Skip to content

ACCA Strategic Professional · Advanced Taxation (UK)

Inheritance Tax: Using Exemptions and Reliefs to Defer and Minimise Liabilities

Inheritance tax planning in ATX-UK means using exemptions, nil rate bands and reliefs to cut or delay the tax on lifetime gifts and on death. You identify each transfer, apply the right relief, compute the tax at 20% or 40%, then advise on payment dates and planning in a clear, scenario-based answer.

What this chapter covers

This chapter covers how inheritance tax (IHT) can be reduced or deferred. You start with lifetime gifts: potentially exempt transfers (PETs) and chargeable lifetime transfers (CLTs), and the annual exemptions that shrink the value transferred. Then you apply the nil rate band, the residence nil rate band and the tax rates. After that come business and agricultural property reliefs, the death estate, payment rules and planning.

The tax tables ACCA provides give the key numbers: nil rate band £325,000, residence nil rate band £175,000, lifetime rate 20% and death rate 40%. Taper relief applies to tax on gifts made more than three years before death, with reductions of 20%, 40%, 60% and 80% as the gap grows. You must know how to use these tables, and also when each rule applies.

The chapter links to the rest of ATX-UK. Gifts of assets also trigger capital gains tax, so you must consider both taxes together, including gift relief and business asset disposal relief. Trusts, owner-managed businesses, and family or succession planning scenarios often include an IHT element. Section A case studies often ask you to advise a client or family on which gifts to make and in what order. Section B questions can test IHT on its own or alongside CGT.

IHT is a core personal tax area, and it appears in scenarios that mix lifetime gifts, death, businesses and trusts. The marks come from correct computations and from advice. You gain technical marks for applying exemptions, reliefs and rates accurately. You gain professional skills marks for analysing options, using commercial judgement, and explaining the advice clearly to a client. A student who masters the order of calculation, the use of the tables and the interaction with CGT can pick up marks steadily in a topic that is highly numerical but rewards structure.

Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities: topics in the order to study them

  1. 1Lifetime Transfers: PETs, CLTs and Annual ExemptionsEverything else builds on knowing what is a transfer of value, which gifts are PETs or CLTs, and which exemptions reduce them.
  2. 2Nil Rate Bands, Residence NRB and Tax RatesYou need the bands and the 20% and 40% rates before you can compute any tax on a lifetime transfer or on death.
  3. 3Business and Agricultural Property ReliefsThese reliefs cut the value transferred before the bands apply, so learn them once you can do a basic computation.
  4. 4Death Estate Computation and Reliefs on DeathThis brings gifts, the estate, reliefs and taper relief together, so it comes after the separate building blocks.
  5. 5Deferring IHT: Payment Dates, Instalments and InterestOnce you can calculate the tax, you learn when it is due, who pays, and what can be deferred.
  6. 6IHT Planning, Variations and Interaction with CGTPlanning advice uses every earlier topic, so study it last, when you can compare options and weigh the CGT effect.

How to prepare Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

Treat this chapter as a set of rules to apply in a fixed order. Practise written answers as well as numbers, because the exam is scenario-based.

  1. Learn the tax table figures for IHT: nil rate band, residence nil rate band, the 20% and 40% rates and the taper relief percentages. Know how to find them quickly in the exam.
  2. Build a standard layout for lifetime transfers: value lost, less reliefs and exemptions, then the chargeable amount. Practise it until it is automatic.
  3. Work the chronological order: compute gifts in date order, track the seven-year cumulation, and see which gifts use up the nil rate band first.
  4. Do a full death computation: the estate, reliefs, residence nil rate band, tax on gifts within seven years, and the extra tax on the estate. Check how taper relief affects the tax on gifts, not the gift value.
  5. Learn payment dates, who is primarily liable, and when instalments are available. Remember that the table gives 8.50% on underpaid tax, so interest questions use that rate.
  6. Pair every gift scenario with a CGT check. Write short advice paragraphs comparing options, as the exam asks for recommendations and not just figures.
  7. Finish with timed past questions, then review your answers for missed reliefs and for professional skills such as clear structure and a client-ready tone.

Common mistakes in Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

  • Applying taper relief to the value of the gift instead of to the tax.

    Fix: Compute the tax first using death rates, then reduce that tax by the taper percentage.

  • Using the nil rate band against gifts in the wrong order.

    Fix: List all transfers by date and set the band against them in that order, looking back seven years before each one.

  • Forgetting to deduct exemptions and reliefs before applying bands and rates.

    Fix: Use a fixed layout: value lost, reliefs, exemptions, then the chargeable amount, and tick each step.

  • Ignoring the CGT consequences of a gift.

    Fix: For every gift of an asset, ask whether CGT arises and whether a relief is available, and comment on both taxes.

  • Giving figures without advice in planning questions.

    Fix: After the figures, state the option you recommend, explain why, and note any risks or conditions.

  • Applying the residence nil rate band without checking the conditions.

    Fix: Check that the conditions are met in the scenario, and state the assumption you make if the facts are unclear.

Last-day revision: Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

  • A PET is a lifetime gift to an individual that becomes chargeable only if the donor dies within seven years.
  • A CLT is generally a lifetime transfer into a trust, taxed at the 20% lifetime rate above the nil rate band.
  • Nil rate band: £325,000. Residence nil rate band: £175,000. Death rate: 40%.
  • Taper relief reduces the tax, not the gift value, and only where the gift is more than three years before death.
  • Taper relief percentages from the tables: 20%, 40%, 60% and 80% for gaps of more than 3, 4, 5 and 6 years.
  • Gifts are set against the nil rate band in date order, and the seven-year cumulation looks back before each transfer.
  • Reliefs such as business property relief and agricultural property relief reduce the value transferred before the bands are used.
  • Annual exemptions reduce the value transferred, so apply them before computing the chargeable amount.
  • The tax on lifetime gifts that become chargeable on death is computed at death rates, with taper relief where available.
  • The table gives 8.50% on underpaid tax and 3.50% on overpaid tax, so use them for interest questions.
  • Always check the CGT effect of a gift, including whether a relief such as gift relief is available.
  • In planning answers, compare options, show figures, and give a clear recommendation.

Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities practice questions

Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities 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 use of exemptions and reliefs in deferring and minimising inheritance tax liabilities: frequently asked questions

What IHT figures does ACCA give in the tax tables?

The tables give the nil rate band of £325,000, the residence nil rate band of £175,000, the lifetime rate of 20% and the death rate of 40%. They also give the taper relief percentages. You still need to know how and when to use each one.

Is taper relief applied to the value of the gift?

No. Taper relief reduces the tax payable on a gift that has become chargeable on death. It applies only where the gift was made more than three years before death. The gift is still counted at its full value when using up the nil rate band.

Do I need to know CGT for this chapter?

Yes. Many gifts are also disposals for CGT. Exam scenarios often ask you to consider both taxes and to recommend the best way to make a gift. The tables give CGT rates of 18% and 24%, and an annual exempt amount of £3,000.

Which interest rate applies to late IHT?

The tax tables give an assumed rate of 8.50% on underpaid tax and 3.50% on overpaid tax. Use these rates in the exam when a question asks you to compute interest.