Inheritance tax: the scope of inheritance tax: formula sheet

Key formulas

Value transferred (loss to donor)

Value transferred = Estate before transfer − Estate after transfer

Measure the fall in the donor's estate, not the gain to the recipient. Use the value of the estate, which may include related property effects.

Chargeable transfer

Transfer of value − exemptions and reliefs, and not a PET = chargeable transfer

Only transfers that are not exempt and not PETs are chargeable when made.

Nil rate band and rates (from ACCA tax tables)

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

Lifetime rate of 20% applies to CLTs. Death rate of 40% applies to the estate and to chargeable transfers taxed on death.

Taper relief (from ACCA tax tables)

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 payable

Taper relief applies only where the donor dies within seven years of a chargeable lifetime transfer or a failed PET. It reduces the tax payable at the death rate, not the value transferred. It only helps where the transfer is above the nil rate band. If death is within three years of the transfer, there is no reduction.

Death treated as a transfer

Value transferred on death = value of the whole estate immediately before death

The deemed transfer is made immediately before death.

Scope for UK domiciled or deemed domiciled person

Chargeable assets = worldwide assets

All assets are in scope wherever they are situated.

Scope for non-UK domiciled person

Chargeable assets = UK situs assets only

Overseas assets are excluded property and are ignored.

IHT rates on the excess over the nil rate band

Lifetime rate 20%; death rate 40%; nil rate band £325,000

Shown in the tax tables. Residence nil rate band is £175,000 where it applies.

Deemed domicile (long-term UK resident test, from 6 April 2025)

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

Treated as UK domiciled for IHT. The tax year of the transfer is the year of the gift or death. Leaver tail: once non-UK resident, a long-term resident stays in scope for a tail period. The tail is 3 years where the person was UK resident for 10 to 13 of the previous 20 tax years. It then increases by 1 year for each additional year of residence from 14 years: 14 years of residence gives a 4-year tail, 15 years gives 5 years, and so on. The maximum tail of 10 years is reached at 20 years of residence. The test and the tail come from the legislation and ACCA's articles. They are not in the tax tables, so you must learn them. Before 6 April 2025 the test was 15 of the previous 20 years, so do not use that older figure.

Excluded property (general)

Non-UK situs property owned by a non-UK domiciled individual

Not part of the estate and not a chargeable transfer.

GWR test

Gift made + donor (or connected person) keeps a benefit in the relevant period = GWR

The relevant period runs from seven years before death (or from the gift, if later) until death. Check full consideration and, for land only, the infirmity and shared occupation exceptions.

GWR effect on death

Asset included in death estate at its value at death

Applies if the benefit continues until death. If the original gift would also be charged, the double charges regulations prevent a double charge, and the estate bears the higher of the two charges, adjusted as the regulations provide.

Benefit ceases before death

Deemed PET on the date the benefit ends

The seven-year period for the deemed PET starts from that date. Death within seven years makes the PET chargeable using the nil rate band and the death rate of 40% above it.

IHT rates

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

These rates are in the tax tables provided in the exam.

Taper relief

3-4 years 20%; 4-5 years 40%; 5-6 years 60%; 6-7 years 80% reduction in tax

Taper relief reduces the tax, not the value. It only helps where the transfer exceeds the nil rate band.

Loss to donor

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

Use this for gifts that reduce a holding, for example shares. Add any tax the donor pays.

Related property valuation

Value of holding = (Holding ÷ Combined related holding) × Value of the combined holding

Spouse and civil partner holdings are related. Value the combined holding first, then apportion it.

Gross up of a lifetime transfer

Gross transfer = Net transfer ÷ 0.8 (for the amount above the nil rate band)

Applies when the donor pays the lifetime tax at 20%. Gross up only the excess over the available nil rate band.

Lifetime tax

Tax = (Gross chargeable transfer − Available nil rate band) × 20%

Nil rate band is £325,000 less chargeable transfers in the previous seven years. Donee pays: no gross up.

Quoted share price

Lower of: quarter-up price, or average of highest and lowest marked bargains

Quarter-up = lower price + ¼ × (higher − lower) of the quoted pair.

Quick revision

• A transfer of value is a gratuitous act that reduces the transferor's estate; measure the loss to the donor.
• Transfers can be exempt, a PET or a CLT; most gifts to individuals are PETs.
• The nil rate band is £325,000 and the residence nil rate band is £175,000.
• Excess over the nil rate band is taxed at 20% on lifetime transfers and 40% on death.
• Taper relief reduces the death tax payable on a chargeable gift (a PET that becomes chargeable, or a CLT) made more than 3 but less than 7 years before death, and only where cumulative transfers exceed the nil rate band.
• A UK domiciled or deemed domiciled person is charged on worldwide assets; others only on UK assets.
• Excluded property is outside the IHT charge.
• If the donor still enjoys a benefit from a gifted asset at death, the asset is treated as part of the donor's death estate, valued at its value at death. Double charge relief applies where relevant, so the same gift is not taxed twice. If the reservation ends in the donor's lifetime, the donor is treated as making a PET of the asset at that date.
• Associated operations can be treated as a single transfer when a series of steps achieves a gift.
• Related property, such as spouse's holdings, is valued together to set the value of the transferor's share.
• Show the before and after valuation clearly so you collect method marks.
• State the rule, apply it to the facts and conclude to earn professional skills marks.

Common mistakes

• Valuing the transfer at what the recipient receives instead of the fall in the donor's estate. Fix: Always do the before and after estate valuation. Compare the answer with the asset value and explain any difference.
• Treating every gift as a chargeable transfer. Fix: A chargeable transfer is a transfer of value that is not exempt and not a PET. Most gifts to individuals are PETs with no tax when made.
• Taxing all worldwide assets of a non-UK domiciled person. Fix: Always state the domicile conclusion first. Only UK situs assets are in scope if the person is not UK domiciled or deemed domiciled.
• Treating someone as non-UK domiciled because they were born abroad, without testing deemed domicile. Fix: Always check the years of UK residence for deemed domicile before concluding.
• Treating the gift as a normal PET and ignoring that the donor stays in the property. Fix: Always ask what the donor still gets. Look for living in, using or drawing income from the asset.
• Valuing the GWR asset at its value on the date of the gift. Fix: Include the asset in the death estate at its value at death.
• Valuing the gift as the value of the shares given away, ignoring the shares kept. Fix: Always compute estate before and after. The loss to donor is the difference.
• Ignoring the spouse's shares when valuing a holding. Fix: Check for related property every time. Combine holdings, value the total, then apportion.

Exam tips

• Always show the before and after values. Marks are given for the working even if the final figure is wrong.
• Check retained assets. Questions on shares or related property often hide a bigger loss than the gift value.
• Read the question for the word omission, lapse, option or waive. These signal an omission to act.
• Take rates and nil rate band from the tax tables. Do not rely on memory.
• Add a professional skills point: state assumptions and give clear advice on whether the transfer is a PET or a CLT.
• Always conclude on domicile in a sentence before any figures. This is where marks sit in a written answer.
• Show the residence count for deemed domicile, for example 16 of the previous 20 tax years, so the marker can see your working.
• List assets in a short table-like list with a label of in scope or excluded, so you do not miss any.