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Taxation (UK) · Payment of inheritance tax

Calculating Tax Payable on Lifetime Transfers and Death

Updated 11 October 2026 · Fact-checked

Inheritance tax on a chargeable lifetime transfer is 20% of the value above the unused nil rate band of £325,000, grossed up at 20/80 if the donor pays. If the donor dies within seven years, the gift is retaxed at 40%, reduced by taper relief, less lifetime tax paid. The estate is taxed at 40% above any remaining nil rate band.

Understand Calculating Tax Payable on Lifetime Transfers and Death

Inheritance tax (IHT) is charged on transfers of value. Each person has a nil rate band of £325,000. Tax only arises on the part of cumulative chargeable transfers that exceeds it.

A chargeable lifetime transfer (CLT), such as a gift into a trust, is taxed at the lifetime rate of 20% on the excess over the available nil rate band. The nil rate band available is £325,000 less chargeable transfers made in the seven years before this gift. Who pays matters. If the donee (for example the trustees) pays, tax is 20% of the excess. If the donor pays, the tax is an extra cost to the donor, so the gift must be grossed up. The net gift above the band is multiplied by 20/80.

If the donor dies within seven years of a CLT, or a potentially exempt transfer (PET) fails, the gift is taxed again at the death rate of 40%. The gift is put in the nil rate band first, using the same cumulation rule. Taper relief then reduces the death tax, not the value of the gift. It applies only if death is more than three years after the gift. The reductions are 20% (3 to 4 years), 40% (4 to 5), 60% (5 to 6) and 80% (6 to 7). Lifetime tax already paid is deducted, but if it was higher than the death tax, nothing is refunded.

Finally, the death estate is taxed at 40%. Any nil rate band used by gifts in the seven years before death is not available to the estate. The £175,000 residence nil rate band may also be available where its conditions are met. The order is always: lifetime transfers first, then gifts that become chargeable on death, then the estate.

Key rules to remember

Nil rate band
Available NRB = £325,000 − chargeable transfers in the 7 years before the gift
Use gross values of earlier chargeable transfers. PETs only count if they become chargeable because of death within seven years.
Lifetime tax, donee pays
Tax = (Transfer − available NRB) × 20%
The transfer is after exemptions. Tax is nil if the transfer is within the band.
Lifetime tax, donor pays (grossing up)
Tax = (Net transfer − available NRB) × 20/80; Gross transfer = Net transfer + tax
Gross up only the excess over the band. Use the gross transfer for later cumulation.
Death tax on a gift
Tax = (Gross gift − available NRB) × 40%
Available NRB is based on transfers in the seven years before that gift.
Taper relief
Death tax × (1 − reduction %); 3–4 yrs 20%, 4–5 yrs 40%, 5–6 yrs 60%, 6–7 yrs 80%
No relief if death is within three years. It reduces the tax, not the value.
Additional tax on death
Additional tax = tapered death tax − lifetime tax paid (minimum nil)
There is no refund if lifetime tax exceeds the tapered death tax.
Death estate
Tax = (Chargeable estate − NRB remaining − RNRB if available) × 40%
Remaining NRB = £325,000 less chargeable transfers in the seven years before death. The RNRB is £175,000, subject to its conditions.

How to solve Calculating Tax Payable on Lifetime Transfers and Death questions

Work through each transfer in date order. Do the lifetime tax first, then the death position.

  1. 1List all gifts in date order. Mark each as a PET or CLT and deduct exemptions to get the transfer value.
  2. 2For each CLT, find the chargeable transfers in the seven years before it. Deduct them from £325,000 to get the available nil rate band.
  3. 3Compute lifetime tax at 20% on the excess. If the donor pays, gross up the excess by 20/80 and note the gross transfer.
  4. 4If death occurs within seven years, treat PETs as chargeable. Recompute each gift at 40%, using the nil rate band available at the date of that gift.
  5. 5Work out the years between gift and death. Apply taper relief to the tax if the gap is more than three years.
  6. 6Deduct lifetime tax paid. Do not go below nil.
  7. 7Compute the estate. Reduce the nil rate band by gifts in the seven years before death, add the RNRB if it applies, and tax the rest at 40%.
  8. 8Check that no nil rate band is used twice and state who pays each tax.

Quickest way: Timeline and band tracker

When to use it: Use for any question with several gifts and a death, especially objective test cases.

  1. Draw a timeline with each gift, its type, the value after exemptions and the date of death.
  2. Beside each gift write the NRB left after earlier chargeable transfers in the previous seven years.
  3. Compute lifetime tax: excess × 20%, or excess × 20/80 if the donor pays.
  4. At death, compute excess × 40%, then multiply by (1 − taper %) and subtract lifetime tax.
  5. Finish with the estate, using whatever nil rate band is left.

Common mistakes in Calculating Tax Payable on Lifetime Transfers and Death

  • Applying taper relief to the value of the gift

    The word 'reduction' suggests the gift shrinks.

    Fix: Compute the 40% tax first, then reduce that tax by the taper percentage. The gift still uses up the nil rate band in full.

  • Grossing up the whole transfer when the donor pays

    Students multiply the full gift by 20/80.

    Fix: Gross up only the part of the net gift above the available nil rate band.

  • Forgetting earlier transfers in the seven years before the gift

    Students start every gift with a full £325,000 band.

    Fix: Always look back seven years from the date of each gift and deduct chargeable transfers made in that period.

  • Deducting lifetime tax before applying taper relief

    Both steps reduce the tax, so the order seems unimportant.

    Fix: Taper the death tax first, then deduct lifetime tax paid. The order changes the answer.

  • Claiming a refund when lifetime tax exceeds the tapered death tax

    The subtraction gives a negative figure.

    Fix: Stop at nil. Lifetime tax paid is never repaid.

  • Giving the estate a full nil rate band

    Students treat the estate as a separate person with its own band.

    Fix: Deduct chargeable transfers made in the seven years before death from £325,000 before computing the estate tax.

Worked examples

Example 1

Priya made no earlier gifts. She gives £400,000 (after exemptions) to a trust. Compute the lifetime IHT (a) if the trustees pay the tax and (b) if Priya pays it. Use the 2025 rates and allowances.

Show the solution
  1. Available nil rate band = £325,000, as there are no transfers in the previous seven years.
  2. (a) Excess = £400,000 − £325,000 = £75,000. Tax = £75,000 × 20% = £15,000.
  3. (b) Excess net gift = £75,000. Tax = £75,000 × 20/80 = £18,750.
  4. Gross transfer in (b) = £400,000 + £18,750 = £418,750.
  5. Check: £418,750 − £325,000 = £93,750; £93,750 × 20% = £18,750.

Answer: (a) £15,000 payable by the trustees. (b) £18,750 payable by Priya, with a gross transfer of £418,750.

Example 2

Tom made no earlier gifts. In June 2020 he gave £425,000 (after exemptions) to a trust, and the trustees paid the lifetime tax. He died in September 2025. His chargeable estate was £600,000, with no exemptions and no residence nil rate band. Compute the additional tax on the gift and the tax on the estate.

Show the solution
  1. Lifetime tax in 2020: (£425,000 − £325,000) × 20% = £20,000.
  2. Tom died about 5 years 3 months after the gift, so the taper reduction is 60%.
  3. Death tax on the gift at 40%: (£425,000 − £325,000) × 40% = £40,000.
  4. After taper relief: £40,000 × (1 − 60%) = £16,000.
  5. Additional tax = £16,000 − £20,000 lifetime tax = negative, so nil.
  6. Estate: the gift of £425,000 within seven years of death uses up the whole £325,000 band, so no band remains.
  7. Estate tax = £600,000 × 40% = £240,000.

Answer: There is no additional tax on the gift, because the tapered death tax of £16,000 is below the £20,000 paid, and there is no refund. The estate tax is £240,000.

Exam tips

  • Write the date gap between gift and death and read the taper band carefully. Gaps such as exactly three years give no relief.
  • State who pays the tax. Examiners often change this, which decides whether you gross up.
  • Show the nil rate band available for each gift as a separate line to earn method marks.
  • In objective test questions, one wrong step makes the whole answer wrong. Check the 20/80 and 40% rates before choosing.
  • Use the rates and allowances table supplied in the exam. Do not rely on memory for the bands.

Practice questions from Payment of inheritance tax

Calculating Tax Payable on Lifetime Transfers and Death: frequently asked questions

How do I gross up a lifetime transfer when the donor pays the tax?

Take the net gift above the available nil rate band and multiply it by 20/80. Add that tax to the net gift to get the gross transfer. Use the gross figure for later cumulation.

How does taper relief work for inheritance tax?

It reduces the tax payable on death, not the value of the gift. The reduction is 20%, 40%, 60% or 80% depending on how many full years passed between the gift and death after the first three. There is no relief if death is within three years.

What happens to lifetime tax if the donor dies within seven years?

The gift is retaxed at 40% using the nil rate band available at the gift date. Taper relief is applied and lifetime tax paid is deducted. If the result is negative, no refund is made.

Does a gift made before death affect the nil rate band for the estate?

Yes. Chargeable transfers in the seven years before death use up the nil rate band first. The estate gets only what is left, plus any residence nil rate band if its conditions are met.