Inheritance tax: the basic principles of computing transfers of value: formula sheet

Key formulas

Transfer of value (loss to donor)

Transfer of value = Value of estate before transfer − Value of estate after transfer

Measured at the donor's loss, not the donee's gain. Compute this before any exemptions.

Gross transfer where the donor pays the tax

Gross transfer = Net transfer ÷ (1 − 20%) for the part falling above the available nil rate band

Used for a lifetime chargeable transfer when the donor bears the IHT. The 20% lifetime rate is in the ACCA tax tables.

Long-term UK resident test

UK resident in at least 10 of the 20 tax years immediately before the tax year of the transfer

If met, worldwide assets are within IHT. If not, only UK assets are in scope.

Tail after leaving the UK

10 to 13 years of residence: 3-year tail. Each extra year adds 1 year. 20 or more years: 10-year tail

The person stays long-term UK resident until the tail ends.

Rates and nil rate band (from the tax tables)

Nil rate band £325,000. Lifetime rate 20%. Death rate 40%

The tables are provided in the exam. Learn where they are, not the figures from memory.

Transfer of value

Transfer of value = Value of estate before − Value of estate after

This is the loss to the donor's estate. If the donor pays the IHT on a CLT, the tax must be added (grossed up) to the loss.

Annual exemption

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

The unused amount is carried forward for one year only. The current year's exemption is used first, then the brought forward amount. The £3,000 annual exemption, the £250 small gifts limit and the marriage exemption limits are not in the tax tables ACCA provides. You must learn them.

Small gifts exemption

£250 per recipient per tax year

It cannot be used on a gift that is already covered by another exemption. If the total gifts to one person in the tax year exceed £250, the small gifts exemption does not apply to that person at all.

Marriage exemption

£5,000 from a parent; £2,500 from a grandparent or remoter ancestor, or from a party to the marriage to the other; £1,000 from anyone else

The gift must be made on or in consideration of the marriage. It is one exemption per donor per marriage. These limits are not in the tax tables, so learn them.

Normal expenditure out of income

Exempt if: part of normal expenditure, paid out of income, and the donor keeps their usual standard of living

There is no monetary limit. Keep records. It can cover regular gifts such as life policy premiums for another person.

Lifetime IHT on a CLT

Tax = (Net chargeable amount − available nil rate band) × 20% if the trustees pay; Tax = (Net chargeable amount − available nil rate band) × 20 ÷ 80 if the donor pays

The net chargeable amount is the gift after exemptions. The nil rate band is £325,000 less CLTs in the previous seven years. Only the net excess over the nil rate band is grossed up, and the gross transfer is the net gift plus the tax.

Nil rate band

£325,000 per person, reduced by chargeable transfers in the seven years before the gift

At the time of a CLT, earlier PETs are ignored because they are treated as exempt. If the donor dies within seven years, those PETs become chargeable and use up the nil rate band. That can increase the tax on later CLTs made within seven years after them.

Nil rate band

NRB = £325,000

Tax tables figure. Applies to lifetime and death transfers. Not tapered.

Residence nil rate band

RNRB = lower of (value of home passing to direct descendants, RNRB available after any taper)

Death only. Add any transferred unused RNRB to the £175,000, then apply the taper to that total. The downsizing addition is considered separately and is not tapered as part of the total.

RNRB taper

Reduction = (Net estate − £2,000,000) ÷ 2

Applies only if net estate exceeds £2,000,000. It reduces the RNRB including any transferred part, but not the downsizing addition. RNRB cannot go below nil. Learn the threshold, as it is not in the tax tables.

Transferable band from a spouse

Extra band = (1 − % used by first spouse) × band at second death

Applies separately to NRB and RNRB. Total extra claim cannot exceed 100% of each band.

Lifetime rate

Donee pays: Tax = 20% × (CLT after annual exemptions − available NRB). Donor pays: Tax = 20/80 × (net gift after annual exemptions − available NRB)

Deduct annual exemptions first, then the available NRB (£325,000 less chargeable transfers in the previous seven years). Gross up only when the donor bears the tax.

Death rate

Tax = 40% × (taxable estate − available NRB − RNRB)

Tax tables death rate.

Reduced rate for charity

36% if charitable gift ≥ 10% of the baseline amount

Baseline is the net estate after liabilities, exemptions and reliefs (other than the charity gift), less available nil rate bands. Applies to the taxable estate.

Taper relief on lifetime gifts

More than 3 but less than 4 years 20%, more than 4 but less than 5 years 40%, more than 5 but less than 6 years 60%, more than 6 but less than 7 years 80% reduction in tax

Reduces the tax on the chargeable part of the gift (the part above the available NRB), not the value. Death must be between 3 and 7 years after the gift. Within 3 years, no relief.

Chargeable death estate

Gross assets − liabilities − funeral costs − exempt legacies

Spouse and UK charity legacies are exempt. Check the domicile of the spouse in the question.

Nil rate band

NRB = £325,000

This is from the ACCA tax tables. Reduce it by chargeable transfers in the seven years before the date of the transfer being taxed.

Residence nil rate band

RNRB = £175,000

Only available if the conditions are met. Apply the conditions and any restrictions given in the question.

Death rate

Tax = 40% × (chargeable estate − available nil rate bands)

Lifetime rate is 20%. Do not mix them up.

Seven-year cumulation

Cumulative transfers = CLTs and failed PETs in the 7 years before the later transfer

Use the gross value of each transfer after exemptions such as annual exemption and marriage exemption.

Taper relief

Reduction in tax on a lifetime transfer: 3–4 yrs 20%, 4–5 yrs 40%, 5–6 yrs 60%, 6–7 yrs 80%

It reduces tax on the gift only, not its value in the cumulative total. No relief if death is within 3 years.

Seven-year rule

Death within 7 years of gift → PET becomes chargeable; CLT is retaxed at death rate

Death rate is 40%. Lifetime rate on a CLT is 20% of the excess over the nil rate band.

Taper relief table

Over 3 but under 4 years: 20% | over 4 but under 5: 40% | over 5 but under 6: 60% | over 6 but under 7: 80%

Relief reduces the tax. No relief if death within 3 years. Give the percentage reduction, not the percentage payable.

Additional tax on a CLT

Additional tax = (death tax after taper relief) − (lifetime tax paid), minimum nil

Taper relief is applied to the death tax, then lifetime tax paid is deducted. Do not taper the lifetime tax.

Tax on a failed PET

Tax = 40% × (gift value after exemptions − available nil rate band), then less taper relief

Annual exemptions come off first. The nil rate band available is £325,000 less chargeable transfers in the seven years before that gift.

Nil rate band

£325,000 (residence nil rate band £175,000 is for the death estate only)

Do not use the residence nil rate band against lifetime transfers.

Valuation of a lifetime gift

Transfer of value = value of estate before − value of estate after

Add grossed-up tax if the donor pays tax on a CLT. Gross up at 20/80 when the donor pays.

Related property

Value of item = (item ÷ total related property value) × value of the combined holding

Used when the donor's own and related holdings together have a higher value. Apply it before and after the gift.

Quick revision

• A transfer of value is the fall in the giver's estate, not the value the receiver gets.
• A PET is an outright gift to an individual, and it becomes chargeable only if the giver dies within seven years.
• A CLT is a lifetime transfer that is chargeable at once, for example a gift into a trust, and the lifetime rate is 20%.
• Deduct exemptions before applying the nil rate band.
• The nil rate band is £325,000 and the residence nil rate band is £175,000, but only where the conditions for it are met.
• Lifetime rate is 20% and death rate is 40% on the excess over the nil rate band.
• Taper relief reduces the tax payable on a gift, not its value. It only helps where tax is actually payable, that is, where the gift exceeds the available nil rate band after earlier transfers. A gift covered by the band still uses it up, even though there is no tax to taper.
• Taper percentages: 20% for more than 3 but less than 4 years, 40% for more than 4 but less than 5 years, 60% for more than 5 but less than 6 years and 80% for more than 6 but less than 7 years.
• On death, chargeable transfers in the seven years before death (CLTs and PETs that have become chargeable) use up the nil rate band in date order.
• For each gift, look back seven years from the date of that gift to find earlier CLTs that have already used the nil rate band.
• Always state who is liable to pay the tax and when, and show your assumptions clearly.

Common mistakes

• Valuing the transfer at the value of what the donee receives. Fix: Always compute estate before minus estate after. Show both figures.
• Using domicile as the basic scope test for worldwide assets. Fix: For the current rules, test long-term UK residence: 10 of the previous 20 tax years. Mention domicile only where the question raises it.
• Using the annual exemption before the marriage exemption on the same gift. Fix: Apply the marriage exemption first, then the annual exemption to what remains. The annual exemption is used last.
• Carrying forward the annual exemption for more than one year. Fix: Carry forward only the unused amount from the previous tax year. Use the current year first, then the brought forward amount.
• Applying the RNRB to lifetime transfers. Fix: The RNRB is a death-only band and needs a home passing to direct descendants. Lifetime gifts only use the NRB.
• Tapering the NRB or tapering the RNRB when the estate is below £2,000,000. Fix: The £2,000,000 taper cuts only the RNRB, by £1 for each £2 of excess. Taper relief is a different relief that reduces the tax on chargeable gifts (the part above the available NRB) where death occurs between 3 and 7 years after the gift.
• Using the full £325,000 NRB against the estate when lifetime gifts were made. Fix: Always deduct the CLTs and PETs in the seven years before death first. The estate gets only what remains.
• Deducting exempt legacies after applying the nil rate band. Fix: Remove exempt legacies first to reach the chargeable estate, then apply bands.
• Applying taper relief to the value of the gift rather than to the tax. Fix: Compute the tax on the full excess over the nil rate band first. Then reduce that tax by the taper percentage.
• Applying taper relief to a gift that is wholly within the nil rate band. Fix: If tax is nil, there is nothing to reduce. The gift still uses nil rate band for later gifts and the estate.

Exam tips

• Show the 20-year count as a short list of tax years. Markers give credit for the method as well as the conclusion.
• Always state the loss to donor calculation with a before and after value, even when the numbers are simple.
• Take the nil rate band, lifetime rate and death rate from the tax tables in the exam. Do not rely on memory.
• In Section A, add a sentence of advice or caution for the client on worldwide scope, for example the effect of leaving the UK and the tail period. This helps with professional skills marks.
• Where a scenario mentions domicile, say that the current worldwide scope test is long-term UK residence, then answer the question asked.
• Set out the annual exemption as a two-line table for each tax year. Marks are given for correct carry-forward.
• Always state the PET or CLT label and the reason. This is where the professional skills marks for analysis are earned.
• Say who pays the tax on a CLT. If it is the donor, show the 20/80 gross-up and the gross transfer.