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Advanced Taxation (UK) · Inheritance tax: the basic principles of computing transfers of value

Transfers of Value, Loss to Donor and IHT Scope

Updated 11 October 2026 · Fact-checked

A transfer of value is a gift or other disposition that reduces the donor's estate. IHT measures it as the loss to the donor: estate value before minus after. Only the transfer of an individual is taxed. UK assets are always in scope. Worldwide assets are in scope if the person is a long-term UK resident.

Understand Chargeable Persons, Transfers of Value and Domicile

Inheritance tax (IHT) is a tax on transfers of wealth, during life and on death. Everything starts with a transfer of value. This is a disposition (including an omission, such as letting a right lapse) made by a person that reduces the value of their estate. A gift is the obvious case. So is selling an asset for less than it is worth, if you meant to benefit the buyer.

The key principle is loss to donor. You do not measure what the recipient gets. You measure how much the donor's estate falls. Value the estate immediately before the transfer, value it immediately after, and take the difference. This matters most for shares and related property. Giving away a small block of shares can cut the value of a controlling holding far more than the block is worth on its own.

The person making the transfer is the chargeable person. IHT is charged on individuals. Companies do not make chargeable transfers. If a close company makes a transfer of value, it is apportioned to its participators and treated as made by them. A transfer only becomes a chargeable transfer if it is not exempt. Lifetime exemptions and the potentially exempt transfer rules come after the transfer of value is measured. This topic is only the first step.

Scope depends on the asset and the person. Assets situated in the UK are always within IHT. Assets outside the UK are within IHT only if the transferor is a long-term UK resident. From 6 April 2025, this residence-based test replaced domicile as the test for worldwide scope. You are a long-term UK resident if you were UK resident for at least 10 of the 20 tax years immediately before the tax year of the transfer or death.

A person who leaves the UK stays in scope for a tail period. For 10 to 13 years of residence the tail is 3 years. It then grows by one year for each extra year of residence, up to a maximum of 10 years for those resident for 20 or more years. Domicile still matters in some other topics and in treaty questions. For the basic scope test in ATX-UK, count the years of residence first. Residence status itself comes from the statutory residence test.

Key rules to remember

Transfer of value (loss to donor)
Transfer of value = Value of estate before transfer − Value of estate after transfer
Measured at the donor's loss, not the donee's gain. Compute this before any exemptions.
Gross transfer where the donor pays the tax
Gross transfer = Net transfer ÷ (1 − 20%) for the part falling above the available nil rate band
Used for a lifetime chargeable transfer when the donor bears the IHT. The 20% lifetime rate is in the ACCA tax tables.
Long-term UK resident test
UK resident in at least 10 of the 20 tax years immediately before the tax year of the transfer
If met, worldwide assets are within IHT. If not, only UK assets are in scope.
Tail after leaving the UK
10 to 13 years of residence: 3-year tail. Each extra year adds 1 year. 20 or more years: 10-year tail
The person stays long-term UK resident until the tail ends.
Rates and nil rate band (from the tax tables)
Nil rate band £325,000. Lifetime rate 20%. Death rate 40%
The tables are provided in the exam. Learn where they are, not the figures from memory.

How to solve Chargeable Persons, Transfers of Value and Domicile questions

Use this order for any question on who is taxed, on what, and by how much. Do not jump to exemptions or tax before scope and value are settled.

  1. 1Identify the transferor. Is it an individual? If a close company made the transfer, apportion it to the participators.
  2. 2Decide whether there is a disposition that reduces the transferor's estate. Check for gifts, sales at undervalue, and omissions.
  3. 3Count the transferor's UK resident tax years in the 20 years immediately before the tax year of the transfer. Ten or more means long-term UK resident. Check the tail if they have left the UK.
  4. 4Decide which assets are in scope. UK assets are always in scope. Overseas assets are in scope only for a long-term UK resident.
  5. 5Value the estate before and after the transfer, using related property rules where they apply, and take the difference as the transfer of value.
  6. 6Apply exemptions next, then the nil rate band and the rate from the tax tables. Say whether the tax is lifetime or death rate.
  7. 7State your conclusion in a sentence, showing the scope reason and the loss to donor figure.

Quickest way: Scope-then-loss shortcut

When to use it: Use this when the scenario gives residence history and a gift of shares or property, and you have little time.

  1. Write the count of resident years out of the last 20 in one line. Mark the result: worldwide or UK only.
  2. Cross out any overseas assets if the person is UK only.
  3. Write value before and value after in two lines. Subtract.
  4. Compare your result with the donee's share value. If they differ, write one sentence naming the loss to donor principle.
  5. Move to exemptions and tax only after these four lines are done.

Common mistakes in Chargeable Persons, Transfers of Value and Domicile

  • Valuing the transfer at the value of what the donee receives.

    Students treat IHT like a tax on the recipient, as in CGT disposal proceeds.

    Fix: Always compute estate before minus estate after. Show both figures.

  • Using domicile as the basic scope test for worldwide assets.

    Older notes and past papers used domicile and deemed domicile.

    Fix: For the current rules, test long-term UK residence: 10 of the previous 20 tax years. Mention domicile only where the question raises it.

  • Counting the tax year of the transfer in the 20-year window.

    Students count years up to and including the event.

    Fix: Count the 20 tax years immediately before the tax year of the transfer or death.

  • Ignoring the tail after the person leaves the UK.

    Students treat non-residence as ending IHT scope at once.

    Fix: Check the years of past residence and apply the 3 to 10 year tail before saying overseas assets are out of scope.

  • Taxing a company as the transferor.

    Students forget that IHT applies to individuals.

    Fix: State that a close company's transfer is apportioned to participators and treated as theirs.

  • Applying the nil rate band before checking whether the transfer is exempt.

    Students rush to the tax calculation.

    Fix: Order: scope, value, exemptions, then nil rate band and rate.

Worked examples

Example 1

Priya owns 60% of the shares in an unquoted UK company. The 60% holding is worth £500,000. She gives 15% of the company to her nephew. After the gift, her remaining 45% holding is worth £280,000. A 15% holding on its own is worth £90,000. Calculate the transfer of value before exemptions.

Show the solution
  1. The gift reduces Priya's estate, so it is a transfer of value.
  2. Apply loss to donor. Value before the gift: £500,000.
  3. Value after the gift: £280,000.
  4. Transfer of value = £500,000 − £280,000 = £220,000.
  5. The £90,000 value of the 15% block on its own is not used. It is the donee's value, not the donor's loss.

Answer: The transfer of value is £220,000 before exemptions.

Example 2

Mei has been UK resident for each of the 2016/17 to 2025/26 tax years, and is still UK resident. Tomas has been UK resident for only 5 of the last 20 tax years. Each owns a UK house and a villa in Spain. Each makes a gift in 2026/27. Which assets are within the scope of IHT for each?

Show the solution
  1. Count Mei's resident years in the 20 tax years before 2026/27, which are 2006/07 to 2025/26.
  2. Mei was resident in 2016/17 to 2025/26. That is 10 years.
  3. Ten of the previous twenty years meets the test, so Mei is a long-term UK resident. Her worldwide assets are in scope, so both the UK house and the Spanish villa are in scope.
  4. Tomas was resident in only 5 of the 20 years. He is not a long-term UK resident.
  5. Tomas's UK house is in scope because UK assets are always in scope. His Spanish villa is outside scope.

Answer: For Mei, both the UK house and Spanish villa are in scope. For Tomas, only the UK house is in scope.

Exam tips

  • Show the 20-year count as a short list of tax years. Markers give credit for the method as well as the conclusion.
  • Always state the loss to donor calculation with a before and after value, even when the numbers are simple.
  • Take the nil rate band, lifetime rate and death rate from the tax tables in the exam. Do not rely on memory.
  • In Section A, add a sentence of advice or caution for the client on worldwide scope, for example the effect of leaving the UK and the tail period. This helps with professional skills marks.
  • Where a scenario mentions domicile, say that the current worldwide scope test is long-term UK residence, then answer the question asked.

Practice questions from Inheritance tax: the basic principles of computing transfers of value

Chargeable Persons, Transfers of Value and Domicile: frequently asked questions

What is the loss to donor principle in inheritance tax?

It means a transfer of value is measured by how much the donor's estate falls, not by what the recipient gets. You value the estate before the transfer and after it, then subtract. This often gives a larger figure than the value of the gifted asset, especially with shares.

Who is a long-term UK resident for IHT?

A person who was UK resident for at least 10 of the 20 tax years immediately before the tax year of the transfer or death. Such a person has worldwide assets within IHT. Others have only UK assets in scope.

Is domicile still relevant to IHT scope in ATX-UK?

For the basic worldwide scope test, long-term UK residence has replaced domicile from 6 April 2025. Domicile can still arise in related areas such as treaty rules. Read the question and apply the residence test unless told otherwise.

Does leaving the UK take overseas assets out of IHT immediately?

No. A long-term UK resident who leaves stays in scope for a tail period. The tail is 3 years after 10 to 13 years of residence, and rises by one year for each extra year of residence, up to 10 years.

Can a company make a chargeable transfer?

IHT is charged on individuals. If a close company makes a transfer of value, it is apportioned among its participators and treated as made by them.