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Work out the value of the estate

To get the value of the estate on which Inheritance Tax is due use these steps:

1. Work out the market value of all the assets in the estate. Add these up to get the 鈥榞ross value鈥� of the estate.

2. Take off any debts (for example, a mortgage). This gives you the 鈥榥et value of the estate鈥�.

3. Deduct any reliefs that apply to agricultural assets, businesses and business assets.

4. Take off the value of any assets left to spouses, civil partners, charities or assets that are exempt for other reasons. This gives you the value of the estate that鈥檚 taxable.

5. Work out the available Inheritance Tax threshold. Take the basic threshold of 拢325,000, including any unused basic threshold from a late spouse or civil partner鈥檚 estate, and deduct the value of any gifts made within 7 years of the death from it. If the value of the gifts is more than the basic threshold, there鈥檒l be Inheritance Tax to pay on those gifts. Add any residence nil rate band (RNRB), including anything transferred from a late spouse or civil partner, to get to the available threshold.

6. Compare the value of the estate at the end of step 4 (the value of the estate that you鈥檒l pay tax on known as the 鈥榗hargeable estate鈥�) with the available threshold at the end of step 5.

If the value of the estate is less than the available threshold at step 5, there鈥檚 no Inheritance Tax to pay. If it鈥檚 more, you pay Inheritance Tax on the excess.

Check that you鈥檝e calculated and applied all relevant reliefs, exemptions and thresholds to the net value of the estate.

Before you start

Assets that get relief from Inheritance Tax

Some types of property get relief from Inheritance Tax, such as:

• agricultural assets
• businesses and business assets

These reliefs reduce the value of these assets, often by 100%. Include the reduced value of the assets after you鈥檝e taken off any relief when you calculate the value of the estate in your report to HMRC.

Assets exempt from Inheritance Tax

Assets are exempt from Inheritance Tax if they鈥檙e left to:

• a spouse or civil partner
• some charities

Entitlement to increased thresholds

The value of an estate is reduced by:

• the basic Inheritance Tax threshold of 拢325,000 (although any gifts made in the 7 years before the person died reduces this)
• any unused basic threshold from a late spouse or civil partner鈥檚 estate
• the residence nil rate band of 拢175,000
• any unused residence nil rate band from a late spouse or civil partner鈥檚 estate

You can to work out how much you can claim.

How the estate is left

The terms of the will can affect how much Inheritance Tax you鈥檒l pay and who pays it when there are:

• tax-free gifts
• items left in trust

Even very valuable estates can end up with small Inheritance Tax bills if they include assets that qualify for relief.

In other cases the benefit of a relief on an estate may be lost because other exemptions apply. For example, if a farm is left to a charity the benefit of agricultural relief will be lost because the charity is exempt from Inheritance Tax.

In such cases, HMRC might need to apply the rules of interaction to give a fairer Inheritance Tax bill.

The interaction rules

Apply interaction rules if the estate qualifies for Agricultural or Business Relief and the will also has:

• at least one specific gift of property
• property subject to tax relief that鈥檚 not specifically given as a gift
• some of the estate is exempt from inheritance tax

As calculations of interaction can be very complex, you can ask a professional tax specialist to help.

Leaving a gift 鈥榝ree of tax鈥�

Inheritance Tax must be paid on any gifts above the threshold that are not eligible for relief. The rate of Inheritance Tax is normally 40% but this reduces to 36% if you leave more than 10% of your estate to charity.

The value of an estate, tax thresholds and tax rates can change over time and can make the final amount of a gift uncertain. As a result you can choose to leave someone a specific amount 鈥榯ax free鈥� instead, meaning the estate pays the tax.

Some of the estate may be exempt from Inheritance Tax after you鈥檝e taken off specific amounts (the 鈥榬esidue鈥�). This could be because it鈥檚 left to a charity. In these cases, HMRC applies a calculation called grossing up when assessing the taxable value of the estate. The exact grossing up calculation will depend on whether the rate of Inheritance Tax applied to the estate is 40% or the reduced 36%.

The grossing up calculator

If there are gifts left 鈥榯ax free鈥� and only part of the rest of the estate is exempt, or when there are gifts made in your lifetime to consider, the calculation for grossing up becomes more complex.

Use the Inheritance Tax grossing up calculators to help with calculations.