Taxation (UK) · The use of exemptions in deferring and minimising inheritance tax liabilities

Inheritance Tax Planning Using Exemptions and Reliefs

Updated 11 October 2026 · Fact-checked

Inheritance tax planning means reducing or delaying IHT by using exemptions, making lifetime gifts early, using the nil rate bands, and arranging wills or variations. Compare each option's IHT and CGT cost, then recommend the one that leaves the family with most after tax.

Understand Inheritance Tax Planning Using Exemptions and Reliefs

Inheritance tax (IHT) is charged on transfers of value, mainly gifts in lifetime and the estate on death. The aim of planning is to move wealth to the next generation so that as little as possible is taxed, or so that tax is paid later.

There are three main tools. First, exemptions: transfers that are outside IHT altogether, such as gifts between spouses or civil partners and gifts to charities. Second, lifetime gifts: a gift to an individual is a potentially exempt transfer (PET), which becomes fully exempt if the donor survives seven years. Third, the nil rate bands: a nil rate band of £325,000 and a residence nil rate band of £175,000 (where it is available) are taxed at 0%.

Timing matters. A gift made early has more chance of surviving seven years. If death occurs more than three years after the gift, taper relief reduces the tax on it. Taper relief reduces the tax, not the value of the gift, and only helps where the gift exceeds the nil rate band. Gifts made earlier also use up the nil rate band first, so later transfers bear tax.

Wills and variations are the second half of planning. A will can leave assets to a spouse or civil partner (exempt) or to charity (exempt). Beneficiaries can also change who gets what after death by a deed of variation, made in writing within two years of death. If the deed says so, the variation is treated for IHT as made by the deceased, not by the beneficiary. This avoids the beneficiary making a gift of their own.

Gifts also have a capital gains tax (CGT) side. A lifetime gift of an asset is a disposal at market value for CGT, so a gain may arise even though no cash was received. On death there is no CGT charge on the deceased's assets, and the beneficiaries acquire them at market value. So lifetime gifts can save IHT but cost CGT, and you must weigh both. Gift holdover relief can defer the gain where available, for example on chargeable lifetime transfers.

Key rules to remember

Nil rate band: £325,000 at 0%; excess taxed at 20% (lifetime) or 40% (death); The nil rate band applies to chargeable transfers in the seven years before the transfer.
Residence nil rate band: Up to £175,000 extra on death, where available; It applies on death only, not to lifetime gifts.
PET rule: PET exempt if donor survives 7 years; if death within 7 years, taxed at death rates; Use the nil rate band available at the date of the gift, after earlier transfers.
Taper relief: 3–4 yrs 20%; 4–5 yrs 40%; 5–6 yrs 60%; 6–7 yrs 80% reduction in tax; Reduces the tax, only where the gift exceeds the available nil rate band. No relief for death within 3 years.
Deed of variation: Written deed within 2 years of death; must state it is to apply for IHT (and CGT); Treated as made by the deceased, so no PET by the beneficiary.
CGT on lifetime gift: Disposal at market value; gain = market value − cost; annual exempt amount £3,000; No CGT on death. Beneficiaries acquire at market value at death.
CGT rates: 18% lower rate; 24% higher rate; Business asset disposal relief and investors' relief gains are taxed at 14% within the £1,000,000 lifetime limits.

How to solve Inheritance Tax Planning Using Exemptions and Reliefs questions

Use this order for any question asking you to advise on minimising IHT or compare gifts with holding assets until death.

1Identify the donor, the assets, the values and the likely beneficiaries, and note any earlier gifts in the last seven years.
2Use exemptions first: spouse or civil partner, charity, and the other lifetime exemptions that apply, so that value passes with no tax.
3Decide whether gifts are PETs or chargeable lifetime transfers (for example gifts to a trust), and work out the nil rate band available.
4Compute the IHT on death if the gift is not made, and the IHT if the donor dies within seven years, applying taper relief to the tax where it is available.
5Compute the CGT on the lifetime gift: market value less cost, less the annual exempt amount, and check whether holdover relief or another relief applies.
6Compare the total IHT and CGT of each option, remembering that there is no CGT on death.
7Consider wills and deeds of variation, and state the conditions such as the two-year limit.
8Give a clear recommendation with the key risk, such as the donor dying early.

Quickest way: Compare tax if gifted versus held

When to use it: Use it in objective test questions and short written parts where you must pick the better of two plans.

Write the IHT if the asset is held until death: value above the available nil rate band at 40%.
Write the IHT if gifted and the donor survives seven years: nil.
Write the CGT cost of gifting now: gain less £3,000 annual exempt amount, at 18% or 24%.
Write the IHT if the donor dies early, using death rates and any taper relief.
Pick the option with the lower combined tax and note the survival risk.

Common mistakes in Inheritance Tax Planning Using Exemptions and Reliefs

Applying taper relief to the value of the gift.
The table shows a percentage reduction and students apply it to the gift.
Fix: Work out the tax first, then reduce the tax by the percentage.
Giving taper relief when the gift is covered by the nil rate band.
Students see 3 to 7 years and apply the table automatically.
Fix: Taper relief only reduces tax that is actually payable. If the gift is covered by the nil rate band, there is no tax to reduce.
Ignoring CGT on a lifetime gift.
No money changes hands, so a disposal seems not to happen.
Fix: A gift is a disposal at market value. Always compute the gain and say whether holdover relief is available.
Treating a deed of variation as a gift by the beneficiary.
Students forget the election effect.
Fix: State that if the deed is in writing, within two years of death and contains the statement, the variation is read back into the will for IHT.
Using the residence nil rate band for lifetime gifts.
Both nil rate bands are learned together.
Fix: The residence nil rate band is available on death only, and only where the conditions are met.
Using 40% on a lifetime chargeable transfer.
Students mix up the lifetime and death rates.
Fix: The lifetime rate is 20%. Extra tax up to 40% is due only if the donor dies within seven years.

Worked examples

Example 1

Anil, aged 70, owns shares worth £400,000 that cost £100,000. He has made no earlier gifts. He wants to give them to his adult son now. Assume he is a higher rate taxpayer, ignore the residence nil rate band, and compare gifting now with leaving the shares on death. Assume the shares are not eligible for holdover relief.

Show the solution

IHT on death if held: £400,000 − £325,000 nil rate band = £75,000 × 40% = £30,000.
A gift now is a PET, so there is no IHT at once. If Anil survives seven years, IHT is nil.
CGT on the gift: gain = £400,000 − £100,000 = £300,000.
Less annual exempt amount £3,000 = £297,000 taxable.
CGT at 24% = £71,280.
On death there is no CGT, and the son acquires the shares at market value.
Compare: gifting costs £71,280 of CGT now to save up to £30,000 of IHT.

Answer: Gifting costs £71,280 of CGT to save at most £30,000 of IHT, so Anil should not gift these shares unless holdover relief applies or the gain is reduced. Holding to death costs £30,000 of IHT and no CGT.

Example 2

Meera died 5 years and 6 months after making a gift of £525,000 to her daughter. She made no other gifts and the annual exemptions are ignored. Compute the IHT on the gift, assuming the nil rate band at her death was £325,000.

Show the solution

The gift was a PET and Meera died within seven years, so it becomes chargeable.
Nil rate band £325,000 is set against the gift.
Taxable amount = £525,000 − £325,000 = £200,000.
IHT at death rate 40% = £80,000.
Death is more than 5 but less than 6 years after the gift, so taper relief is 60%.
Reduction = £80,000 × 60% = £48,000.
IHT payable = £80,000 − £48,000 = £32,000.

Answer: The IHT payable on the gift is £32,000, paid by the donee.

Exam tips

In Section C, set out IHT and CGT in separate headed workings so marks are easy to give.
In objective questions, check the years between the gift and death before choosing the taper percentage.
Always state the conditions for a deed of variation: in writing, within two years of death, with the statement.
When asked for advice, give a clear recommendation and mention the risk of early death.
Remember the annual exempt amount for CGT is £3,000 and applies to the lifetime gift.

Practice questions from The use of exemptions in deferring and minimising inheritance tax liabilities

Inheritance Tax Planning Using Exemptions and Reliefs in other exams

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

ACCA Strategic ProfessionalCapital Gains Tax and Inheritance Tax Planning Measures

Inheritance Tax Planning Using Exemptions and Reliefs: frequently asked questions

How can I minimise inheritance tax using lifetime gifts?

Make gifts to individuals early, because a gift becomes exempt if the donor survives seven years. Use the exemptions available each year and keep gifts within the nil rate band where you can. Check the CGT cost of gifting assets that have grown in value.

Does a deed of variation need to be made within two years?

Yes. It must be in writing and made within two years of the death. It must also state that it is to apply for IHT. Then it is treated as made by the deceased, not as a gift by the beneficiary.

How do IHT and CGT interact on gifts?

A lifetime gift can be a disposal for CGT at market value and also a transfer for IHT. On death there is no CGT charge, and beneficiaries take assets at market value. This means gifting can save IHT but cost CGT, so you compare both.

What are the advantages of lifetime gifts over gifts on death?

A lifetime gift can fall out of IHT if the donor lives seven years, and lifetime rates on chargeable transfers are 20% rather than 40%. The drawback is a possible CGT charge, and the donor loses control of the asset.