At a glance: How to calculate Inheritance Tax

What is Inheritance Tax (IHT)? When is IHT charged? How do I calculate IHT on an individual's estate? What rate of IHT applies?

This is a freeview 'At a glance' guide to calculating Inheritance Tax (IHT). 

What is Inheritance Tax (IHT) and when is it charged? 

IHT is not simply a tax paid on the value of someone's estate at the time of their death.

IHT is charged on the value transferred by a 'chargeable transfer'. 

  • A chargeable transfer is a transfer of assets made by an individual in life or death, which results in the value of their estate i.e. their assets chargeable to IHT, being reduced.
  • A chargeable transfer can arise both during an individual's lifetime, for example on a Transfer into a trust, and on their death, when their estate is transferred to their beneficiaries. 
  • Some Transfers of value are exempt from IHT at the time they are made. Others are Potentially exempt, and will only become chargeable if they are not survived by seven years. 

An individual's Domicile may limit the territorial scope of IHT charged. 

  • A UK domiciled individual is liable to IHT on worldwide assets, whereas someone with a non-UK domicile is only liable to IHT on UK situs assets. 

Many trusts are also subject to IHT charges. These can arise every ten years as well as when assets leave the trust. See Ten-year charge reporting requirements and Exit charge reporting requirements

IHT on an individual's death 

There are three types of transfer which may become subject to IHT (or additional IHT) when an individual dies: 

  1. A deemed chargeable transfer in relation to the individual's death estate (discussed below). 
  2. Potentially Exempt Transfers (PETs) made in the seven years prior to death (outside the scope of this note). 
  3. Chargeable Lifetime Transfers (CLTs) made in the seven years prior to death (outside the scope of this note). 

Whether any IHT is actually payable on these transfers will depend on values and the availability of reliefs and exemptions. 

How do I calculate IHT on a death estate?

When an individual dies, they are deemed to make a chargeable transfer, for IHT purposes, which is equal to the net value of the assets in their estate at the time of their death.

In order to calculate the IHT payable on an estate the steps below should usually be followed. There may be more points to consider for some estates, depending on the nature of the assets held and wider facts. 

Step 1: Value the assets of the estate

All of the assets that the deceased was beneficially entitled to need to be valued at their open market value at the date of death.

A person's assets might include:

  • Their home.
  • Other properties, land or buildings.
  • Cash, and money in banks and building societies.
  • Interests in businesses such as sole trade businesses and partnerships. 
  • Stocks and shares.
  • Household and personal items, including furniture, antiques, paintings and jewellery. 
  • Cars, caravans or boats.
  • Foreign assets (for UK-domiciled individuals)
  • Amounts owed to them, for example, wages, tax repayments, refunds and loans made to other people. 
  • Payments made on their death, such as life insurance payments or Lump sum death benefits from a pension.

There are special valuation rules which apply to: 

  • Jointly owned assets, depending on whether owned as joint tenants or tenants in common. 
  • Quoted shares and units in authorised unit trusts.
  • Related property (usually property owned by a spouse or civil partner, or in some cases a charity, charitable trust or certain political, national or public bodies). 

Deemed assets of the deceased must also be included in the value of the estate. These include:

Step 2: Deduct liabilities

Next, a deduction for allowable liabilities can be made. These typically include: 

Reasonable funeral expenses may also be deducted. 

Where a loan is secured on a particular asset, its value will usually be deducted from that asset's value. This is subject to Anti-avoidance rules which apply where the debt in question is not repaid or was used to acquire, maintain or enhance: 

  • Excluded property.
  • Assets qualifying for Business Property Relief or Agricultural Property Relief (see below). 

See IHT: Loans and restrictions on liabilities against the estate

Step 3: Deduct exemptions and reliefs 

From the value arrived at following Step 2, deduct any exemptions which are being claimed. These might include transfers on death to: 

  • The individual's spouse or civil partner.
  • Registered charities and certain Community Amateur Sports Clubs (CASCs).
  • Qualifying political parties. 
  • Certain housing associations. 
  • Some national bodies, such as the National Gallery and the British Museum.

Next, deduct the value of any reliefs being claimed, for example:  

Step 4: Deduct nil rate bands

a) Work out, and deduct, the value of both of the

Ensure that the NRB is reduced by the value of the chargeable transfers made by the deceased in the seven years before their death: 

  • Not all transfers in the seven years before death will be chargeable.
  • Some may be covered by exemptions, such as gifts of Normal Expenditure Out of Income or the Annual exemption. 
  • Note that the value of the RNRB is tapered for estates exceeding £2m in value. 

b) Work out, and deduct, the value of available Transferable Nil Rate Bands

The result of this step is the value chargeable to IHT. 

Step 5: Calculate the IHT on the estate

Calculate the IHT liability on the value chargeable to IHT from Step 4. 

See IHT relief: 10% discount for charitable bequests on death

Step 6: Calculate reductions to IHT payable 

Quick Succession Relief

  • If, in the five years before the individual died, they inherited money or assets from another person’s estate on which IHT was paid, calculate and deduct Quick Succession Relief (also known as Successive Charges Relief).

Double Tax Relief

  • If overseas property is subject to an equivalent tax in another country, Double Tax Relief may be available for all or part of the overseas tax paid, either under the terms of the relevant tax treaty, or, via unilateral relief. Deduct this from the Step 5 value. 

The result should be the IHT payable on the estate. In some cases, some or all of this may be payable in instalments. 

How can IHT be mitigated?  

There are often many options for IHT planning before someone dies. See: 

Where an individual has died, it may not be too late to undertake planning in order to achieve a more favourable IHT outcome. For examples, see Deed of variation.

Squirrel ad


Are you enjoying our content? 

Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.

Register with us now to receive our receive our FREE SME Topical Tax Update & newletter