Payment of inheritance tax: formula sheet

Key formulas

Lifetime chargeable transfer due date

Later of: 30 April after the end of the tax year of transfer, and 6 months after the end of the month of transfer

A transfer from 6 April to 30 September falls on 30 April of the following year. A transfer from 1 October to 31 March falls six months after the end of the month. A transfer from 1 to 5 April falls on 31 October of the same year.

Due date on death

6 months after the end of the month of death

Applies to the death estate and to additional tax on lifetime transfers made within seven years before death.

Interest on late IHT

Interest runs from the due date until the tax is paid

The interest rate is not in the ACCA tax tables, so the exam tests the start date rather than a calculation.

Lifetime and death rates

Lifetime rate 20%; death rate 40%

Given in the exam tax tables. They are not due dates, but they tell you which tax is being paid.

Lifetime tax on a CLT

(Chargeable value − available nil rate band) × 20%

Use this when the donee or trustees pay the tax. The nil rate band is £325,000 less CLTs in the previous seven years. The lifetime rate is 20%.

Gross up when the donor pays

Tax = excess over nil rate band × 20 ÷ 80

The donor paying the tax is itself a transfer of value. So the net excess is grossed up. The effective rate is 25% of the net excess.

Death rate on lifetime transfers

Tax at 40% on the amount above the nil rate band, less taper relief

Taper relief applies only to the tax, not to the value. It applies to gifts made more than three years before death.

Taper relief

3–4 years 20%; 4–5 years 40%; 5–6 years 60%; 6–7 years 80% reduction

These are the percentage reductions in the tax, as in the ACCA tax tables.

Who pays

CLT: donor (trustees secondary). PET or extra tax on a CLT on death: donee or trustees. Death estate: personal representatives

This is the core rule for the topic.

Nil rate band

Available NRB = £325,000 − chargeable transfers in the 7 years before the gift

Use gross values of earlier chargeable transfers. PETs only count if they become chargeable because of death within seven years.

Lifetime tax, donee pays

Tax = (Transfer − available NRB) × 20%

The transfer is after exemptions. Tax is nil if the transfer is within the band.

Lifetime tax, donor pays (grossing up)

Tax = (Net transfer − available NRB) × 20/80; Gross transfer = Net transfer + tax

Gross up only the excess over the band. Use the gross transfer for later cumulation.

Death tax on a gift

Tax = (Gross gift − available NRB) × 40%

Available NRB is based on transfers in the seven years before that gift.

Taper relief

Death tax × (1 − reduction %); 3–4 yrs 20%, 4–5 yrs 40%, 5–6 yrs 60%, 6–7 yrs 80%

No relief if death is within three years. It reduces the tax, not the value.

Additional tax on death

Additional tax = tapered death tax − lifetime tax paid (minimum nil)

There is no refund if lifetime tax exceeds the tapered death tax.

Death estate

Tax = (Chargeable estate − NRB remaining − RNRB if available) × 40%

Remaining NRB = £325,000 less chargeable transfers in the seven years before death. The RNRB is £175,000, subject to its conditions.

Tax on qualifying asset

Total IHT × (Value of qualifying asset ÷ Total chargeable value)

Use this when the nil rate band is shared across the whole estate. Only this part of the tax can be paid by instalments.

Annual instalment

Tax on qualifying asset ÷ 10

Ten equal annual instalments. The first falls on the normal due date.

Due date on death

Six months after the end of the month of death

This is the date of the first instalment. Later ones fall on each anniversary.

IHT rates used

Nil rate band £325,000; death rate 40%; lifetime rate 20%

From the ACCA tax tables. The residence nil rate band is £175,000 where it applies.

Sale of the asset

Unpaid instalments become due immediately

This applies on a sale of the asset. Interest rules depend on the asset type.

Interest on underpaid tax

Tax paid late × 8.50% × (period late ÷ 12 months)

Run the period from the due date to the payment date. Use months or days as the question suggests.

Interest on overpaid tax

Tax overpaid × 3.50% × (period ÷ 12 months)

This is the lower rate. It is paid to the taxpayer.

Official rate of interest

3.75%

Do not use this for late IHT. Use 8.50% or 3.50%.

Standard penalties for errors

Careless: max 30%, min 0% unprompted, 15% prompted. Deliberate but not concealed: max 70%, min 20% unprompted, 35% prompted. Deliberate and concealed: max 100%, min 30% unprompted, 50% prompted.

Applied to the extra tax from the error, not to late payment alone.

Quick revision

• Nil rate band is £325,000 and the residence nil rate band is up to £175,000, both given in the exam tax tables.
• The lifetime rate is 20% and the death rate is 40%.
• If the donor pays the lifetime tax, gross up the net chargeable amount: tax = net amount × 20/80.
• Taper relief reduces the tax, not the value transferred, for transfers made more than three years before death.
• Taper relief percentages are 20%, 40%, 60% and 80% for 3-4, 4-5, 5-6 and 6-7 years before death.
• For a lifetime transfer within seven years of death, work out death tax at 40% on the transfer above the available nil rate band, reduce it by taper relief, then deduct lifetime tax paid. The result cannot go below zero, and nothing is refunded if the lifetime tax was higher. The death estate gets no taper relief.
• Lifetime transfers made 6 April to 30 September are due by 30 April in the tax year following the year of the transfer.
• Lifetime transfers made 1 October to 5 April are due six months after the end of the month of the transfer.
• Tax arising because of death is due six months after the end of the month of death.
• Personal representatives pay the tax on the death estate. Additional tax on death on a PET is paid by the donee. On a CLT it is paid by the trustees, and the donee or the donor's personal representatives are liable only in limited cases.
• Instalments (ten equal yearly instalments) are available for land and buildings, controlling shareholdings, unquoted shares meeting the conditions, and business property. Some of these carry interest-free instalments, while for others interest is charged on the whole outstanding balance, so check each asset.
• Interest on underpaid tax is 8·50% in the exam tables, and overpaid tax earns 3·50%.

Common mistakes

• Using the date of the gift for a PET that fails on death. Fix: A PET has no tax until death. The due date is six months after the end of the month of death.
• Saying all lifetime transfers are due on 30 April. Fix: Always compare it with six months after the end of the month of transfer and take the later date.
• Saying the personal representatives pay tax on a failed PET. Fix: The PRs deal with the death estate. The donee pays tax on a failed PET. The extra tax on a CLT is paid by the trustees.
• Forgetting to gross up when the donor pays the lifetime tax. Fix: If the donor pays, multiply the excess by 20 ÷ 80. If the donee pays, use 20% of the excess.
• Applying taper relief to the value of the gift Fix: Compute the 40% tax first, then reduce that tax by the taper percentage. The gift still uses up the nil rate band in full.
• Grossing up the whole transfer when the donor pays Fix: Gross up only the part of the net gift above the available nil rate band.
• Spreading the whole IHT bill over ten years. Fix: Always apportion the tax to the qualifying asset first. The rest is due on the normal date.
• Treating all assets as qualifying. Fix: Control or specific unquoted conditions are needed. Quoted minority holdings and cash never qualify.
• Using the official rate of 3.75% for late IHT. Fix: Underpaid tax uses 8.50%. Overpaid tax uses 3.50%.
• Starting the interest period at the date of death or gift. Fix: Interest runs from the due date for payment, not from when the liability arose.

Exam tips

• Write the two lifetime dates side by side and circle the later one. It shows the examiner your method.
• In objective questions, check the month of the gift before you look at the options. Wrong options are often the other date.
• For PETs, state that tax is only due if death occurs within seven years, and that the due date runs from death.
• Check whether the question asks about tax at the time of the gift or at death. The answer differs.
• Remember the tax year ends on 5 April when you place a gift in a tax year.
• Always start by naming the transfer as a CLT, PET or the death estate. The marks for who pays follow from this.
• In a written answer, give the person liable in a separate short sentence. Do not bury it in the calculation.
• Check who pays lifetime tax on a CLT. The grossing up step is easy to forget and is often examined.