How much Inheritance Tax is paid on large estates?
This guide explains how much Inheritance Tax is paid on large estates including allowances, tapering rules, calculation examples and strategies to reduce the tax.
Inheritance Tax becomes a real concern for families when the estate is large enough that allowances and reliefs no longer cover the full value. Once an estate rises above £1 million the question shifts from “Will we pay Inheritance Tax?” to “How much will we pay and what can we do about it?” In my opinion understanding how Inheritance Tax works on large estates is essential because the rules become more complex once assets exceed the available allowances, and higher value estates are often penalised more heavily due to the tapering of the residence nil rate band.
This guide explains exactly how much Inheritance Tax is paid on large estates in the UK. I break down the tax rates, thresholds, tapering rules, reliefs, and practical examples to show what Inheritance Tax looks like at different estate sizes. I also explain why large estates often pay more than expected, how to reduce the tax, and the planning strategies I believe every family with a sizeable estate should consider.
First: inheritance tax is charged at 40 percent above the available allowances
Inheritance Tax (IHT) is charged at 40 percent on the value of an estate above the available tax-free thresholds. Understanding these starting allowances is vital before looking at large estate calculations.
The core allowances are:
Nil Rate Band (NRB)
£325,000 per person
Transferable between spouses or civil partners
Residence Nil Rate Band (RNRB)
£175,000 per person
Only applies when leaving a qualifying home to direct descendants
Also transferable
Combined potential allowance for a couple:
£325,000 + £325,000
£175,000 + £175,000
Maximum available: £1 million
However this only applies if:
You are married or in a civil partnership
You leave your home to children or grandchildren
Your estate is below £2 million
In my opinion large estates must plan around the £2 million taper because it reduces the residence nil rate band dramatically and increases the IHT bill.
How Inheritance Tax works on large estates
The amount of tax paid depends on:
The value of the estate
Whether you are married or widowed
Whether you have a qualifying residence
Whether the £2 million taper applies
Whether reliefs (like business relief or agricultural relief) apply
Once an estate exceeds around £2 million the residence nil rate band begins to taper away which means larger estates may lose up to £350,000 of extra tax free allowance as a couple.
This increases the effective IHT rate.
How the residence nil rate band taper reduces allowances for large estates
The RNRB begins to taper once the estate exceeds £2 million.
For every £2 above £2 million you lose £1 of the RNRB.
This means:
An estate of £2.2 million loses £100,000 of RNRB
An estate of £2.35 million loses £175,000 of RNRB
An estate of £2.7 million loses the RNRB entirely for both spouses
Combined losses for couples:
Couples can lose up to £350,000 of RNRB, which can add up to £140,000 to the IHT bill.
In my opinion this taper rule is one of the biggest reasons large estates pay far more than expected.
How to calculate Inheritance Tax on large estates
Let’s break down typical scenarios.
Example 1: Estate worth £1.2 million (married couple)
Assets:
Home
Savings
Investments
Allowances:
Nil rate band: £650,000
Residence nil rate band: £350,000
Total allowances: £1 million
Taxable estate: £200,000
IHT at 40 percent = £80,000
Key point
Even with a £1.2 million estate, the IHT bill can be modest if both allowances apply.
Example 2: Estate worth £1.6 million (married couple)
Allowances:
Same £1 million as above (assuming home left to children)
Taxable estate: £600,000
IHT at 40 percent = £240,000
Example 3: Estate worth £2.3 million (married couple)
Now the taper begins.
Estate exceeds £2m by £300,000.
RNRB lost: £150,000 per spouse = £300,000 total.
Allowances:
NRB combined: £650,000
RNRB remaining: £50,000 per spouse = £100,000
Total allowances: £750,000
Taxable estate: £1.55 million
IHT at 40 percent = £620,000
In my opinion this is where most families are shocked because the loss of RNRB increases the tax dramatically.
Example 4: Estate worth £3 million (married couple)
Estate exceeds £2m by £1m.
RNRB completely lost.
Allowances:
NRB combined: £650,000
RNRB remaining: £0
Taxable estate: £2.35 million
IHT at 40 percent = £940,000
Example 5: Estate worth £5 million (married couple)
Same lost RNRB.
Only NRB remains.
Allowances:
£650,000
Taxable estate: £4.35 million
IHT at 40 percent = £1.74 million
Example 6: Estate worth £10 million (married couple)
Taxable estate: £9.35 million
IHT at 40 percent = £3.74 million
Effective tax rate:
Over 37 percent of the total estate
Well above the headline 40 percent rate on taxable portions
Largely caused by loss of RNRB and freezing of thresholds
In my opinion this is why very large estates require far more detailed planning to avoid unnecessary tax.
Why large estates often pay more than expected
1. The £2 million taper removes up to £350,000 of allowances
This alone increases tax by £140,000.
2. The nil rate band has been frozen for over a decade
As assets grow, the proportion falling above allowances increases.
3. Property inflation
Homes purchased decades ago may now push estates well into IHT territory.
4. Business or investment assets may not qualify for relief if structured incorrectly
Business relief is valuable but must be planned correctly.
5. Failure to equalise estates between spouses
One spouse may die with a huge estate while the other has unused allowances.
6. Pensions often not used effectively
Pensions are outside the estate but many people draw them down unnecessarily.
In my opinion the biggest mistakes are failing to equalise estates, ignoring pensions and leaving allowances unused.
How large estates can reduce or eliminate Inheritance Tax
The good news is that large estates have several planning tools available. The earlier you act the more effective they become.
Here are the most powerful strategies.
Strategy 1: Use spousal transfers to equalise estates
Balancing estates ensures both sets of allowances can be used fully.
Example
If the husband owns £2.4 million and the wife owns £200,000, the husband’s estate will lose RNRB.
Transferring assets during lifetime can bring both estates under £2 million.
This preserves the full £350,000 RNRB.
Strategy 2: Make lifetime gifts
Lifetime gifts reduce the estate immediately or after seven years.
Gifts can be:
PETs (become tax free after 7 years)
Annual allowances
Income gifts under the normal expenditure rule
Large estates should start gifting early because significant gifts take time to become exempt.
In my opinion gifting is the simplest and most effective IHT reduction method.
Strategy 3: Use the “normal expenditure out of income” exemption
This allows unlimited IHT-free gifts if:
They are made regularly
They come from income
They do not reduce your standard of living
Large estates often have significant surplus income. This exemption is ideal for them.
Strategy 4: Use pensions as the main inheritance vehicle
Pensions are outside the estate for IHT purposes.
If you die before age 75 your pension can pass to beneficiaries tax free.
If you die after 75 it passes with income tax but no IHT.
Large estates can reduce IHT dramatically by drawing non-pension assets first and preserving pensions.
Strategy 5: Use business relief where possible
Business relief can reduce the taxable value of qualifying assets by 50 percent or 100 percent.
This includes:
AIM shares
Shares in unlisted trading companies
Agricultural land
Business assets
These require two years of ownership but can remove millions from an estate.
In my opinion business relief is the most powerful tool for very large estates.
Strategy 6: Place life insurance in trust
Life insurance can fund the IHT bill so assets do not need to be sold.
By writing the policy in trust:
It is not part of the estate
It pays out immediately
It avoids probate
Beneficiaries receive the funds tax free
Strategy 7: Use trusts for long term planning
Trusts can:
Move assets out of the estate
Control how wealth is passed on
Protect vulnerable beneficiaries
Reduce IHT if used correctly
Trust planning becomes especially useful as estate values rise.
Strategy 8: Keep the estate under £2 million where possible
This preserves the residence nil rate band.
Ways to reduce the estate below £2m include:
Making gifts
Donating to charity
Moving assets into trust
Using business relief assets that do not count towards the £2m threshold
In my opinion this threshold is one of the most important numbers for large estates.
Strategy 9: Leave 10 percent to charity to reduce the IHT rate
Leaving 10 percent or more of the net estate to charity reduces the IHT rate from:
40 percent to
36 percent
This can significantly decrease the tax paid by beneficiaries.
Real world examples of Inheritance Tax on large estates
Example 1: Estate worth £2.8 million
Loss of full RNRB
Large taxable estate
Poor planning results in:
IHT bill = £912,000
Example 2: Same estate but with planning
Gifting reduces estate below £2m
Both RNRB preserved
Taxable estate falls significantly
IHT saved = £300,000 +
Example 3: Estate worth £5 million with business assets
£2 million in qualifying business assets exempt
Taxable estate reduces to £3 million
IHT due = £1.2 million
Tax saving = £800,000
Example 4: Estate worth £4 million using pensions effectively
By spending non-pension assets first
Pension of £1 million sits outside estate
Taxable estate drops to £3 million
IHT saving = £400,000
In my opinion: the key things large estates must focus on
If I had to summarise the most important points for large estates, I would say:
The 40 percent rate hurts most when you lose allowances.
The residence nil rate band taper can cost a family up to £140,000 in extra tax.
Equalising estates between spouses is essential.
Pensions are one of the most tax efficient inheritance tools.
Gifting early is vital because the seven year rule takes time.
Business relief can remove large assets from IHT entirely.
Charity planning can reduce the IHT rate.
Early planning almost always saves the most tax.
In my opinion large estates should review their estate plan every two years to stay ahead of tax changes and protect more of their wealth.
Final thoughts
Inheritance Tax on large estates can be significant. The 40 percent rate applies to the value above available allowances and the residence nil rate band taper can dramatically increase the tax for estates over £2 million. However with careful planning you can reduce the tax bill through gifting, pensions, business relief, spousal planning, trusts, charity planning and sensible asset structuring.
In my opinion families with large estates should not simply accept a high IHT bill. With early planning it is possible to save hundreds of thousands of pounds or more and ensure that more of your wealth passes to the people and causes you care about.