How to Calculate Inheritance Tax

Arthur Childs
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It is good practice to calculate the value of your estate every few years. If you can do it annually so much the better. This will stop you from building up an inheritance tax liability on your estate unawares. Before you can start to plan the best way to deal with inheritance tax on your estate it is necessary to have a clear idea of the likely tax that would be charged if you had died, let’s say yesterday.  Only then can you start to make your plan for mitigation of the tax due.

Table of contents

Use these steps to calculate Inheritance Tax

Step (1) Work out the total value of your ASSETS – you also need to value any interests that you have under certain types of trust.

Step (2) Work out the total sum of your LIABILITIES.

Step (3) The value of your NET ESTATE is found by subtracting the value of your total liabilities from your total assets.

Step (4) To arrive at your TOTAL TAXABLE ESTATE you should deduct any amounts left to charities or political parties in your will.  There is also special treatment for any business or agricultural property that you own.

Step (5) You should then subtract the value of the NIL RATE BAND (currently £325,000) and, if applicable the RESIDENCE NIL RATE BAND (currently £175,000).

Step (6) If you are a widow or widower you should also subtract the unused value of your DECEASED SPOUSE’S NIL RATE BAND and, if applicable, the unused value of your DECEASED SPOUSE’S RESIDENCE NIL RATE BAND.

Step (7) The remaining figure should be MULTIPLIED BY 40% to obtain an estimate of your potential IHT liability.

An example Inheritance Tax calculation

The following example shows the calculations.

Table of assets showing how to calculate inheritance tax

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.