Advanced Taxation (UK) · Investment and other expenditure that reduces tax liabilities

Inheritance Tax Nil Rate Bands, Rates and Taper Relief

Updated 11 October 2026 · Fact-checked

Inheritance tax is charged at 20% on lifetime chargeable transfers and 40% on death, only on value above the available nil rate band of £325,000. A residence nil rate band of £175,000 can apply to a home left to descendants. Taper relief cuts the tax, not the value, on gifts made 3 to 7 years before death.

Understand Inheritance Tax Planning: Nil Rate Bands, Rates and Taper Relief

Inheritance tax (IHT) applies to transfers of value. Each person has a nil rate band (NRB) of £325,000. Transfers within the NRB are taxed at 0%. Only the excess is taxed.

There are two rates. The lifetime rate is 20% and applies to chargeable lifetime transfers, such as gifts into a trust. The death rate is 40% and applies to the death estate and to lifetime transfers that become chargeable because the donor dies. A potentially exempt transfer (PET), such as a gift to an individual, is free of tax if the donor survives seven years. If the donor dies within seven years, the PET becomes chargeable at death rates.

The residence nil rate band (RNRB) is an extra £175,000 on death. It applies when a home, or a share of one, passes to direct descendants. It is reduced for large estates (the reduction is £1 for every £2 by which the estate exceeds £2,000,000; this threshold is not in the tax tables, so learn it). Unused NRB and RNRB of a deceased spouse or civil partner can be transferred to the survivor.

Taper relief applies only when a gift is chargeable at death and tax is actually due on it. It reduces the tax by a percentage based on the time between gift and death. It does not reduce the value of the gift. So the gift still uses up the NRB in full, and that is what hurts the death estate.

A reduced death rate of 36% applies when at least 10% of the net estate, measured after the nil rate band, is left to charity. The tables do not give this rate, so you must remember it.

Key rules to remember

Nil rate band: NRB = £325,000; Applies to the cumulative chargeable transfers in the seven years before each transfer. Tax is only on the excess.
Residence nil rate band: RNRB = £175,000; Death only. Needs a home passing to direct descendants. Reduced by £1 for every £2 of estate above £2,000,000 (learn this, not in tables). Unused amounts can pass to a surviving spouse.
IHT rates: Lifetime 20%; Death 40%; Charged on the excess over the available NRB. A 36% death rate applies if at least 10% of the net estate goes to charity.
Taper relief: Tax on gift × (1 − reduction %); Years between gift and death: more than 3 but less than 4 = 20%; more than 4 but less than 5 = 40%; more than 5 but less than 6 = 60%; more than 6 but less than 7 = 80%. Under 3 years: no relief.
Additional tax on a CLT at death: Death tax (after taper) − lifetime tax paid, minimum nil; Compute death tax at 40% on the excess over the NRB, apply taper, then deduct lifetime tax paid. Never refund.

How to solve Inheritance Tax Planning: Nil Rate Bands, Rates and Taper Relief questions

Use this order for any lifetime gift and death question. Work in date order and keep the NRB position clear.

1List all transfers in date order with dates, values and type (PET or CLT). Note any exemptions and reliefs that reduce the value.
2For each gift, find the chargeable transfers in the seven years before it. This gives the NRB left for the gift.
3For lifetime CLTs, compute tax at 20% on the excess over the remaining NRB. Check whether the donor or the trustees pay, because the gross-up differs.
4If the donor dies within seven years, recompute each gift at 40% using the NRB position at death. Do the earliest gift first, as it uses the NRB first.
5Count the full years between gift and death and apply taper relief to the tax, only if tax is due on that gift. Deduct any lifetime tax paid, but not below nil.
6Compute the death estate. Deduct only the NRB left after the failed gifts. Add the RNRB if the conditions are met. Check for the 36% charity rate.
7Say who pays each tax and when. Then state the total or answer the planning point asked.

Quickest way: NRB tracker for failed gifts

When to use it: Use when a question has several gifts and a death within seven years, and you need to avoid losing track of the NRB.

Draw a timeline with each gift and the death date.
Write the NRB used by each gift beside it. Taper relief never changes this figure.
Mark the gifts with under 3 years or over 7 years between gift and death. Under 3 years has no taper, and over 7 years is exempt.
Calculate tax on each gift once. Apply the taper percentage straight to that tax figure.
Subtract the NRB used from £325,000 to get the amount available for the estate. Then add the RNRB if the home passes to descendants.

Common mistakes in Inheritance Tax Planning: Nil Rate Bands, Rates and Taper Relief

Applying taper relief to the value of the gift instead of the tax.
The word relief suggests the gift is reduced.
Fix: Work out the tax at 40% first. Then multiply that tax by (1 − reduction %). The gift still uses the NRB in full.
Giving taper relief when the gift falls inside the NRB.
Students apply the table by habit.
Fix: Taper relief only reduces tax that is payable. If the gift is covered by the NRB there is no tax and nothing to reduce.
Giving the estate the full £325,000 NRB after failed gifts.
Students forget that the failed PETs use the NRB first.
Fix: Deduct the NRB used by chargeable gifts from the previous seven years. Only the remainder is available to the estate.
Claiming the RNRB without checking the conditions.
The £175,000 looks like an automatic allowance.
Fix: Check that a home is in the estate and passes to direct descendants. Check the £2,000,000 taper. It is not available for lifetime gifts.
Using the wrong time period for taper relief, for example counting from the date of the will or rounding up.
The table's wording is easy to misread.
Fix: Count the time from the gift date to the death date. For under 3 years there is no relief. Use the band that the elapsed time falls in.
Ignoring the lifetime tax already paid when a CLT becomes taxable at death.
Students compute death tax and stop.
Fix: Deduct the lifetime tax paid from the death tax after taper. If the result is negative, the additional tax is nil.

Worked examples

Example 1

Ann made a PET of £500,000 to her son on 1 June 2018. She had made no earlier gifts. She died on 1 September 2024. Her death estate was £700,000, including her home worth £300,000, which she left to her daughter. Ignore exemptions on the gift. Compute the IHT on the PET and on the estate.

Show the solution

Gap between gift and death: 6 years 3 months. This is more than 6 but less than 7 years, so the taper reduction is 80%.
PET becomes chargeable at 40%. No gifts in the seven years before, so the full NRB of £325,000 is used.
Excess: £500,000 − £325,000 = £175,000. Tax at 40% = £70,000.
Taper relief: £70,000 × (1 − 0.80) = £14,000. This is payable by the son.
The PET used the whole £325,000 NRB, because taper relief does not change this. The estate has no NRB left.
The home goes to a descendant, and the estate is under £2,000,000, so the full RNRB of £175,000 applies.
Estate taxable at 40%: £700,000 − £175,000 = £525,000. Tax = £210,000.

Answer: IHT on the PET is £14,000 and IHT on the estate is £210,000.

Example 2

Ben transferred £405,000 into a discretionary trust on 1 March 2020 and the trustees paid the tax. He had made no other gifts. He died on 1 September 2024. Ignore exemptions and treat £405,000 as the gross transfer. Compute the additional IHT due on his death in respect of the transfer.

Show the solution

Lifetime tax: excess over NRB = £405,000 − £325,000 = £80,000. At 20% = £16,000, paid by the trustees.
Gap between transfer and death: 4 years 6 months. This is more than 4 but less than 5 years, so the reduction is 40%.
Death tax at 40%: £80,000 × 40% = £32,000.
After taper relief: £32,000 × (1 − 0.40) = £19,200.
Deduct lifetime tax paid: £19,200 − £16,000 = £3,200.

Answer: Additional IHT of £3,200 is due on Ben's death in respect of the transfer.

Exam tips

Show a clear timeline and the NRB used at each step. Marks follow the working, and a wrong NRB position can be carried through for consequential marks.
Apply the percentage from the tax table only to tax, and state the years between the gift and the death.
Always check who pays and when: donee, trustees or the estate. Say it in one line.
In planning questions, give the effect of survival: a gift that survives seven years is free of tax. Add a short professional comment, such as advising the client to keep records of gifts.
Look for charity gifts in the will. Check the 10% test for the 36% rate. Also check whether the RNRB is lost through a large estate or the home not passing to descendants.

Practice questions from Investment and other expenditure that reduces tax liabilities

Inheritance Tax Planning: Nil Rate Bands, Rates and Taper Relief 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 SkillsNil Rate Band and Residence Nil Rate Band

Inheritance Tax Planning: Nil Rate Bands, Rates and Taper Relief: frequently asked questions

What is the difference between the nil rate band and the residence nil rate band?

The nil rate band is £325,000 and applies to all transfers, in life and on death. The residence nil rate band is an extra £175,000 that applies only on death, when a home passes to direct descendants. It reduces for estates above £2,000,000.

How does taper relief work for inheritance tax?

Taper relief reduces the tax on a failed gift where death is more than three years but less than seven years after the gift. The reduction is 20%, 40%, 60% or 80%, depending on the years elapsed. It does not reduce the value of the gift or the NRB it uses.

When does the 36% inheritance tax rate apply?

The rate is 36% instead of 40% if at least 10% of the net estate, after deducting the nil rate band, is left to charity. This figure is not in the ACCA tax tables, so learn it.

Do I have to apply taper relief to every gift made within seven years of death?

No. It only applies if the gift is more than three years before death and tax is due on it. If the gift is covered by the NRB, or death is within three years, there is nothing to taper.