Advanced Taxation (UK) · Alternative ways of achieving personal or business outcomes and their tax consequences

Inheritance Tax Planning: Lifetime Gifts and Wills

Updated 11 October 2026 · Fact-checked

IHT planning reduces the tax payable on death by using exemptions, the nil rate band and residence nil rate band, and by making lifetime gifts that are exempt if the donor survives seven years. Work out each gift's tax, apply the nil rate band, then taper relief to the tax, then the death estate.

Understand Inheritance Tax Planning: Lifetime Gifts and Wills

Inheritance tax (IHT) is charged on transfers of value. The main charge is on a person's estate at death, at 40% on the excess over the available nil rate bands. Planning means arranging your affairs so less value is taxed, or taxed at lower rates, without breaking the rules.

Lifetime gifts are the main planning tool. A gift to another individual is usually a potentially exempt transfer (PET). It is not taxed when made. If the donor survives seven years, it becomes fully exempt. If the donor dies within seven years, the PET becomes chargeable and is taxed using death rates.

A gift into most trusts is a chargeable lifetime transfer (CLT). It is taxed at once at the 20% lifetime rate on the excess over the nil rate band. If the donor dies within seven years, extra tax can arise up to the 40% death rate.

Taper relief is the key point students get wrong. It reduces the tax on a gift that is chargeable on death, not the value of the gift. It applies only to gifts made more than three years before death. The gift still uses up the nil rate band in full. So taper relief only helps when the gift is larger than the available nil rate band.

A will is also a planning tool. Leaving assets to a spouse or civil partner is exempt and can pass unused nil rate band to the survivor. Leaving a home to children or grandchildren can unlock the residence nil rate band (RNRB). The RNRB is reduced for large estates and is limited to the value of the qualifying home passing to direct descendants.

Key rules to remember

Nil rate band (NRB): NRB = £325,000; Taken from the tax tables. Applies to cumulative chargeable transfers in the seven years before each transfer. Any unused proportion of a deceased spouse's or civil partner's NRB can be added to the survivor's.
Residence nil rate band (RNRB): RNRB = £175,000 (maximum); Available on death where a home passes to direct descendants. Limited to the value of the home passing to them. Reduced by £1 for every £2 the estate exceeds £2,000,000. Unused RNRB can be transferred to a surviving spouse or civil partner.
IHT rates: Lifetime rate 20%; death rate 40%; Both apply to the excess over the available nil rate band. A lifetime rate applies to CLTs when made. The death rate applies to the estate and to gifts made within seven years of death.
Taper relief: Tax payable on death × (1 − taper %); Reduction applies to the tax. Over 3 but under 4 years: 20%. Over 4 but under 5: 40%. Over 5 but under 6: 60%. Over 6 but under 7: 80%. No relief if death is within 3 years.
Grossing up a CLT: Gross = net gift above NRB × 100 ÷ 80; Use when the donor pays the lifetime tax. The tax is then 20% of the gross excess. If the donee pays, no gross up is needed.
Main annual exemptions: Annual £3,000; small gifts £250 per donee; marriage gifts £5,000 parent, £2,500 grandparent, £1,000 others; The annual exemption can carry forward one year if unused. It is applied to the earliest gift in the tax year. Normal expenditure out of income is also exempt if the conditions are met.
Seven-year cumulation: Look back seven years from each chargeable transfer; Earlier chargeable transfers use up the NRB before later ones. PETs count only if they became chargeable.

How to solve Inheritance Tax Planning: Lifetime Gifts and Wills questions

Use this order for any lifetime gift or death question. It keeps the cumulation and taper rules in the right sequence.

1List every gift and date, in date order. Note the type: PET, CLT or exempt. Gifts to a spouse or civil partner are exempt.
2Deduct exemptions from each gift: annual exemption for the year and the previous year if unused, then small gift, marriage and other exemptions. Apply them to the earliest gift in each tax year first.
3Decide the tax position. A PET is only taxed if death occurs within seven years. A CLT is taxed when made at 20% and again at up to 40% on death.
4Find the NRB available for each gift: £325,000 minus chargeable transfers in the seven years before that gift. Work in date order.
5Compute the tax at the death rate of 40% on the excess over the NRB. Then apply taper relief to that tax if death is more than three years after the gift. For CLTs, deduct any lifetime tax already paid, but not below nil.
6Compute the death estate: assets less liabilities, exempt legacies and reliefs. Use the NRB left after gifts in the seven years before death. Add the RNRB if a home passes to direct descendants, after any taper for estates over £2,000,000.
7State who pays and when. Then add a short planning comment on what would save tax, such as surviving seven years or leaving the home to children.

Quickest way: Three-column gift schedule

When to use it: Use for questions with several gifts and a death within seven years. It saves time and keeps your working easy for the marker to follow.

Draw columns: date, gross gift after exemptions, and NRB used. Write the running NRB figure beside each gift.
Mark any gift made over seven years before death as nil. Cross it out and move on.
Do the tax on only the part that exceeds the remaining NRB, at 40%, then multiply by (1 − taper %).
Leave the death estate for last. The NRB remaining for the estate is £325,000 less the gifts that count, so enter it as one line.

Common mistakes in Inheritance Tax Planning: Lifetime Gifts and Wills

Applying taper relief to the value of the gift instead of the tax.
The word 'reduction' in the table sounds like a reduction in value.
Fix: Compute tax at 40% on the excess over the NRB first. Then multiply the tax by (1 − taper %).
Thinking taper relief helps when the gift is covered by the nil rate band.
Students apply the taper table automatically to every gift in the seven-year window.
Fix: If the gift falls within the NRB, the tax is nil already. The gift still uses the NRB, which can increase the tax on the death estate.
Forgetting the seven-year look-back before each gift.
Students only consider gifts after the one they are working on.
Fix: For each chargeable gift, add chargeable transfers made in the seven years before that gift to find the NRB used up.
Applying the annual exemption to the wrong gift, or not using the previous year's unused exemption.
The order rules are easy to forget under time pressure.
Fix: Use the current year first, then the previous year's unused amount, against the earliest gift in the year. Exemptions are not given to CLTs and PETs in a way that avoids the order; follow it exactly.
Giving the full RNRB when the estate exceeds £2,000,000, or when the home does not pass to direct descendants.
The RNRB is treated as an automatic extra allowance.
Fix: Check three things: a home exists, it passes to direct descendants, and the estate is under the £2,000,000 taper threshold. The RNRB is the lower of £175,000 and the qualifying home value.
Treating a gift where the donor keeps the benefit as a completed PET.
Students stop at 'gift to a child'.
Fix: Read the facts. If the donor keeps using the asset without paying full rent, the gift with reservation rules can bring the asset back into the estate.

Worked examples

Example 1

Priya gave her son £500,000 in cash on 10 June 2019. She had made no earlier gifts and had used no exemptions in 2018/19 or 2019/20. She died on 20 January 2026. Calculate the IHT payable on the gift as a result of her death, and say who pays.

Show the solution

The gift to her son is a PET. She died within seven years, so it becomes chargeable.
Exemptions: 2019/20 annual exemption £3,000 plus the unused 2018/19 exemption £3,000 = £6,000. Gross transfer = £500,000 − £6,000 = £494,000.
No earlier chargeable transfers in the seven years before the gift, so the full NRB of £325,000 is available.
Excess over NRB = £494,000 − £325,000 = £169,000.
Tax at 40% = £169,000 × 40% = £67,600.
Time from gift to death is 6 years 7 months. That is more than 6 but less than 7 years, so taper relief is 80%.
Tax after taper = £67,600 × (1 − 80%) = £67,600 × 20% = £13,520.
The son, as donee, is primarily liable for the tax. The gift used the whole NRB, so no NRB remains for Priya's death estate.

Answer: IHT of £13,520 is payable, by her son. No NRB is left for Priya's death estate.

Example 2

Mr Hall died in 2026. His wife died in 2019 and left everything to him. His estate is £1,200,000, including his home worth £500,000. Everything passes to his children. He made no lifetime gifts. (a) Calculate the IHT on his death. (b) Advise whether giving £200,000 cash to his children now, instead of at death, would save tax. Ignore exemptions and growth.

Show the solution

(a) NRB: his own £325,000 plus the whole of his wife's unused NRB £325,000 (she left everything to him, so her NRB was unused) = £650,000.
RNRB: his £175,000 plus the whole of his wife's unused £175,000 = £350,000. The home passing to children is £500,000, so the full £350,000 is available. The estate is below £2,000,000, so there is no taper.
Total bands = £650,000 + £350,000 = £1,000,000.
Taxable estate = £1,200,000 − £1,000,000 = £200,000. Tax at 40% = £80,000.
(b) If he gives £200,000 now, it is a PET. If he survives seven years, it is exempt. His estate is then £1,000,000 and covered by the bands, so the tax is nil. The estate keeps the £500,000 home, so the RNRB is still available.
If he dies within seven years, the PET is chargeable but falls within his £650,000 NRB, so there is no tax on the gift. It uses £200,000 of NRB, leaving £450,000 for the estate. Bands = £450,000 + £350,000 = £800,000. The estate of £1,000,000 gives a taxable £200,000 and tax of £80,000.
So the gift cannot make the position worse on these figures, and saves £80,000 if he survives seven years.

Answer: (a) IHT on death is £80,000. (b) Yes. The gift saves £80,000 if he survives seven years, and leaves the tax at £80,000 if he does not.

Exam tips

Show the taper percentage and the years between gift and death. Markers give marks for the correct band, even if the arithmetic goes wrong later.
Write the NRB remaining beside every gift. This gives you follow-through marks and avoids errors in the death estate.
Planning questions need a recommendation with numbers. Say what saves tax, by how much, and the risk, such as dying within seven years or the donor losing access to the asset.
Use the tax tables for the NRB, RNRB, rates and taper percentages. Learn the exemptions and the RNRB taper rules, as the tables may not list them.
Add a short professional skills line: explain the advice in plain terms to the client and state any assumptions you have made.

Practice questions from Alternative ways of achieving personal or business outcomes and their tax consequences

Inheritance Tax Planning: Lifetime Gifts and Wills in other exams

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

Inheritance Tax Planning: Lifetime Gifts and Wills: frequently asked questions

Does taper relief reduce the value of a gift?

No. It reduces the tax payable on a gift that is chargeable because of death. The gift still uses up the nil rate band in full. It only helps where the gift exceeds the available NRB.

How do I calculate IHT on a potentially exempt transfer in ATX?

Deduct exemptions, then find the NRB available after earlier chargeable transfers in the previous seven years. Tax the excess at 40% and apply taper relief to that tax if death was more than three years after the gift. The donee normally pays.

When can the residence nil rate band be used?

When the deceased owned a home that passes to direct descendants such as children or grandchildren. The RNRB is capped at £175,000 and at the value of the home passing to them. It reduces by £1 for every £2 the estate exceeds £2,000,000.

What is the difference between a PET and a CLT?

A PET is a gift to another individual and is not taxed when made unless the donor dies within seven years. A CLT is usually a gift into a trust and is taxed at 20% above the NRB when made. Extra tax can arise on death within seven years.