Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities: formula sheet

Key formulas

Nil rate band

£325,000

Reduced by chargeable transfers in the seven years before the transfer. Residence nil rate band (£175,000) is for death estates, not lifetime gifts.

Lifetime IHT rate on a CLT

20% × (CLT after exemptions − available nil rate band)

Applies to the excess only. If the donee pays the tax, no gross-up is needed.

Gross-up where donor pays lifetime tax

Gross transfer = net amount in excess of nil rate band ÷ 0.8

Only the part above the available nil rate band is grossed up. Cash given plus tax paid by donor is the transfer of value.

Death rate

40% × (chargeable amount − available nil rate band)

Applies to PETs and CLTs made within seven years before death. Tax on a CLT is reduced by lifetime tax paid, but not below zero.

Taper relief

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

Reduces the tax, not the value. Gifts made less than 3 years before death get no relief. It only helps where the gift exceeds the nil rate band.

Annual exemption

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

Use the current year's first, then the brought-forward amount. Apply to the earliest gift in the year first.

Small gifts exemption

£250 per donee per tax year

Not available if the donee also receives a gift covered by another exemption such as the annual exemption. It cannot be used to top up a larger gift.

Marriage gift exemption

Parent £5,000; grandparent or remoter ancestor, or bride or groom to the other, £2,500; anyone else £1,000

Gift must be made on or shortly before the marriage and depends on it.

Normal expenditure out of income

Exempt if regular, from income, and leaves the donor with enough income to maintain usual standard of living

No monetary limit. Keep evidence of a pattern of gifts.

Nil rate band

NRB = £325,000

Reduced by chargeable transfers in the seven years before the transfer. Use the tax table figure.

IHT rates

Death rate = 40%; lifetime rate = 20%

Applied only to the value above available nil rate bands.

Residence nil rate band

RNRB = lower of (£175,000 available, value of home left to direct descendants)

Death estates only. The home must pass to direct descendants.

RNRB taper

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

Applies only if the net estate exceeds £2,000,000. Reduction cannot take the RNRB below zero.

Transferable NRB

Transferred NRB = unused % of first spouse's NRB × NRB at second death

Unused % = 1 − (NRB used ÷ NRB at first death). Maximum extra is 100%.

Transferable RNRB

Transferred RNRB = unused % of first spouse's RNRB × RNRB at second death

Maximum extra is 100%. If the first death was before the RNRB existed, treat 100% as unused.

Reduced 36% rate test

Charity gift ≥ 10% × (net estate after reliefs and exemptions other than charity − available NRB)

If the test is met, the whole taxable estate is taxed at 36%. Otherwise it is taxed at 40%.

BPR rate: 100%

Business or business interest; unquoted shares (any holding, including AIM) = 100%

Applies to a sole trader's business and a partner's share of a partnership.

BPR rate: 50%

Quoted shares with control; land, buildings and machinery used in a controlled company or the transferor's partnership = 50%

Control means more than 50% of the votes. No control means no relief on personally owned assets used by the company.

APR rate

APR = 100% (vacant possession within 12 months, or tenancy starting on or after 1 September 1995) or 50% (otherwise), applied to agricultural value

Relief is on agricultural value only, not market value.

Ownership period

Normally owned for at least 2 years before the transfer

Replacement property can qualify if the total period of ownership of the old and new property is at least two years in the five years before the transfer. The APR occupation tests also apply.

Excepted assets (shares)

Relief on shares is broadly restricted to the proportion of company value attributable to business assets: business assets ÷ (business assets + excepted assets)

Use this proportion when a company holds surplus cash or investments. Check the figures given in the question.

Order of reliefs

APR on agricultural value first, then BPR on the balance of value if it qualifies

You can never claim both reliefs on the same value.

Lifetime gifts: conditions at death

Donee must still own the property (or qualifying replacement) at the donor's death, and it must still qualify

Failure loses relief on a PET or CLT that becomes chargeable because of death within seven years.

IHT rates from the tables

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

Apply to the value left after BPR and APR.

Nil rate band and rates

NRB £325,000; death rate 40%; lifetime rate 20%

These figures are in the ATX tax tables (inheritance tax table). Remaining NRB = £325,000 less chargeable transfers in the seven years before death.

Residence nil rate band

RNRB up to £175,000

The £175,000 is given in the tax tables. Needs a main residence passing to direct descendants. It is tapered away for large estates: the RNRB falls by £1 for every £2 by which the net estate exceeds £2,000,000. That taper rule is not in the tax tables, so learn it. Unused RNRB of a late spouse may be claimed. Check the question for the figures.

Taper relief on tax

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

Applies to the tax on the gift, not to its value. No relief if death is within three years. Tax cannot fall below the lifetime tax paid, and there is no refund.

Additional tax on a gift at death

Death tax (after taper) − lifetime tax paid, minimum nil

For a CLT, compare with the lifetime tax paid. A PET that becomes chargeable has no lifetime tax.

Quick succession relief

QSR = % × tax on earlier transfer × (net transfer ÷ gross transfer)

% depends on the time between the transfer and death: under 1 year 100%; 1-2 years 80%; 2-3 years 60%; 3-4 years 40%; 4-5 years 20%. These percentages come from the syllabus and legislation. They are not in the tax tables, so learn them.

Charity reduced rate

36% if charity gets at least 10% of the baseline amount

The 36% rate and the 10% test are not in the exam tax tables, so you must learn them. Baseline = estate after other exemptions and liabilities, less the available nil rate band. Test this when a charitable legacy is large.

Order of charging

Lifetime transfers (earliest first) then death estate

Each gift uses the nil rate band before later gifts and the estate.

Lifetime CLT due date (6 April to 30 September)

Due date = 30 April following the end of the tax year

For example, a gift in July 2025 is due by 30 April 2026.

Lifetime CLT due date (1 October to 5 April)

Due date = end of the sixth month after the month of the gift

A gift in November 2025 is due by 31 May 2026.

Due date on death

Due date = last day of the sixth month after the month of death

Applies to the death estate, failed PETs and additional tax on CLTs.

Instalment option

Ten equal annual instalments; the first is due at the normal due date

Only for qualifying assets. Check the conditions for the type of transfer: lifetime CLT, failed PET or death estate.

Interest rates (tax tables)

Underpaid tax: 8.50%; overpaid tax: 3.50%

Interest on underpaid tax runs from the due date to the date of payment.

IHT rates (tax tables)

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

Needed to compute the tax whose payment date you are testing.

IHT bands and rates

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

Tax is charged only on the excess over the available nil rate band. Use the tables given in the exam.

Taper relief on death within 7 years

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

It reduces the tax on the gift, not the value of the gift. It only helps if tax is actually payable after the nil rate band.

CGT rates and annual exempt amount

18% lower rate; 24% higher rate; annual exempt amount £3,000

Individuals' gains are taxed at 18% only to the extent basic rate band is unused, and 24% above that.

Business asset disposal relief

Qualifying gains taxed at 14%; lifetime limit £1,000,000

Applies to qualifying business disposals. It does not apply to a gift where holdover relief is claimed on the same gain.

Holdover relief effect

Donee's base cost = market value at gift − held-over gain

The donor has no chargeable gain on the held-over part. The donee's later gain is therefore larger.

Deed of variation conditions

In writing + within 2 years of death + no consideration + statement for read-back

IHT and CGT read-back are separate elections. Without the statement, the variation is a gift by the beneficiary.

CGT on death

No chargeable gain on death; beneficiary's base cost = probate value

Losses on assets held at death are lost, so consider selling loss-making assets in lifetime.

Quick revision

• A PET is a lifetime gift to an individual that becomes chargeable only if the donor dies within seven years.
• A CLT is generally a lifetime transfer into a trust, taxed at the 20% lifetime rate above the nil rate band.
• Nil rate band: £325,000. Residence nil rate band: £175,000. Death rate: 40%.
• Taper relief reduces the tax, not the gift value, and only where the gift is more than three years before death.
• Taper relief percentages from the tables: 20%, 40%, 60% and 80% for gaps of more than 3, 4, 5 and 6 years.
• Gifts are set against the nil rate band in date order, and the seven-year cumulation looks back before each transfer.
• Reliefs such as business property relief and agricultural property relief reduce the value transferred before the bands are used.
• Annual exemptions reduce the value transferred, so apply them before computing the chargeable amount.
• The tax on lifetime gifts that become chargeable on death is computed at death rates, with taper relief where available.
• The table gives 8.50% on underpaid tax and 3.50% on overpaid tax, so use them for interest questions.
• Always check the CGT effect of a gift, including whether a relief such as gift relief is available.
• In planning answers, compare options, show figures, and give a clear recommendation.

Common mistakes

• Taxing a PET at the time of the gift. Fix: Ask who receives the gift. An individual means a PET, so say no tax is due unless the donor dies within seven years.
• Applying taper relief to the value of the gift instead of the tax. Fix: Compute death tax first, then reduce that tax by the taper percentage. Gifts within the nil rate band have no tax to reduce.
• Applying the RNRB when the home is left to a spouse, a sibling or a trust that is not for descendants. Fix: Check who receives the home. It must pass to direct descendants. Spouse exemption applies instead, but the RNRB is not used there.
• Applying the taper to the chargeable estate after reliefs or charity gifts. Fix: Use the net estate value before reliefs such as business property relief and before the charity exemption for the £2,000,000 taper test. Check the question wording.
• Giving 50% BPR on land owned by the transferor but used by a company they do not control. Fix: Check the shareholding first. Without more than 50% of the votes, no relief applies to personally owned assets used by the company.
• Claiming APR on full market value. Fix: Find the agricultural value. Only that part gets APR. Test the balance for BPR.
• Applying taper relief to the value of the gift instead of to the tax. Fix: Compute the tax at 40% first, then reduce that tax by the taper percentage.
• Giving the estate the full £325,000 nil rate band when lifetime gifts have used it. Fix: Always work out gifts first, then deduct the gross chargeable transfers in the seven years before death from the NRB.
• Using six months from the gift date for every lifetime transfer. Fix: Check the month of the gift. April to September gifts are due on 30 April the following year.
• Saying the donor is always liable for tax on a failed PET. Fix: After a PET fails on death, the donee is primarily liable. The estate is liable for tax on the estate itself.

Exam tips

• Show the classification (PET or CLT) for each gift in a clear line. Marks are often earned for the label, even when later numbers are wrong.
• Write the tax year next to each gift. Annual exemption marks depend on the 6 April to 5 April boundary, and many questions put gifts either side of it.
• Look for planning requirements. Typical advice is to use the annual exemption and carry-forward, make regular gifts out of surplus income and keep records, and make PETs early to start the seven-year clock.
• Always read who pays the tax. It decides whether you gross up a CLT.
• Take the nil rate band and taper table from the tax tables provided. Remember the tables show only the percentages, so state what they reduce.
• Always show the NRB and RNRB as separate lines. The marker gives separate marks for each band and for the transfer percentage.
• Quote the rates from the tax table. Do not rely on memory for the 40% and 20% rates and the £2,000,000 taper threshold. Check which figures the question provides.
• For spouse transfer questions, show the percentage workings: NRB used ÷ NRB at first death, then unused % × current NRB.