifts, taper, transferred bands, the charity rate and pensions from 2027 — and shows what your heirs actually receive after every kind of tax. Open What will my family receive? with your own figures.
Questions people ask
Is inheritance tax paid on the whole estate or only the part above the threshold? Only the part above your allowances. An estate of £400,000 with no home allowance pays 40% of £75,000 — £30,000 — not 40% of £400,000.
Do I pay inheritance tax if I leave everything to my husband or wife? No. Transfers between spouses and civil partners are exempt, and the unused allowances pass to the survivor. Unmarried partners get no exemption and cannot transfer bands.
Are the thresholds going up? Under current plans the £325,000 and £175,000 bands stay frozen until April 2031. Money Horizon's projection applies the freeze and then uprates with inflation.
Does my pension count? Not for deaths before 6 April 2027. From that date unused pension funds and death benefits are part of the estate for inheritance tax. If you die at 75 or over, the person inheriting the pension also pays income tax on what they draw.
What is the residence nil-rate band? An extra allowance of up to £175,000 when a home you have lived in passes to your children, grandchildren or their spouses. It is reduced for estates over £2m and is lost entirely at £2.35m for one person.