The use of exemptions in deferring and minimising inheritance tax liabilities: formula sheet

Key formulas

Annual exemption

£3,000 per tax year, plus unused amount from the previous year only

Use the current year's exemption first, then any amount brought forward. Only the unused part of the previous year's exemption carries forward, for one year.

Small gifts exemption

Up to £250 per recipient per tax year

Applies to total gifts to one person of up to £250 in the year. If total gifts to that person exceed £250, it does not apply at all, but the annual exemption can be used.

Marriage gifts

Parent £5,000; remote ancestor (e.g. grandparent) or one party to the marriage £2,500; anyone else £1,000

Given on or shortly before the marriage and conditional on it. One limit per donor per marriage.

Normal expenditure out of income

Exempt if regular, from income, and the donor's standard of living is maintained

No monetary limit. All three conditions must be met.

Spouse or civil partner gifts

Exempt without limit

Unless the donor is UK domiciled and the recipient spouse is not. Then the exemption is limited to £325,000. This is a standard rule. The figure matches the nil rate band in the exam tables, but the tables do not label it as the spouse exemption limit.

Order of use

Loss to the donor first; then the specific exemptions (spouse, marriage, small gifts, normal expenditure); annual exemption last

Compute the loss to the donor first. Apply the specific exemptions next; there is no need to treat them as a strict sequence among themselves. Apply the annual exemption after them, to the earliest gifts first.

Nil rate band

NRB = £325,000, less gifts in the previous 7 years that used it

Rate on the excess is 40% on death and 20% on lifetime transfers.

Residence nil rate band

RNRB = lower of £175,000 and value of home passing to direct descendants

Death only. Home must be in the estate and left to direct descendants.

Taper of RNRB

Reduction = (net estate − £2,000,000) ÷ 2, deducted from the total RNRB including any transferred RNRB

Net estate is after liabilities, before reliefs and exemptions. The £2,000,000 threshold is not increased for transferred amounts. Apply only if over £2,000,000.

Transfer of unused band

Transferred % = unused band at first death ÷ band at first death; added band = % × band at second death

Applies to both NRB and RNRB for a spouse or civil partner.

Tax on death estate

IHT = (chargeable estate − available NRB − available RNRB) × 40%

Only if the result is positive.

Nil rate band

£325,000

Applies to chargeable transfers in the seven years before each transfer. The residence nil rate band (£175,000) is for the death estate, not for lifetime gifts.

Lifetime rate (CLT)

20% on the excess over the available nil rate band

If the donor pays the tax, gross up the net excess: tax = net excess × 20 ÷ 80.

Death rate

40% on the excess over the available nil rate band

Applies to PETs that fail and to CLTs where the donor dies within seven years.

Taper relief

Death tax × (1 − taper %)

More than 3 but less than 4 years: 20%. More than 4 but less than 5: 40%. More than 5 but less than 6: 60%. More than 6 but less than 7: 80%. Three years or less: no relief.

Net chargeable transfer

Value lost − annual exemptions (current year and unused previous year) − other exemptions

The exemptions are used against the earliest gift in the tax year. A PET only uses them if it later becomes chargeable.

Additional tax on a CLT at death

Death tax after taper − lifetime tax paid (not below nil)

No refund if the lifetime tax is higher.

Spouse exemption

Transfer to spouse or civil partner on death = exempt

Unlimited in standard exam questions. Exempt assets are removed from the chargeable estate.

Charity exemption

Transfer to a qualifying UK charity on death = exempt

Unlimited. The gift reduces the chargeable estate but the nil rate band still applies to what remains.

Baseline amount

Baseline = net estate − exemptions other than charity − available nil rate band

Do not deduct the charity gift. Do not deduct the residence nil rate band. Available nil rate band is £325,000 less any used by lifetime transfers.

10% test

Charity gift ≥ 10% × baseline amount → rate of 36%

If the gift is below 10% of baseline, the rate is 40%.

Chargeable estate

Chargeable estate = net estate − spouse − charity − nil rate band − residence nil rate band (if available)

Tax = chargeable estate × 36% or 40%. Use the nil rate band left after lifetime transfers.

IHT rates

Death rate 40%; reduced rate 36%; nil rate band £325,000; residence nil rate band £175,000

The nil rate band, the residence nil rate band and the 40% death rate are given in the ACCA tax rates and allowances for Finance Act 2025. The 36% charity rate and the 10% baseline test are not listed there, so you must learn them.

Nil rate band

£325,000 at 0%; excess taxed at 20% (lifetime) or 40% (death)

The nil rate band applies to chargeable transfers in the seven years before the transfer.

Residence nil rate band

Up to £175,000 extra on death, where available

It applies on death only, not to lifetime gifts.

PET rule

PET exempt if donor survives 7 years; if death within 7 years, taxed at death rates

Use the nil rate band available at the date of the gift, after earlier transfers.

Taper relief

3–4 yrs 20%; 4–5 yrs 40%; 5–6 yrs 60%; 6–7 yrs 80% reduction in tax

Reduces the tax, only where the gift exceeds the available nil rate band. No relief for death within 3 years.

Deed of variation

Written deed within 2 years of death; must state it is to apply for IHT (and CGT)

Treated as made by the deceased, so no PET by the beneficiary.

CGT on lifetime gift

Disposal at market value; gain = market value − cost; annual exempt amount £3,000

No CGT on death. Beneficiaries acquire at market value at death.

CGT rates

18% lower rate; 24% higher rate

Business asset disposal relief and investors' relief gains are taxed at 14% within the £1,000,000 lifetime limits.

Quick revision

• IHT nil rate band is £325,000 and the residence nil rate band is £175,000.
• Tax on the excess is 20% on chargeable lifetime transfers and 40% on death.
• A PET is only taxed if the donor dies within seven years of the gift.
• A gift to an individual is usually a PET, and a gift into most trusts is usually a CLT.
• Taper relief applies only after three years: 20%, 40%, 60% and 80% as the gap before death grows.
• Taper relief reduces the tax, and only where the gift exceeds the available nil rate band.
• Gifts to a spouse or civil partner and to charity are exempt, with no upper limit in the normal case.
• The annual exemption is £3,000 and any unused amount can be carried forward for one year only.
• Use the current year's annual exemption first, then the carried-forward amount, against the earliest gift.
• Marriage gifts are £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else.
• Small gifts of up to £250 per person per year are exempt, but not to someone who also received the annual exemption.
• Gifts made in the seven years before a transfer use up the nil rate band first.

Common mistakes

• Carrying the annual exemption forward for more than one year. Fix: Carry forward only to the next tax year. If the carried amount is not used then, it is lost.
• Using the brought-forward exemption before the current year's exemption. Fix: Always use the current year's £3,000 first, then the amount brought forward.
• Giving the RNRB when the home goes to a niece, friend or sibling. Fix: Only direct descendants qualify, such as children and grandchildren. Check who receives the home.
• Tapering the nil rate band as well as the RNRB. Fix: The taper applies to the RNRB only. The NRB stays at £325,000.
• Applying taper relief to the value of the gift. Fix: Work out the 40% tax first, then reduce the tax. The full gift value still counts in the cumulation for later gifts.
• Giving taper relief when death is within three years. Fix: Count the full years first. Three years or less means no relief, so the full 40% applies.
• Deducting the charity gift when finding the baseline amount. Fix: Deduct spouse gifts and the nil rate band for the baseline, but leave the charity gift in. Deduct charity only when you compute the chargeable estate.
• Deducting the residence nil rate band in the baseline amount. Fix: Use only the nil rate band for the baseline. Deduct the residence nil rate band later, when finding the chargeable estate.
• Applying taper relief to the value of the gift. Fix: Work out the tax first, then reduce the tax by the percentage.
• Giving taper relief when the gift is covered by the nil rate band. Fix: Taper relief only reduces tax that is actually payable. If the gift is covered by the nil rate band, there is no tax to reduce.

Exam tips

• Show the order of exemptions clearly: specific exemptions first, annual exemption after them. Marks are given for the method, not just the answer.
• Write the carry forward amount at the end of each tax year, even if it is nil.
• For normal expenditure, quote the three conditions and tie each to a fact in the question.
• In objective tests, check whether total gifts to that person in the year are over £250 before you consider small gifts.
• Check the date. A gift made on 5 April and one on 6 April fall into different tax years and use different exemptions.
• Write the NRB and RNRB figures from memory. The exam gives the tax tables, but looking them up wastes time.
• Set out the NRB and the RNRB in separate lines in a constructed response answer so a marker can see each step.
• In OT cases, check three things before choosing an answer: who receives the home, the net estate against £2,000,000, and whether any band was used by earlier gifts.