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ACCA Applied Skills · Taxation (UK)

IHT on Chargeable Lifetime Transfers and Death

This chapter covers inheritance tax on lifetime gifts and on death. You work out whether a transfer is chargeable, potentially exempt or exempt, then apply the £325,000 nil rate band, the 20% lifetime or 40% death rate, taper relief and any residence nil rate band. Finally you decide who pays and when.

What this chapter covers

This chapter is about inheritance tax (IHT) on an individual's gifts during life and on their estate at death. You learn to classify each transfer, to track the seven-year cumulation of gifts, and to calculate tax at the lifetime rate of 20% or the death rate of 40% above the nil rate band of £325,000. The residence nil rate band of £175,000 can add to the band on death in the right circumstances.

The chapter has a clear order of events. A gift is first tested for exemptions. What remains is either a chargeable lifetime transfer (CLT), which may suffer tax at once, or a potentially exempt transfer (PET), which is only taxed if the donor dies within seven years. Death then brings a second calculation: the death estate, plus any earlier gifts that fall back into charge. Taper relief reduces tax on gifts made more than three years before death, but only where tax is actually payable on them.

IHT links to the rest of the paper. A gift of an asset is also a disposal for capital gains tax, so the same transfer can raise both taxes. Death is handled differently for CGT. ISAs give income tax and CGT advantages but no IHT relief. IHT appears in Section A, in Section B objective test cases and often in a Section C written question, so you need both quick rule recall and a tidy calculation layout.

IHT is a regular source of marks in TX-UK, and its questions reward method more than memory. Objective questions test single rules such as the taper percentage, the payment date or who is liable. A constructed response question may ask for the lifetime tax, the extra tax on death and the death estate in one go. The rates and bands are given in the tax tables, so your effort goes into knowing how to apply them and in laying out the working so that every step can earn marks. Candidates who learn the order of the calculation score steadily here. Candidates who guess the order lose marks on cumulation and on the nil rate band.

The liabilities arising on chargeable lifetime transfers and on the death of an individual: topics in the order to study them

  1. 1IHT Nil Rate Band and Tax RatesEverything else uses the £325,000 band and the 20% and 40% rates, so learn how they work first.
  2. 2Chargeable Lifetime Transfers and Lifetime IHT CalculationCLTs are the simplest place to practise cumulation, exemptions and the gross-up when the donor pays the tax.
  3. 3Potentially Exempt Transfers and Taper ReliefPETs build on CLTs and introduce the seven-year rule and the taper relief table, which you need before the death calculation.
  4. 4IHT Calculation on Death and the Death EstateDeath combines the estate with the earlier gifts, so it only makes sense once you can handle CLTs and PETs.
  5. 5Residence Nil Rate Band and Transfer of Unused BandsThese extra bands apply to the death calculation, so add them once the basic death layout is secure.
  6. 6IHT Payment Dates and Who Is Liable to PayDates and liability are easy to learn once you know which transfers can create tax and when.
  7. 7Interaction of IHT with Capital Gains Tax and ISAsThis links the chapter to other parts of the paper, so finish with it and compare how each tax treats the same event.

How to prepare The liabilities arising on chargeable lifetime transfers and on the death of an individual

Treat this chapter as one process that you repeat for every transfer. Practise the process until the order feels automatic.

  1. Learn the tax table figures by sight: £325,000 nil rate band, £175,000 residence nil rate band, 20% lifetime rate, 40% death rate and the taper relief percentages. You will be given them in the exam, so focus on knowing where each applies.
  2. Draw a timeline for every question. Mark each gift date and the date of death, and check which gifts fall within seven years before each later transfer and before death.
  3. Classify each gift in order: exempt, PET or CLT. Apply exemptions such as the annual exemption before you calculate any tax.
  4. Practise the CLT calculation until you can do it without notes: deduct exemptions, add up the chargeable transfers in the previous seven years, use the remaining nil rate band, then tax the excess at 20%. Gross up if the donor pays the tax.
  5. Do the death calculation in two parts: first the lifetime gifts within seven years, in date order, with taper relief where tax is due, and then the death estate with the remaining nil rate band and any residence nil rate band.
  6. Learn the payment dates and liability rules as a short list, and compare IHT with CGT for the same gift.
  7. Finish with mixed past-style questions: answer objective questions under time pressure, then write one full constructed response answer with clear headings and workings.

Common mistakes in The liabilities arising on chargeable lifetime transfers and on the death of an individual

  • Applying the nil rate band to each gift separately instead of cumulating.

    Fix: Keep a running total of chargeable transfers in the seven years before each gift, in date order, and only the unused band is available.

  • Using taper relief on every gift made more than three years before death.

    Fix: Check first whether the gift exceeds the available nil rate band. If no tax is due on it, there is nothing to reduce. Taper relief reduces the tax, not the value.

  • Forgetting to gross up a CLT when the donor pays the tax.

    Fix: Ask who pays. If the donor pays, the amount given is the net transfer, so calculate the tax on the gross amount at 20% on the excess over the available band.

  • Mixing up the lifetime rate and the death rate.

    Fix: Use 20% for lifetime tax on CLTs. On death, tax the estate at 40% above the available nil rate band. Recalculate gifts made within seven years of death at 40% only on the excess over the nil rate band left after earlier gifts. Then reduce that tax by taper relief, and deduct lifetime tax already paid on a CLT, but not by more than the death tax on that gift.

  • Missing exemptions before classifying the gift.

    Fix: Always deduct exemptions first, including the annual exemption and any unused amount from the previous year, in the order the exemption rules require.

  • Confusing IHT dates and liability with CGT or income tax.

    Fix: Write a separate line for each tax. Learn the IHT dates and liability rules as a fixed list, and do not borrow dates from CGT.

Last-day revision: The liabilities arising on chargeable lifetime transfers and on the death of an individual

  • Nil rate band is £325,000; the residence nil rate band is £175,000 and is only available in the right circumstances on death.
  • Lifetime rate on a CLT above the band is 20%; the death rate is 40%.
  • A CLT is usually a gift into a trust or to a company; a PET is a gift to an individual (or to certain trusts). Both are tested for exemptions first.
  • A PET is exempt if the donor survives seven years; if not, it becomes chargeable at death rates.
  • CLTs are cumulated over the previous seven years to see how much nil rate band is left.
  • If the donor pays the lifetime tax, the gift is a net amount and you gross it up at 20%.
  • Taper relief only reduces tax, not the value of the gift, and only applies if tax is payable on that gift. Relief starts only when death is more than three years after the gift.
  • Taper relief table (years between gift and death): three years or less: no relief; 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.
  • Gifts made in the seven years before death use up the nil rate band before the death estate does.
  • On death, tax on the estate is paid by the personal representatives. Additional tax on a PET because of death is paid by the donee. Additional tax on a CLT because of death is paid by the trustees where the gift was into trust. The personal representatives are liable for the additional tax only if it remains unpaid.
  • IHT on the death estate and on lifetime transfers made within seven years of death is due six months after the end of the month of death.
  • Lifetime tax on a CLT made between 6 April and 30 September is due on 30 April in the following tax year. For a CLT made between 1 October and 5 April, it is due six months after the end of the month of the gift.
  • A gift of an asset can also trigger CGT; assets held at death are not charged to CGT, and ISAs get no IHT relief.

The liabilities arising on chargeable lifetime transfers and on the death of an individual practice questions

The liabilities arising on chargeable lifetime transfers and on the death of an individual in other exams

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

The liabilities arising on chargeable lifetime transfers and on the death of an individual: frequently asked questions

What is the difference between a CLT and a PET?

A chargeable lifetime transfer is usually a gift into a trust and may suffer lifetime IHT at once. A potentially exempt transfer is usually a gift to an individual and only becomes chargeable if the donor dies within seven years. In both cases you test for exemptions first.

How does taper relief work in TX-UK?

Taper relief reduces the IHT payable on a gift made more than three years before death. The reduction is 20%, 40%, 60% or 80% depending on the number of full years between gift and death. It only applies where tax is payable on the gift, because a gift covered by the nil rate band has no tax to reduce.

When can the residence nil rate band be used?

It is available on death, in addition to the £325,000 nil rate band, when a home is left to direct descendants and the other conditions are met. The maximum in the tax tables is £175,000. Unused amounts can also be transferred to a surviving spouse or civil partner.

Do I need to learn the IHT rates and bands?

You are given the nil rate band, residence nil rate band, rates and taper relief table in the tax tables. Spend your time on knowing when each applies and how the cumulation works. Practise until you can set out the calculation in the right order.

Is IHT tested in the objective questions or the written questions?

Both. Objective questions tend to test a single rule, such as taper relief, who pays or the due date. A written question can ask you to calculate lifetime tax, the extra tax on death and the death estate in one answer, so practise both styles.