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What The Inheritance Tax Calculator Works Out
- Tax-free threshold: the GBP 325,000 nil rate band plus the residence nil rate band of up to GBP 175,000 when a home passes to children or grandchildren, giving a single person up to GBP 500,000 tax free. The residence band is capped at the home's value and tapers away by GBP 1 for every GBP 2 the estate exceeds GBP 2 million.
- Inheritance tax due: 40% of the part of the estate above the threshold. On a GBP 600,000 estate with a family home going to the children, GBP 100,000 is taxable and the bill is GBP 40,000.
- Late spouse's allowances: assets passing between spouses or civil partners are exempt, and the survivor's estate inherits any unused percentage of the first-to-die's bands, so a couple can pass up to GBP 1 million to their children tax free.
- Estate after tax: what is left for the beneficiaries once the tax is paid (after debts in advanced mode). Both thresholds are frozen until April 2031, which quietly pulls more estates into the net each year as house prices rise.
- Debts, mortgage and funeral costs (advanced): deducted from the estate before any tax is worked out. Reasonable funeral costs and outstanding mortgages are the most common deductions.
- Gifts in the last 7 years (advanced): gifts made within seven years of death use up the nil rate band first, leaving less to shelter the estate. Gifts above GBP 3,000 a year count; survive seven years and they fall out entirely, with taper relief reducing the tax on gifts between three and seven years old.
- Left to charity (advanced): charity legacies are exempt, and leaving at least 10% of the baseline estate (the net estate after the nil rate band) cuts the rate on the rest from 40% to 36%. The card shows how much tax the gift saves and what it really costs the other heirs.
- Unused pension pot (advanced): from April 2027 unused defined contribution pensions come into the estate for inheritance tax. The card isolates how much of the bill the pension causes, which for many estates turns a nil bill into a six-figure one.
- Effective rate (advanced): tax as a share of the whole gross estate. Because of the allowances this is usually far below 40%, often 5% to 15% for estates under GBP 1 million.
- Caveats: a simplified estimate. Business and agricultural reliefs (being restricted from April 2026), trusts and lifetime planning all change real bills, so anyone near the thresholds should take professional advice.
Source and further reading: GOV.UK (HMRC): Inheritance Tax.