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

How to Compute Inheritance Tax on a Death Estate

Updated 11 October 2026 · Fact-checked

Inheritance tax on death is charged on the net estate at death at 40% above the available nil rate band. You value all assets, deduct debts and funeral costs, remove exempt legacies, add chargeable lifetime transfers made in the previous seven years, then apply the nil rate bands and 40% to the excess.

Understand Death Estate Computation and Tax on Death

On death, you are treated as making a transfer of value equal to your whole estate. The estate is everything you own at death, less liabilities. The estate is valued at open market value at the date of death.

Start with gross assets. Then deduct debts you owed and reasonable funeral expenses. Next remove legacies that are exempt. A gift to a UK-domiciled spouse or civil partner is exempt. A gift to a UK charity is exempt. What remains is the chargeable estate.

The tax depends on the nil rate band (NRB) left over. The NRB is £325,000. Any chargeable lifetime transfers (CLTs) made in the seven years before death use up part of it. Potentially exempt transfers (PETs) made in those seven years become chargeable if the donor dies within seven years, so they also use up NRB. This is the seven-year cumulation. The death estate is taxed last, so it only gets what is left of the NRB.

The death rate is 40% on the excess over the available NRB. Lifetime gifts are taxed on a different basis. The estate may also qualify for the residence nil rate band (RNRB) of £175,000. You must check the conditions given in the question, such as a home passing to direct descendants. Unused NRB can be transferred from a deceased spouse. The question will tell you the percentage unused.

In the exam, the layout matters. Show a clear estate computation, then the tax. Keep the lifetime tax and the death tax separate.

Key rules to remember

Chargeable death estate: Gross assets − liabilities − funeral costs − exempt legacies; Spouse and UK charity legacies are exempt. Check the domicile of the spouse in the question.
Nil rate band: NRB = £325,000; This is from the ACCA tax tables. Reduce it by chargeable transfers in the seven years before the date of the transfer being taxed.
Residence nil rate band: RNRB = £175,000; Only available if the conditions are met. Apply the conditions and any restrictions given in the question.
Death rate: Tax = 40% × (chargeable estate − available nil rate bands); Lifetime rate is 20%. Do not mix them up.
Seven-year cumulation: Cumulative transfers = CLTs and failed PETs in the 7 years before the later transfer; Use the gross value of each transfer after exemptions such as annual exemption and marriage exemption.
Taper relief: Reduction in tax on a lifetime transfer: 3–4 yrs 20%, 4–5 yrs 40%, 5–6 yrs 60%, 6–7 yrs 80%; It reduces tax on the gift only, not its value in the cumulative total. No relief if death is within 3 years.

How to solve Death Estate Computation and Tax on Death questions

Use this order for any death estate question. It keeps the lifetime transfers and the estate apart.

1List and value every asset at death at open market value. Include jointly owned assets, using the deceased's share.
2Deduct debts and funeral expenses to get the net estate.
3Deduct exempt legacies, such as those to a UK-domiciled spouse or civil partner and to UK charities.
4Work out the cumulative lifetime transfers in the seven years before death. Include CLTs and PETs, after exemptions, using values in the question.
5Compute the NRB available for the estate: £325,000 less the cumulative transfers, never below nil. Add any transferred NRB.
6Add the RNRB if conditions are met. Apply any restriction the question mentions.
7Deduct available bands from the chargeable estate and tax the excess at 40%.
8State who pays, and whether any extra tax on lifetime gifts arises. Show final tax clearly.

Quickest way: Four-line estate and tax shortcut

When to use it: Use when the question gives a net estate and few lifetime gifts, and you must work fast.

Write: Net estate − exempt legacies = chargeable estate.
Write: £325,000 − gifts in the last seven years (floor at nil) = NRB left.
Add RNRB £175,000 only if the conditions are clearly met.
Tax = 40% × (chargeable estate − NRB left − RNRB). If the result is negative, tax is nil.

Common mistakes in Death Estate Computation and Tax on Death

Using the full £325,000 NRB against the estate when lifetime gifts were made.
Students treat the death estate and lifetime gifts as separate computations.
Fix: Always deduct the CLTs and PETs in the seven years before death first. The estate gets only what remains.
Deducting exempt legacies after applying the nil rate band.
The order of the layout is forgotten.
Fix: Remove exempt legacies first to reach the chargeable estate, then apply bands.
Applying 20% to the death estate.
The lifetime rate is confused with the death rate.
Fix: Tax on the estate at death is 40% on the excess over the nil rate band.
Treating all gifts to a spouse as exempt.
The exemption is learned without its conditions.
Fix: Check the domicile of the recipient spouse in the question. Restrictions may apply if the spouse is not UK-domiciled.
Ignoring PETs made in the seven years before death.
PETs are exempt at the time of the gift, so they look irrelevant.
Fix: If death occurs within seven years, the PET becomes chargeable and uses the NRB. Count it in cumulation.
Reducing the cumulative total by taper relief.
Taper relief is mixed up with the value of the transfer.
Fix: Taper relief only cuts the tax payable on the gift. The gift still uses NRB in full.

Worked examples

Example 1

Arun died in the current tax year. His assets were a house worth £450,000, investments of £200,000 and cash of £50,000. He owed debts of £20,000 and funeral costs were £10,000. He left £100,000 to a UK charity and the rest to his adult son. He made no lifetime gifts. Assume the RNRB is not available. Compute the IHT due on death.

Show the solution

Gross estate: £450,000 + £200,000 + £50,000 = £700,000.
Less debts and funeral costs: £700,000 − £20,000 − £10,000 = £670,000.
Less exempt charity legacy: £670,000 − £100,000 = £570,000 chargeable estate.
NRB available is £325,000 as there are no lifetime gifts.
Excess over NRB: £570,000 − £325,000 = £245,000.
Tax at 40%: £245,000 × 40% = £98,000.

Answer: IHT payable on death is £98,000.

Example 2

Beth died on 1 March 2026. In June 2022 she made a chargeable lifetime transfer, after exemptions, of £200,000. Her net estate at death was £600,000, including a £50,000 legacy to her UK-domiciled husband. The rest passed to friends. Assume no RNRB and no transferred NRB. Compute the IHT on her death estate.

Show the solution

The CLT was made within seven years before death, so it counts in cumulation. Cumulative total is £200,000.
NRB left for the estate: £325,000 − £200,000 = £125,000.
Chargeable estate: £600,000 − £50,000 spouse exempt legacy = £550,000.
Excess over remaining NRB: £550,000 − £125,000 = £425,000.
Tax at 40%: £425,000 × 40% = £170,000.

Answer: IHT on the death estate is £170,000. Any additional tax on the CLT would be computed separately.

Exam tips

Set out the estate in columns with headings: assets, liabilities, exempt legacies, chargeable estate. Markers award marks for layout.
Always take the nil rate band, rates and taper table from the tax tables. Do not rely on memory for the figures.
State your assumption if the question is unclear, such as RNRB availability or the spouse's domicile. Assumptions earn professional skills marks.
Show the seven-year look-back with dates. Write the date of each gift and the date of death.
Where a PET becomes chargeable, use it in cumulation even if taper relief reduces its own tax.

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

Death Estate Computation and Tax on Death in other exams

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

ACCA Applied SkillsIHT Calculation on Death and the Death Estate

Death Estate Computation and Tax on Death: frequently asked questions

How do I compute inheritance tax on a death estate?

Value all assets at death, deduct debts and funeral costs, then remove exempt legacies. Deduct the NRB left after lifetime transfers in the previous seven years, plus any RNRB. Tax the excess at 40%.

What is the seven-year cumulation period for IHT?

It is the seven years before a transfer. Chargeable transfers made in that period use up the nil rate band before the later transfer is taxed. On death, CLTs and failed PETs from the last seven years are counted.

Which legacies are exempt from IHT on death?

Gifts to a UK-domiciled spouse or civil partner are exempt, and so are gifts to UK charities. Check the domicile of the spouse in the question because it can restrict the exemption.

Does taper relief reduce the value used in cumulation?

No. Taper relief reduces only the tax on a lifetime gift when death occurs more than three years after it. The full value still uses the nil rate band for later transfers.