Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death: formula sheet

Key formulas

Transfer of value (loss to donor)

Transfer = value of estate before − value of estate after

Measure the fall in the donor's estate, not the value received. Related property and associated costs can make the loss larger than the asset's own value.

Classification of lifetime transfers

Exempt → no IHT; PET → tax only if donor dies within 7 years; CLT → tax now at 20% above nil rate band

A PET is a gift to an individual. A gift into a discretionary trust is typically a CLT.

IHT rates and bands (given in the exam)

Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%

The residence nil rate band applies on death only, and only where its conditions are met.

Taper relief (given in the exam)

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

The reduction applies to the tax, and only where the transfer exceeds the nil rate band. Death within 3 years gets no relief.

Scope by domicile status

UK domiciled / deemed domiciled (incl. long-term UK resident) → worldwide assets; otherwise → UK assets only

Non-UK assets of a person outside this category are excluded property.

Nil rate band

£325,000

Available NRB = £325,000 less chargeable transfers in the 7 years before the gift. Residence nil rate band does not apply to lifetime transfers.

Lifetime rate

20% on the excess over the available NRB

Use when trustees pay the tax (no grossing up).

Grossing up

Gross transfer = NRB used + (net gift − available NRB) × 100/80

Use when the donor pays the tax. Tax = 20% × (gross − NRB), or 25% of the net amount over the NRB (20/80).

Death rate

40% on the excess over the available NRB

Applies to PETs and CLTs made within 7 years of death.

Taper relief

Years between gift and death: 3–4: 20%; 4–5: 40%; 5–6: 60%; 6–7: 80% reduction

Reduces the death tax payable. No relief if death is within 3 years.

Cumulation period

7 years before the date of the gift

Look back from each gift, not from death.

Death rate and nil rate band

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

Nil rate band £325,000, RNRB £175,000, death rate 40%, all from the ACCA tax tables. Lifetime gifts in the previous seven years can use up the nil rate band first.

Transferable nil rate band

Extra band = unused % of deceased spouse's band × nil rate band on the survivor's death

Total extra is capped at 100% of one nil rate band.

RNRB available

RNRB = lower of (RNRB available after taper) and (value of qualifying home passing to direct descendants)

Unused RNRB of a deceased spouse can be added before the lower-of test.

RNRB taper

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

Net estate is before reliefs and exemptions. The reduction applies to the total RNRB, including any transferred amount.

Charity rate test

Charity gift ≥ 10% × (estate before charity exemption − available nil rate band) → 36% rate

Check the test first. If met, the whole taxable estate is taxed at 36%.

Nil rate band and death rate

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

The residence nil rate band of £175,000 relates to the death estate and a home passed to direct descendants. It is not used against lifetime transfers.

Taper relief

Years before death: more than 3 but less than 4 = 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% reduction

The percentage reduces the tax. There is no reduction if death is within 3 years of the gift.

Additional tax on a failed PET

Tax at 40% on the part above the available nil rate band × (1 − taper %)

Available nil rate band = £325,000 less chargeable transfers in the 7 years before the gift.

Additional tax on a CLT

Death tax after taper relief − lifetime tax paid, with a minimum of nil

No refund is given if the lifetime tax paid is higher. The taper applies to the death tax, not to the lifetime tax paid.

Cumulation period

Look back 7 years from the date of each gift

Include CLTs and failed PETs in that period. PETs count only once they have failed.

BPR rates

100% or 50% of the value of relevant business property

100%: business or partnership interest, unquoted shares. 50%: controlling quoted shares; land, buildings, plant and machinery used by controlled company or partnership.

APR rates

100% or 50% of the agricultural value only

Relief is not given on development or hold value. 100% where the owner farms for two years or owns and has it farmed for seven years. 50% in other cases.

Minimum ownership

BPR: 2 years. APR: 2 years if owner-occupied, 7 years if let and farmed by another

Replacement property: combined ownership must be 2 of the last 5 years for BPR.

Excepted assets

Qualifying value = value of business − value attributable to excepted assets

Excepted assets are not used wholly or mainly for the business for two years, and not needed for future use.

Clawback condition for lifetime transfers

Relief survives only if, at the earlier of donor's death or donee's death, the donee still owns the asset (or a qualifying replacement acquired within 3 years) and it still qualifies

Applies only where the donor dies within seven years of the gift. If the condition fails, the relief is lost and the transfer is taxed on its full value.

IHT rates from the tax tables

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

Apply the reliefs to value first, then use the nil rate band. Taper relief reduces the tax, not the value.

Loss to donor

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

For a chargeable lifetime transfer where the donor pays the IHT, the tax paid is also a loss to the estate, so gross up the net gift: gross = net ÷ (1 − 20%) = net ÷ 0.8 for the part above the nil rate band.

Related property apportionment

Transferor's value = (value of own holding ÷ combined value of related holdings) × value of combined holding

Use the number of shares or the separate stand-alone values as the apportioning base. Related property: spouse or civil partner, or an exempt body (such as a charity) that received the property from the transferor or spouse by an exempt transfer and either still holds it at the transfer date or held it within the previous 5 years.

Quoted shares

Lower of: (1) lower price + ¼ × (higher price − lower price); (2) ½ × (highest + lowest marked bargain)

Use the prices on the date of transfer, which is the date of the gift or the date of death.

Quick succession relief

QSR = % × IHT on earlier transfer × (net increase to estate ÷ gross earlier transfer)

Percentage by time from earlier transfer to later transfer or death: up to 1 year 100%; 1 to 2 years 80%; 2 to 3 years 60%; 3 to 4 years 40%; 4 to 5 years 20%. Learn this scale, as it is not in the tax tables. It reduces the tax, not the value.

IHT rates and nil rate band

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

Taper relief on lifetime gifts after death: over 3 but under 4 years 20%; over 4 but under 5 years 40%; over 5 but under 6 years 60%; over 6 but under 7 years 80%. It reduces the tax, not the value.

Fall in value relief

Value of gift for the tax on that gift = original value of gift − fall in value to death (or earlier arm's length sale)

The relief reduces the value of the gift used to calculate the tax on that gift. The original value is still used when cumulating for later transfers and for working out the nil rate band left for them.

CLT due date

6 April to 30 September: 30 April following. 1 October to 5 April: six months after end of month of gift

Tax on the CLT itself. State the date as a calendar date in your answer.

Death due date

Six months after the end of the month of death

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

Interest on late tax

Tax × 8.50% × months late ÷ 12

Rate on underpaid tax from the tax tables. Overpaid tax earns 3.50%. Interest runs from the due date.

Rates and nil rate band

NRB £325,000; RNRB £175,000; lifetime 20%; death 40%

Tax applies to the excess over the nil rate band. The RNRB is only available in the stated conditions, so check the question.

Grossing up a lifetime CLT

Tax = excess net transfer × 20 ÷ 80

Use when the donor pays the tax. If the donee pays, tax is 20% of the excess.

Taper relief on death

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 the death tax

The reduction is to the tax, not the value. It applies only where tax is payable on the gift. Use the band that matches the exact period between gift and death.

Instalment option

Ten equal annual instalments, first on the normal due date

Available only for qualifying assets. It applies to a CLT where the donee or trustees bear the tax, to a PET that becomes chargeable, and to tax arising on death. Interest is charged on instalments only for certain assets. This point is not in the supplied tax tables.

CGT on gifts

Gain = market value less cost; CGT 18% or 24% after the £3,000 annual exempt amount

Business asset disposal relief at 14% may apply to a qualifying business disposal. Holdover relief, where available, defers the gain and cuts the donee's base cost.

Quick revision

• Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%.
• A transfer of value is a lifetime or death fall in the value of the donor's estate, not the value received.
• UK-domiciled individuals are taxed on worldwide assets; others are taxed only on UK assets. Check the domicile rules in the question.
• A PET is a gift to an individual and is exempt unless the donor dies within seven years.
• A CLT, such as a gift to a trust, is taxed at 20% above the nil rate band at the time of the gift.
• If the donor pays the lifetime tax, gross up the gift: the tax is 20/80 of the excess over the available nil rate band.
• Look back seven years from each gift to see how much of the nil rate band is already used.
• Taper relief reduces the tax, not the gift's value, and only applies where the gift exceeds the available nil rate band.
• Taper relief percentages: 20% (3-4 years), 40% (4-5), 60% (5-6), 80% (6-7).
• Death tax on a CLT is 40% less lifetime tax paid; no refund if lifetime tax was higher.
• Business property relief and agricultural property relief reduce the value transferred, subject to their conditions.
• Quick succession relief applies where the estate received a chargeable transfer within the previous five years.

Common mistakes

• Measuring the transfer by the value the donee receives. Fix: Always compare the donor's estate before and after. Check for related property or costs the donor pays.
• Calling every lifetime gift a PET. Fix: Check the donee first. A gift into a discretionary trust is typically a CLT and is taxed immediately at 20% above the nil rate band.
• Forgetting to gross up when the donor pays the lifetime tax. Fix: Assume the donor pays unless told the trustees pay. Divide the excess by 80%.
• Grossing up the whole gift rather than only the part above the NRB. Fix: Deduct the available NRB first. Gross up only the remainder, then add the NRB back.
• Deducting the RNRB when computing the charity baseline amount. Fix: Only the nil rate band, including any transferred amount, comes off the baseline. Do not deduct the RNRB.
• Using the estate after exemptions to test the £2,000,000 taper. Fix: Use the net estate after liabilities but before reliefs and exemptions.
• Applying taper relief to the value of the gift. Fix: Calculate the tax first, then reduce the tax by the taper percentage. The value stays as at the date of the gift.
• Applying taper relief to a gift that is within the nil rate band. Fix: Taper only reduces tax. If the gift is fully covered by the nil rate band, there is no tax and no taper. The gift still uses up the band.
• Giving APR on the full market value of farmland. Fix: Split the value. APR applies to the agricultural value only. Test the excess for BPR as part of a farming business, otherwise it is fully taxable.
• Giving 100% BPR on quoted shares. Fix: Unquoted shares (including AIM) get 100%. A controlling quoted holding gets 50%. A non-controlling quoted holding gets nothing.

Exam tips

• Write a one-line status conclusion first (UK domiciled, deemed domiciled or not). Marks are given for the reasoning and later answers depend on it.
• Show the classification of each gift in a short table of donee, type and tax now. It earns easy marks and makes your professional skills visible.
• Use the tax tables given in the exam. Do not rely on memory for the nil rate band, rates or taper percentages.
• State assumptions clearly when facts are missing, such as earlier transfers or the donor's residence history.
• Finish with a short client-facing conclusion. Plain language about what is taxed now and what may be taxed later scores well.
• Write the gift date and calculate the seven-year look-back for every transfer. Examiners award marks for this explicit step.
• State your assumption on who pays the lifetime tax. If unstated, assume the donor pays and gross up.
• Use the exam's tax tables for the NRB, 20% and 40% rates and the taper table. Do not rely on memory.