Taxation (UK) · The basic principles of computing transfers of value

Inheritance Tax Basics and Chargeable Persons for ACCA Taxation (UK)

Updated 11 October 2026 · Fact-checked

Inheritance tax (IHT) is charged on a transfer of value, which is a gift or other event that reduces the value of the giver's estate. It applies to lifetime transfers and to the estate on death. You compute the loss to the donor, apply exemptions, then the nil rate band and rates.

Understand Inheritance Tax Basics and Chargeable Persons

Inheritance tax is a tax on wealth passing from one person to others. It is charged in two situations: on certain gifts made during life, and on the estate a person owns at death.

The key idea is the transfer of value. This is any disposition that reduces the value of the donor's estate. The tax looks at the loss to the donor, not the gain to the person receiving. If you give away an asset worth less to the recipient than the fall in your own estate, you use the fall in your estate.

Who is chargeable depends on domicile. A person domiciled (or deemed domiciled) in the UK is chargeable on their worldwide assets. A person who is not UK domiciled is chargeable only on assets with a UK situs, meaning assets located in the UK, such as UK land or UK bank accounts. Assets outside the charge are called excluded property, for example overseas assets owned by a non-UK domiciled person.

The tax is charged on lifetime transfers and on death at different rates. The nil rate band is £325,000. Tax on the excess is at 20% for lifetime rates and 40% for the death rate. A residence nil rate band of £175,000 may also be available on death. Lifetime gifts to individuals are usually potentially exempt, and chargeable lifetime transfers are mainly gifts into trusts. Those details are covered in later topics.

In TX-UK you are not asked for the detailed domicile tests. You are expected to know the effect: UK domiciled means worldwide assets, non-UK domiciled means UK assets only.

Key rules to remember

Transfer of value: Transfer of value = Value of donor's estate before − Value of donor's estate after; This is the loss to the donor. It is not the value received by the donor's recipient.
Scope of charge: UK domiciled: worldwide assets. Non-UK domiciled: UK situs assets only; Overseas assets of a non-UK domiciled person are excluded property.
Nil rate band: Nil rate band = £325,000; Figure given in the ACCA tax rates and allowances. Residence nil rate band is £175,000.
IHT rates on the excess: Lifetime rate 20%; death rate 40%; Applied to the value above the available nil rate band.
Taper relief on tax: Years before death: 3-4: 20%; 4-5: 40%; 5-6: 60%; 6-7: 80% reduction; Reduces the tax, not the value. It applies only where tax is payable on a gift made within seven years before death.

How to solve Inheritance Tax Basics and Chargeable Persons questions

Use this order for any question on who is liable and what is chargeable.

1Identify the event: a lifetime gift or a death.
2Decide the donor's domicile status and so the scope: worldwide assets or UK situs assets only.
3Strip out any excluded property, such as overseas assets of a non-UK domiciled person.
4For a lifetime gift, compute the transfer of value as the fall in the donor's estate.
5Note whether the gift is to an individual (potentially exempt) or into a trust (chargeable lifetime transfer).
6Apply exemptions, then the nil rate band, and the correct rate: 20% lifetime, 40% on death.
7State the answer clearly and show each line of working.

Quickest way: Scope check then loss to donor

When to use it: Use for objective test questions asking who is chargeable or the value of a transfer.

Ask: is the donor UK domiciled? If yes, everything counts.
If no, keep only UK assets and drop overseas ones.
For the value transferred, write estate before minus estate after.
Pick 20% for lifetime or 40% for death only after using the nil rate band.

Common mistakes in Inheritance Tax Basics and Chargeable Persons

Using the value received by the recipient as the transfer of value.
It feels natural to value the gift itself.
Fix: Always compute the fall in the donor's estate. Compare before and after.
Taxing overseas assets of a non-UK domiciled person.
Students forget that scope depends on domicile.
Fix: Check domicile first. Non-UK domiciled means UK situs assets only.
Applying 40% to a lifetime transfer.
Mixing up the lifetime and death rates.
Fix: Lifetime rate is 20%, death rate is 40%. Tie each to the event.
Treating taper relief as reducing the value of the gift.
The word relief suggests a reduction in value.
Fix: Taper relief reduces the tax payable, and only where a gift is made within seven years of death and tax is due.
Applying the nil rate band as if it were an exemption on every gift.
Confusing exemptions with the nil rate band.
Fix: Deduct exemptions from the transfer first. Then use the nil rate band against the remaining value.

Worked examples

Example 1

Anil is UK domiciled. He owns a house in Leeds worth £400,000, and a flat in Spain worth £150,000. He dies. What assets are within the charge to IHT?

Show the solution

Anil is UK domiciled, so his worldwide assets are chargeable.
The Leeds house is a UK asset, so it is included: £400,000.
The Spanish flat is an overseas asset but is still included because of his domicile: £150,000.
Total value in scope is £400,000 + £150,000 = £550,000.

Answer: £550,000 of assets are within the charge, before other estate items, reliefs and nil rate bands.

Example 2

Beth owns shares in a company worth £200,000 before a gift. She gives some of them to her friend. After the gift her estate is worth £150,000 less. The friend's shares are valued at £140,000 on their own. What is the transfer of value?

Show the solution

The transfer of value is the loss to the donor.
Beth's estate falls by £150,000.
The value in the friend's hands (£140,000) is ignored.
Transfer of value is £150,000.

Answer: The transfer of value is £150,000, before any exemptions.

Exam tips

In objective tests, read for the domicile status first. It often decides the answer.
Remember that the transfer of value is measured by the loss to the donor.
Learn the nil rate band, rates and taper relief percentages. They are given in the tax tables, but you need to know how to use them.
In written answers, label each stage: transfer, exemptions, nil rate band, tax. This earns method marks.
Do not mix up taper relief with a reduction in the value of the gift.

Practice questions from The basic principles of computing transfers of value

Inheritance Tax Basics and Chargeable Persons: frequently asked questions

What is a transfer of value for inheritance tax?

It is a gift or other disposition that reduces the value of the donor's estate. The amount is the fall in the donor's estate, not the value the recipient gets.

What is excluded property?

It is property that falls outside the inheritance tax charge. A common example is overseas assets owned by a person who is not UK domiciled.

Who pays IHT on assets abroad?

A UK domiciled person is chargeable on worldwide assets, so overseas assets are included. A non-UK domiciled person is chargeable only on UK situs assets.

What are the IHT rates in TX-UK?

The nil rate band is £325,000. The excess is taxed at 20% on lifetime transfers and 40% on death. Taper relief can reduce lifetime tax on gifts made more than three years before death.