ACCA Strategic Professional · Advanced Taxation (UK)
Inheritance Tax: Basic Principles of Computing Transfers of Value
Inheritance tax charges a transfer of value, which is the fall in the giver's estate caused by a gift. Lifetime gifts are either PETs or CLTs. You apply exemptions, then the nil rate band, then the 20% lifetime or 40% death rate, with taper relief and cumulation over seven years.
What this chapter covers
This chapter teaches you how inheritance tax (IHT) is calculated. You start with who is chargeable and what a transfer of value is. You then deal with lifetime gifts, which are either potentially exempt transfers (PETs) or chargeable lifetime transfers (CLTs). After that you cover the death estate, the nil rate bands, taper relief, and payment rules.
The core idea is simple. A transfer of value is the loss to the giver's estate, not the value the receiver gets. You then strip out exemptions, use the nil rate band of £325,000, and charge the excess at 20% in lifetime or 40% on death. The residence nil rate band of £175,000 can add relief on death where the conditions are met. Always check the conditions from the scenario.
IHT links to much of the rest of ATX-UK. It overlaps with capital gains tax on gifts, with trusts, with business property and agricultural reliefs, and with tax planning advice for families and owner-managed businesses. Section A and Section B questions often ask you to compute IHT and then advise on the best way to give or to leave assets. Weak basics here will cost you marks in those wider questions too.
IHT appears regularly in written ATX-UK questions, often mixed with CGT, income tax or trust issues, so the basics are worth real effort. The computations are mechanical, which makes them a good source of technical marks if you set them out in a clear order. The professional skills marks then reward you for applying the numbers to the client's position, for example by advising on gifts, on survivors' reliefs or on who pays the tax. A student who handles the core computation quickly has more time for the advice that earns the harder marks.
Inheritance tax: the basic principles of computing transfers of value: topics in the order to study them
- 1Chargeable Persons, Transfers of Value and DomicileStart here because you must know who is taxed, what a transfer of value is and how domicile affects the assets in charge before any calculation.
- 2Lifetime Transfers: PETs, CLTs and ExemptionsYou need to classify each gift and remove exemptions before you can apply any bands or rates.
- 3Nil Rate Band, Residence Nil Rate Band and IHT RatesOnce gifts are classified, you learn the bands and the 20% and 40% rates that drive every calculation.
- 4Death Estate Computation and Tax on DeathThis applies the bands and rates to the estate at death, using the lifetime gifts you already understand.
- 5Taper Relief, Additional Tax on Death and ValuationThis builds on the death computation by adjusting tax on earlier gifts and by showing how assets are valued.
- 6Payment, Due Dates, Interest and LiabilityStudy this last because it needs the computed tax figures to decide who pays, when, and what interest applies.
How to prepare Inheritance tax: the basic principles of computing transfers of value
Treat this chapter as a fixed routine you can repeat under time pressure, then practise it on mixed scenarios.
- Learn the definitions first: transfer of value, PET, CLT, domicile, and what an estate includes.
- Memorise the figures from the tax tables: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20%, death rate 40% and the taper relief percentages. Practise finding them quickly in the exam tables.
- Do small lifetime gift computations with a timeline. Show the gift, the exemptions, the value transferred and the seven-year cumulation period for each gift.
- Do full death computations in order: estate, chargeable lifetime transfers in the seven years before death (CLTs and PETs that have become chargeable), then tax on gifts first and the estate last. For each gift, also look back seven years from the date of that gift for earlier CLTs.
- Add taper relief, the residence nil rate band and the liability and payment rules once the basic order is automatic.
- Finish with past-style written questions. Write your workings, state your assumptions and finish with a short piece of advice to the client.
Common mistakes in Inheritance tax: the basic principles of computing transfers of value
Taxing the value received instead of the loss to the giver's estate.
Fix: Always compare the estate before and after the gift. Add any tax paid by the giver where they pay it, which grosses up the transfer.
Applying the nil rate band before deducting exemptions.
Fix: Set out each gift in the same sequence: value, exemptions, taxable amount, then band and rate.
Using the wrong seven-year window for cumulation.
Fix: Draw a timeline. For each gift, look back seven years from that gift to find earlier chargeable transfers.
Applying taper relief to the value of the gift.
Fix: Work out the tax first, then reduce the tax by the taper percentage. Check that tax is actually payable: a gift covered by the available nil rate band uses up the band but has no tax to taper.
Assuming the residence nil rate band always applies.
Fix: Check the scenario for a qualifying home passing to direct descendants. Say clearly whether the conditions are met, and state any assumptions.
Ignoring who pays the tax and the due date.
Fix: Add a short note on who is liable, the due date and interest. This often earns easy marks and supports your advice.
Last-day revision: Inheritance tax: the basic principles of computing transfers of value
- A transfer of value is the fall in the giver's estate, not the value the receiver gets.
- A PET is an outright gift to an individual, and it becomes chargeable only if the giver dies within seven years.
- A CLT is a lifetime transfer that is chargeable at once, for example a gift into a trust, and the lifetime rate is 20%.
- Deduct exemptions before applying the nil rate band.
- The nil rate band is £325,000 and the residence nil rate band is £175,000, but only where the conditions for it are met.
- Lifetime rate is 20% and death rate is 40% on the excess over the nil rate band.
- Taper relief reduces the tax payable on a gift, not its value. It only helps where tax is actually payable, that is, where the gift exceeds the available nil rate band after earlier transfers. A gift covered by the band still uses it up, even though there is no tax to taper.
- Taper percentages: 20% for more than 3 but less than 4 years, 40% for more than 4 but less than 5 years, 60% for more than 5 but less than 6 years and 80% for more than 6 but less than 7 years.
- On death, chargeable transfers in the seven years before death (CLTs and PETs that have become chargeable) use up the nil rate band in date order.
- For each gift, look back seven years from the date of that gift to find earlier CLTs that have already used the nil rate band.
- Always state who is liable to pay the tax and when, and show your assumptions clearly.
Inheritance tax: the basic principles of computing transfers of value practice questions
- Meera makes a gift of £200,000 cash to her adult nephew. She has made no previous transfers and no exemptions apply other than those automat…
- Arthur died in January 2027 with a death estate of £700,000 after deducting all debts and funeral costs. He made no lifetime transfers, left…
- Marta owns a controlling holding of 6,000 of the 10,000 shares in Zeta Ltd, valued at £12 per share. She gives 2,000 shares to her son, leav…
- Mr Evans died in March 2027. In March 2021 he made a chargeable lifetime transfer of £425,000 (after reliefs), on which lifetime tax was pai…
- Mei made a chargeable lifetime transfer of £525,000 to a discretionary trust in May 2018, when she had made no earlier transfers, and the tr…
- Mr Patel died in July 2026 leaving a chargeable estate of £625,000 to his adult son. He had made no lifetime transfers and the residence nil…
- Nadia gives her daughter a gift of £400,000 cash in lifetime, with no exemptions available. Which statement is correct?
- Marcus died in the current tax year. His death estate, after deducting all reliefs and exemptions, was valued at £725,000. He made no lifeti…
Inheritance tax: the basic principles of computing transfers of value 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: the basic principles of computing transfers of value: frequently asked questions
What is the difference between a PET and a CLT?
A PET is a gift to another individual, which is exempt unless the giver dies within seven years. A CLT is a lifetime transfer that is chargeable straight away, such as a gift into a trust, and it is taxed at the 20% lifetime rate above the nil rate band.
What rates and bands do I use for IHT in ATX-UK?
The tax tables give a nil rate band of £325,000 and a residence nil rate band of £175,000. The rate above the band is 20% for lifetime transfers and 40% on death. You must still check that the conditions for the residence nil rate band are met.
How does taper relief work?
Taper relief reduces the tax on a gift that is chargeable on death when the giver dies more than three years after making it. The reduction is 20% for more than 3 but less than 4 years, 40% for more than 4 but less than 5 years, 60% for more than 5 but less than 6 years and 80% for more than 6 but less than 7 years. It reduces the tax, not the value of the gift, so it only helps where tax is payable.
Do I need to show workings in an IHT answer?
Yes. Clear workings let the marker award marks for correct method even if a figure is wrong. Show each gift, the exemptions, the band used and the tax, and state your assumptions.