Inheritance Tax: Nil-Rate Band, Taper Relief, and How It's Calculated
Inheritance tax (IHT) is charged at 40% on the value of a deceased person's estate above their available nil-rate band. Despite affecting fewer than 4% of estates, IHT generates significant concern because of house price growth and frozen thresholds. Understanding the calculation reveals both the liability and the legitimate planning available.
The Nil-Rate Band
| Allowance | Amount | Conditions |
|---|---|---|
| Standard nil-rate band (NRB) | £325,000 | Everyone; frozen until April 2030 |
| Residence nil-rate band (RNRB) | £175,000 | Passing main home to direct descendants |
| Spouse/civil partner transferable NRB | Up to £325,000 | If deceased spouse's NRB unused |
| Spouse/civil partner transferable RNRB | Up to £175,000 | If unused on first death |
| Maximum combined (married couple) | £1,000,000 | Both NRBs + both RNRBs |
The Basic Calculation
IHT = (Net Estate − Available Nil-Rate Bands) × 40% Net Estate = Assets − Liabilities (mortgages, debts, funeral costs) Example: Single person, no property passing to children Estate: £700,000 − Mortgage: £80,000 = Net estate: £620,000 NRB: £325,000 Taxable: £620,000 − £325,000 = £295,000 IHT: £295,000 × 40% = £118,000
Taper Relief on Gifts
Gifts made within 7 years of death are included in the estate (potentially exempt transfers). Taper relief reduces the IHT on those gifts if made more than 3 years before death.
| Years Before Death | IHT Rate on Gift |
|---|---|
| 0–3 years | 40% |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% (fully exempt) |
What-If Scenarios
Scenario 1: Married couple, family home
Combined estate £950,000 (including £400,000 home). Second death, home passes to adult children. Available allowances: £325,000 + £325,000 (transferred) + £175,000 + £175,000 (transferred RNRB) = £1,000,000. Taxable estate: £0. IHT: £0.
Scenario 2: Single person, estate £800,000, no property to children
Available: NRB £325,000 only (no RNRB — no qualifying property). Taxable: £475,000. IHT: £190,000.
Scenario 3: Impact of a £100,000 gift made 4.5 years before death
Gift £100,000, made 4.5 years before death. Taper relief: 24% rate (not 40%). IHT on gift: £24,000 (if NRB already used by rest of estate) — saving £16,000 vs dying before 3-year mark.
Frequently Asked Questions
→ Model estate growth over time with the Savings Calculator
Indicative only. IHT is complex and individual circumstances vary significantly. Consult a solicitor or regulated financial adviser for estate planning.