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

Nil Rate Band and Computing Lifetime Inheritance Tax

Updated 11 October 2026 · Fact-checked

Lifetime inheritance tax applies to chargeable lifetime transfers above the £325,000 nil rate band, after deducting CLTs made in the previous seven years. The excess is taxed at 20%. If the donor pays the tax, gross up the excess by multiplying by 20/80, because the donor's loss includes the tax.

Understand Nil Rate Band and Computing Lifetime Tax

A chargeable lifetime transfer (CLT) is a lifetime gift that is taxed straight away. The usual example is a gift into a trust. Gifts between individuals are normally potentially exempt transfers and are dealt with elsewhere. Here you work out the tax on a CLT.

Every person has a nil rate band (NRB) of £325,000. Tax is charged only on the part of the cumulative chargeable transfers that is above it. The lifetime rate on the excess is 20%. The death rate is 40%.

The NRB is used up by earlier gifts. Look back seven years from the date of the new gift. Add up the gross chargeable transfers made in that period. Take this total from £325,000 to find the NRB left. A CLT made more than seven years before drops out and no longer uses the band.

The donor can pay the tax or the donee can pay it. If the donee pays, the gift is the full amount and tax is simply 20% of the excess. If the donor pays, the donor loses the gift and the tax as well. The gift is then a net amount, so you must gross it up. The tax on the net excess is 20/80 of that excess. The gross transfer is the net gift plus that tax.

Before you apply the band, deduct any available exemptions from the value transferred. The annual exemption is £3,000 a year, and an unused amount can be carried forward for one year only. Use the current year first, then the previous year.

Key rules to remember

Nil rate band available
£325,000 − gross CLTs in the 7 years before the gift
Use the gross amounts of earlier CLTs, including any tax the donor paid on them. Gifts older than 7 years are ignored.
Lifetime tax, donee pays
Tax = 20% × (CLT after exemptions − NRB available)
No grossing up is needed because the donee bears the tax.
Lifetime tax, donor pays
Tax = 20/80 × (net CLT after exemptions − NRB available)
Equivalent to 25% of the net excess. Only the excess over the NRB is grossed up.
Gross chargeable transfer
Net transfer + tax paid by donor
This is the figure that goes into cumulation for later gifts.
Check on a grossed-up answer
20% × (gross transfer − NRB available) = tax
If this does not equal your tax, the gross-up is wrong.

How to solve Nil Rate Band and Computing Lifetime Tax questions

Use the same order every time. It works for a single CLT or a series of CLTs.

  1. 1Find the value transferred (the donor's loss) and deduct exemptions such as the annual exemption for the current year and any unused amount from the previous year.
  2. 2Work out who pays the tax. The question usually says. If the donor pays, the figure you now have is a net amount.
  3. 3List the gross CLTs made in the seven years before this gift and total them. Ignore anything older.
  4. 4Deduct that total from £325,000 to find the NRB available. If it is nil or negative, the whole transfer is taxable.
  5. 5Find the excess of the transfer over the NRB available.
  6. 6If the donee pays, tax is 20% of the excess. If the donor pays, tax is 20/80 of the excess.
  7. 7If the donor paid, add the tax to the net transfer to get the gross chargeable transfer. Record it for later cumulation.
  8. 8Check by taking 20% of the gross transfer less the NRB available.

Quickest way: Net excess × 25% shortcut

When to use it: Use it when the donor pays the tax and the question gives a net gift. It saves you working out the gross figure first.

  1. Subtract exemptions from the gift.
  2. Subtract the NRB available (£325,000 less CLTs in the last 7 years).
  3. Multiply the remaining net excess by 25% (the same as 20/80). That is the tax.
  4. Add the tax to the net gift if you need the gross transfer for later cumulation.

Common mistakes in Nil Rate Band and Computing Lifetime Tax

  • Applying 20% to the net excess when the donor pays.

    Students remember the 20% rate and forget that the donor's loss includes the tax.

    Fix: Whenever the donor pays, multiply the net excess by 20/80. Then run the check: 20% of the gross excess must equal the tax.

  • Grossing up the whole gift instead of only the excess over the NRB.

    The gross-up is treated as a step applied to every gift.

    Fix: Subtract the NRB available first. Only the excess bears tax, so only the excess is grossed up.

  • Including CLTs made more than seven years before the gift in cumulation.

    Students add every earlier transfer.

    Fix: Count back seven years from the date of the new gift. Include only CLTs within that period.

  • Using the net figure of an earlier CLT in the cumulation total.

    The question gives the net gift, and students forget the tax paid on it.

    Fix: Use the gross figure, which is the net gift plus the tax the donor paid.

  • Forgetting to deduct the annual exemptions, or deducting them in the wrong order.

    The exemptions are easy to overlook when the question focuses on the band.

    Fix: Deduct exemptions first. Use the current year's £3,000 first, then any unused amount from the previous year, if the question says they are available.

  • Treating PETs as using up the nil rate band in a lifetime calculation.

    Students confuse CLTs and PETs.

    Fix: A PET is ignored for lifetime tax on a CLT unless the donor has died. In that case it becomes chargeable and the position is reworked.

Worked examples

Example 1

Ravi makes his first ever transfer on 1 August 2025. He puts £400,000 in cash into a discretionary trust. His annual exemptions for 2025/26 and 2024/25 are both unused. Ravi pays any lifetime inheritance tax. Calculate the tax and the gross chargeable transfer.

Show the solution
  1. Value transferred is £400,000. Deduct annual exemptions of £3,000 + £3,000 = £6,000. Net transfer is £394,000.
  2. There are no CLTs in the previous seven years, so the NRB available is £325,000.
  3. Net excess is £394,000 − £325,000 = £69,000.
  4. Ravi pays the tax, so multiply by 20/80: £69,000 × 20/80 = £17,250.
  5. Gross chargeable transfer is £394,000 + £17,250 = £411,250.
  6. Check: (£411,250 − £325,000) × 20% = £86,250 × 20% = £17,250. This matches.

Answer: Lifetime tax is £17,250 and the gross chargeable transfer is £411,250.

Example 2

Mina made a CLT in March 2017 with a gross value of £100,000 and a CLT in May 2021 with a gross value of £200,000. On 10 December 2025 she puts £250,000 into a trust. This is after all exemptions, which are used up. Calculate the lifetime tax if (a) Mina pays it and (b) the trustees pay it.

Show the solution
  1. The seven years before 10 December 2025 start on 10 December 2018. The March 2017 CLT is outside this period and is ignored.
  2. The May 2021 CLT is within seven years. Its gross value of £200,000 uses part of the NRB.
  3. NRB available is £325,000 − £200,000 = £125,000.
  4. The excess of the £250,000 over £125,000 is £125,000.
  5. (a) Mina pays the tax, so the £250,000 is a net gift. Tax is £125,000 × 20/80 = £31,250. Gross chargeable transfer is £250,000 + £31,250 = £281,250. Check: (£281,250 − £125,000) × 20% = £31,250.
  6. (b) The trustees pay the tax, so the £250,000 is the full transfer. Tax is £125,000 × 20% = £25,000. No gross-up applies.

Answer: (a) Tax is £31,250 and the gross transfer is £281,250. (b) Tax is £25,000.

Exam tips

  • Read who pays the tax before you start. Look for words like 'the donor pays any tax due'. This decides whether you gross up.
  • Set out the seven-year lookback explicitly. Write the start date of the period. Marks are given for ignoring old CLTs.
  • Show the NRB available as its own line. Include the £325,000 and the previous CLTs on the page, even in objective test cases, so you do not slip on the arithmetic.
  • In a Section C answer, show the check line. It confirms your gross-up and picks up follow-through marks.
  • The NRB, 20% lifetime rate and 40% death rate are given in the tax tables. The 20/80 gross-up and the annual exemption are not, so learn them.

Practice questions from The basic principles of computing transfers of value

Nil Rate Band and Computing Lifetime Tax in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Nil Rate Band and Computing Lifetime Tax: frequently asked questions

How do you gross up a chargeable lifetime transfer?

First deduct exemptions and the NRB available to get the net excess. Multiply this by 20/80 to find the tax. Add the tax to the net gift to get the gross transfer.

What is the inheritance tax nil rate band and how does cumulation work?

The NRB is £325,000. You subtract the gross CLTs made in the seven years before the new gift. Only the remainder is available against the new transfer.

Does the donor or the donee pay lifetime inheritance tax?

Either can. If the donee pays, tax is 20% of the excess over the NRB. If the donor pays, the gift is net and you must gross it up.

Do PETs use up the nil rate band for lifetime tax?

Not when you calculate lifetime tax on a CLT while the donor is alive. A PET becomes chargeable only if the donor dies within seven years of making it, and then the tax is recalculated.