Estate Valuation & Inheritance Tax (IHT) Details
📊 Inheritance Tax Calculation Breakdown
Inheritance Tax (IHT) is a UK tax levied on the net estate (property, money, investments, and physical possessions) of a deceased person.
Understanding how the Nil Rate Band (£325,000) and Residence Nil Rate Band (£175,000) combine allows families to transfer up to £1,000,000 tax-free.
⚙️ Statutory IHT Allowances & Rules for 2026/27
1. Statutory Exemption Thresholds
- Nil Rate Band (NRB): £325,000 per individual (0% IHT).
- Residence Nil Rate Band (RNRB): Additional £175,000 per individual if passing your main residence to direct descendants (children, grandchildren).
- Combined Single Exemption: £500,000 for a single person passing a home to children.
- Combined Married Couple Exemption: £1,000,000 (spouses can transfer 100% of unused allowances to each other tax-free upon first death).
2. Statutory 40% IHT Rate
The standard rate of Inheritance Tax is 40%, charged only on the net value of the estate that exceeds your combined tax-free allowance threshold.
3. The 7-Year Lifetime Gift Rule (PETs)
Gifts made to individuals while living are Potentially Exempt Transfers (PETs). If you survive for 7 complete years after making a gift, it becomes 100% tax-free. If you die within 7 years, taper relief reduces the tax rate (ranging from 40% down to 8%).
📊 Practical Inheritance Tax Worked Examples
Below are two worked calculation examples illustrating single vs. married estate tax:
- Total Net Estate Value: **£700,000.00**
- Nil Rate Band: **£325,000.00**
- Residence Nil Rate Band: **£175,000.00**
- Combined Tax-Free Exemption: **£500,000.00**
Calculation: Taxable Estate = £700,000 - £500,000 = £200,000. IHT @ 40% = £80,000.00.
- Total Net Estate Value: **£1,200,000.00**
- Combined Transferred Allowances (2 × £500,000): **£1,000,000.00** (0% IHT)
- Taxable Estate Excess: £1,200,000 - £1,000,000 = **£200,000.00**
Calculation: Taxable £200,000 × 40% IHT = £80,000.00.
📑 Common Pitfalls & IHT Warnings
- The Gift with Reservation of Benefit Trap: If you gift your home to your children but continue living in it rent-free, HMRC treats the gift as a “Gift with Reservation of Benefit.” The property remains 100% inside your estate for IHT purposes.
- RNRB Taper Threshold (£2,000,000 Estate Limit): If an estate’s net value exceeds £2,000,000, the Residence Nil Rate Band (£175,000) is reduced by £1 for every £2 over £2M, disappearing entirely at £2.35M.
- Charitable Legacy 36% Rate Discount: If you leave at least 10% of your net estate to registered charities in your will, the IHT tax rate on the remainder of your estate drops from 40% down to 36%.
❓ Frequently Asked Questions (FAQ)
No. Gifts and transfers of assets between legally married spouses or civil partners who are UK-domiciled are 100% exempt from Inheritance Tax during lifetime or upon death.
You can gift up to **£3,000 per tax year** completely tax-free (Annual Exemption). Unused annual exemption can be carried forward 1 year. Small gifts of up to £250 per person per year are also exempt.
Defined contribution pension pots are held outside your legal estate and generally pass to designated beneficiaries 100% free of Inheritance Tax regardless of estate size.
Inheritance Tax must be paid within **6 months** after the end of the month in which the person died. Interest is charged by HMRC on any unpaid tax after the 6-month deadline.