Inheritance Tax Calculator

What is inheritance tax?

Inheritance tax is a tax on the estate of someone who has died. It applies when the total value of the estate exceeds the available tax-free thresholds.

Unlike income or capital gains tax, inheritance tax applies to the total value of assets transferred on death and to certain gifts made during a person’s lifetime.

How inheritance tax works

Inheritance tax is charged on the value of a person’s estate at the time of their death. It may also apply to gifts made during their lifetime if those gifts were made within seven years of death.

This includes straightforward actions, such as giving money to family members, as well as less obvious arrangements where value shifts indirectly, such as transferring assets for less than their worth or changing the terms of a trust.

The seven-year rule for gifts

Gifts made within seven years of death are counted as part of the estate when calculating inheritance tax. This rule prevents individuals from avoiding tax by transferring assets shortly before they die.

Gifts to individuals, known as potentially exempt transfers, are tax-free at the time they are made but may become taxable if the person dies within seven years. Gifts to trusts are handled differently. They can be taxed immediately if the amount is large enough, and may also attract further charges if death occurs within seven years.

How your tax-free allowances work together

Each person has a standard inheritance tax allowance of £325,000. This is called the nil-rate band and applies to your entire estate. In addition to this, there is a separate allowance of up to £175,000 that can apply to your main home, but only if it is passed to a direct descendant such as a child or grandchild. This is known as the residence nil-rate band and it comes with extra conditions.

If you are married or in a civil partnership, any unused portion of your spouse’s allowances can be transferred to your estate when they die. This means a couple can potentially pass on up to £1 million free of inheritance tax, depending on how much of the allowances were used by the first person to die.

Gift exemptions and lifetime planning

Certain types of gifts are automatically exempt from inheritance tax, either because of their size, frequency, or purpose. Understanding how these exemptions work can help reduce the value of your taxable estate without the need for complex planning.

Annual gift allowance

You can give away up to £3,000 each tax year without it being added to your estate for inheritance tax purposes. This is your annual exemption. It applies per donor, not per recipient. If you do not use the exemption in one tax year, you can carry it forward for one additional year only. After that, it is lost.

For example, if you made no gifts last year, you can give up to £6,000 this year without affecting your inheritance tax position. If you gave £1,000 last year, you can give up to £5,000 this year. Once two years have passed, the unused exemption from the earlier year cannot be recovered.

Small gift exemption

You can give up to £250 to any number of individuals each tax year, and those gifts will be completely ignored for inheritance tax purposes. However, you cannot use this exemption for someone who has already received a gift under another exemption in the same tax year.

For example, you cannot give someone £250 under the small gift exemption and also include them in your £3,000 annual exemption.

This exemption is often used for birthday presents, Christmas gifts, or other routine one-off gestures.

Gifts made regularly from income

You can give away unlimited amounts from your income if the gifts are regular, form a clear pattern, and do not reduce your standard of living. This exemption only applies to income, not capital.

The gift must be funded entirely from surplus income such as earnings, pensions, or investment returns, after covering your usual living costs.

There is no financial limit, but you must be able to show that:

• You had enough income to cover both the gift and your living expenses at the time it was made
• The gifts formed a consistent pattern or were clearly intended to be regular
• You kept proper records of income and outgoings to demonstrate that the gift came from surplus

Examples might include paying a grandchild’s school fees every term, making monthly contributions to a child’s rent, or giving your children £200 per month from your pension income.

This exemption is often the most powerful but is frequently challenged by HMRC if records are unclear. You should document each gift, the source of income used, and evidence that your remaining income was sufficient for your normal needs.

Wedding and civil partnership gifts

Gifts made in connection with a wedding or civil partnership are exempt up to specific limits. The limits depend on your relationship to the couple:

• A parent can give up to £5,000
• A grandparent or great-grandparent can give up to £2,500
• Any other person can give up to £1,000

The gift must be made on or shortly before the date of the wedding or civil partnership. If the ceremony is cancelled, the exemption does not apply.

This exemption can be combined with the £3,000 annual exemption, but not with the £250 small gift exemption for the same person in the same tax year.

Valuation and administration

When someone dies, all assets in their estate must be reported at their open market value as at the date of death. This means the price the asset could reasonably be expected to fetch if sold on the open market between a willing buyer and a willing seller.

The requirement applies to all types of property, including homes, savings, investments, personal possessions, and any remaining business interests.

Valuing financial assets

For straightforward assets such as bank accounts, listed shares, or investment funds, valuation is usually based on published figures from the date of death. Bank accounts are valued using their closing balances. Listed shares are valued using the official closing price, averaged across the bid and offer where appropriate.

Valuing property

Property must be valued on a realistic market basis, taking into account location, condition, and comparable sales. It is not based on insurance value or original purchase price.

An estate agent’s appraisal may be used for informal guidance, but where inheritance tax is payable, a formal valuation from a chartered surveyor is generally expected.

Valuing personal possessions

Items such as jewellery, antiques, vehicles, or collectibles must be valued at their second-hand market value. This reflects what they would sell for in a normal sale, not their replacement cost or sentimental value.

Overvaluation can result in unnecessary tax, while undervaluation risks penalties or delays.

Valuing unlisted shares and business interests

Unlisted shares and private business assets require specialist valuation. This involves reviewing company accounts, recent profits, dividend history, and whether the deceased held a controlling stake.

Discounts may apply for minority holdings or restricted shares. These valuations must be clearly supported with evidence and are subject to HMRC review.

If there is disagreement, HMRC may refer the matter to its internal Shares and Assets Valuation team.

Responsibility and risk

It is the responsibility of the executor or personal representative to ensure that all valuations are accurate and properly documented. Deliberate undervaluation can lead to penalties.

HMRC frequently queries valuations that appear inconsistent or poorly supported and may require professional evidence in disputed cases.

Compliance and enforcement

HMRC has broad powers to review inheritance tax returns and investigate estates where underpayment is suspected.

Most estates pass through without issue, but where the figures raise questions, HMRC may intervene to check the values reported and the reliefs claimed.

How HMRC identifies risk

HMRC applies a risk-based approach when reviewing inheritance tax returns. Estates are more likely to be investigated if they include substantial lifetime gifts, inconsistent valuations, or undeclared assets.

The risk increases where an estate appears to fall just under the tax threshold without a clear explanation, or where exemptions are claimed without proper evidence.

HMRC cross-checks reported values with third-party data, such as Land Registry records, bank and investment statements, and property sales. Where something appears unusual or incomplete, they may request additional documentation or initiate a formal compliance check.

What happens during an investigation

If HMRC opens a compliance check, they will contact the executor or personal representative in writing. They may ask for:

• Evidence of asset valuations, such as surveyor reports or share price calculations
• Proof of lifetime gifts, including dates and amounts
• Documentation supporting any exemptions claimed, such as records of regular gifts from income
• Explanations for changes in asset values shortly before or after death

Investigations can take several months. If HMRC is not satisfied, they may propose adjustments to the value of the estate and charge additional tax. They can also impose penalties where they believe the error was careless or deliberate.

Penalties for inaccurate reporting

Penalties vary depending on the cause of the error:

• If the mistake was genuine and reasonable care was taken, no penalty applies
• If the mistake was careless, a penalty of up to 30 percent of the additional tax may be charged
• If the error was deliberate, penalties can reach 70 percent or more
• Where there was deliberate concealment, the penalty is uncapped and criminal prosecution is possible

HMRC will assess whether the person responsible took reasonable steps to ensure accuracy, such as using professional valuations or seeking advice. Poor record-keeping is not accepted as a defence.

Digital audit systems

HMRC now uses international data-sharing agreements to access overseas asset information, including bank accounts, property holdings, and offshore trusts. They also use automated systems to detect discrepancies across tax records, land transactions, and probate filings.

Digital assets such as cryptocurrency, online investment accounts, and virtual currencies are also within scope. Executors are expected to identify and report these in the same way as any other asset. Failure to disclose them can trigger penalties in the same way as with traditional property or financial accounts.

Hints and tips

The rules around inheritance tax are fixed, but how they apply in practice often depends on timing, use of allowances, and the way your estate is structured. These hints and tips show how small actions taken early can make a meaningful difference to what gets taxed later.

Start early with gifts

Timing matters. If you plan to give money away, the sooner you start, the more likely you are to survive the seven-year rule. A gift made at 62 is far more likely to fall outside your estate than one made at 78.

Spreading gifts over time also helps make full use of annual exemptions and reduces the need for large transfers later in life.

Use your annual exemption

The £3,000 annual exemption is small, but it adds up. Over ten years, it can remove £30,000 from your estate without triggering any tax.

If unused, it can be carried forward for one year only. It applies per donor, not per recipient, and can be combined with other exemptions such as wedding gifts.

Make use of the £250 small gift rule

Gifts of £250 or less to any number of people are exempt, provided the recipient does not receive anything else from you under a different exemption in the same year.

This rule is often overlooked but can be used freely for birthdays, seasonal gifts, or small one-off transfers to grandchildren, nieces, or friends.

Keep clear records for gifts from income

This is one of the most powerful exemptions, but also one of the most rigorously tested. For the exemption to apply, the gifts must be made from post-tax income, must be part of a clear and regular pattern, and must not compromise your ability to maintain your usual standard of living.

HMRC will expect detailed records showing the amount and source of income, a breakdown of your monthly expenditure, and evidence that the gifts came from surplus funds. A one-off gift or a payment made without planning will not qualify.

The exemption is uncapped, but poor record-keeping can result in it being disallowed in full.

Write life insurance in trust

Inheritance tax must be paid before probate is granted, which can create cash flow problems. Life insurance policies provide immediate funds that can be used to pay the tax bill.

If the policy is written in trust, the proceeds are paid directly to the trustees, not to the estate, meaning they are outside the scope of inheritance tax and accessible without delay.

This structure can be particularly useful where most of the estate is tied up in property or a family business.

Review your position regularly

Wills, gifts, and tax reliefs do not adjust automatically. If you experience major life changes such as a sale of property, a death in the family, or a significant change in wealth, your inheritance tax position may shift.

Reviewing your plans every few years helps ensure that your will reflects your current intentions, your reliefs are still valid, and your records are complete.

Get advice for complex estates

If your estate is likely to exceed £1 million, or if you own a business, farmland, or significant private investments, professional advice is strongly recommended.

Reliefs such as business property relief can reduce tax significantly, but the qualifying conditions are detailed and often misunderstood. Misapplying them or failing to document ownership correctly can lead to costly challenges later.