Learn what inheritance tax is, why it matters in the UK, and how to calculate it step-by-step including exemptions, reliefs, and recent global asset rules.
TheInterviewTimes.com | November 19, 2025 — Inheritance tax (IHT) is a tax applied to the estate of a deceased person before the assets are passed on to their heirs. In the UK, it is a significant consideration for those with substantial wealth, especially given recent reforms extending the tax to worldwide assets of long-term residents. This explainer breaks down what inheritance tax is, how it works, and details a step-by-step approach to calculating it.
What is Inheritance Tax?
Inheritance tax is charged on the transfer of property, money, and possessions when someone dies, based on the value of the estate. In the UK, the standard IHT rate is 40%, and it applies only to the value of the estate above certain tax-free thresholds, known as nil-rate bands. The aim is to tax particularly large inheritances, while allowing smaller estates or gifts to close relatives to pass with little or no tax.
The UK also offers reliefs and exemptions to reduce the IHT bill in certain cases, such as when assets are left to a spouse, civil partner, or charity. Since April 2025, a key reform introduced worldwide taxation of long-term UK residents’ global assets for inheritance tax purposes, broadening the tax’s reach beyond just UK assets.
Why It Matters Now
The inheritance tax regime has been highlighted recently by the departure of several billionaires from the UK, including Lakshmi Mittal, who cited inheritance tax on worldwide assets as a major factor in his decision. The UK increased scrutiny and expanded tax rules have led high-net-worth individuals to reconsider their residency, as global assets become taxable if one has been a UK tax resident for at least 10 out of the last 20 years.
Step-by-Step Calculation of Inheritance Tax in the UK
- Valuing the Estate: The first step is to calculate the total market value of all the deceased person’s assets at the date of death. This includes property, savings, investments, personal possessions, and business interests, both in the UK and abroad if the person qualifies as a long-term UK resident.
- Deducting Liabilities: From the gross value, subtract any debts or liabilities linked to the estate, such as mortgages, outstanding loans, funeral expenses, and other debts owed by the deceased.
- Apply Exemptions and Reliefs: Certain assets may be exempt or partially relieved from inheritance tax. This includes:
- Transfers to a spouse or civil partner, which are usually exempt.
- Gifts left to charities, which also reduce the overall IHT rate from 40% to 36% if 10% or more of the net estate goes to charity.
- Business property relief and agricultural relief that reduce the taxable value of qualifying assets.
- Annual exemptions for small gifts and gifts made out of normal expenditure from income.
- Apply the Nil-Rate Bands: Every individual has a tax-free threshold, known as the nil-rate band, currently set at £325,000. If a person leaves a main residence to direct descendants (such as children or grandchildren), an extra residence nil-rate band of up to £175,000 applies, giving some estates a combined tax-free allowance of up to £500,000 per person. Married couples or civil partners can transfer unused allowances, potentially doubling this threshold.
- Calculate the Taxable Estate: Subtracting liabilities, exemptions, and nil-rate bands from the total value gives the taxable estate amount that inheritance tax will apply to.
- Calculate the Tax Due: Inheritance tax is charged at 40% on the taxable estate value above the thresholds. If 10% or more of the net estate is left to charity, the rate is reduced to 36%.
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Example Calculation
If an estate is valued at £600,000 and after deducting debts and exemptions the taxable value amounts to £275,000, with the standard nil-rate band of £325,000 applied, the IHT is due only on the excess above the threshold. Here, since £600,000 – (£325,000 + any additional residence band) equals taxable value, the tax is calculated accordingly. For instance, on £275,000 above the threshold, the tax at 40% would be £110,000.
Additional Considerations
- Worldwide Assets: Since April 2025, UK inheritance tax includes global assets for individuals who have been UK residents for 10 of the last 20 years, catching real estate, investments, and other assets overseas.
- Payment Timing: IHT must usually be paid within six months of the end of the month in which the person died. Executors or administrators are responsible for reporting and paying the tax. For illiquid assets such as property or businesses, payment can be made in installments but may attract interest.
- Planning: Given the complexity and potential liabilities, many seek expert advice to use trusts, gifts, and other estate planning tools to reduce inheritance tax exposure.
Inheritance tax remains a significant planning issue for many, especially amid recent expansions in scope. Understanding its calculation and exemptions is vital for anyone managing or inheriting substantial wealth.
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