Skip to content

Advanced Taxation (UK) · Legitimate tax planning measures

Inheritance Tax Planning: Lifetime Gifts and Nil Rate Bands

Updated 11 October 2026 · Fact-checked

IHT planning reduces the tax on your estate by using exemptions, the nil rate band of £325,000 and the residence nil rate band of £175,000, and by making potentially exempt transfers. A gift becomes fully exempt if the donor survives seven years. Taper relief only reduces tax on gifts above the nil rate band.

Understand Inheritance Tax Planning: Lifetime Gifts and Nil Rate Bands

Inheritance tax (IHT) is charged on transfers of value, either on death or on certain gifts made during life. Each person has a nil rate band (NRB) of £325,000. Tax is charged only on the excess. The death rate is 40%. The lifetime rate is 20%.

Lifetime gifts split into three types. Exempt transfers, such as gifts to a spouse or civil partner, or to charity, never attract IHT. Potentially exempt transfers (PETs) are gifts to individuals. They are ignored if the donor lives seven years after the gift. Chargeable lifetime transfers (CLTs), such as gifts into most trusts, are taxed at 20% above the NRB when made.

If the donor dies within seven years of a PET, it becomes chargeable. It is added to the donor's cumulative total, and it uses up the NRB before the death estate does. The gifts made in the seven years before a transfer decide how much NRB is left. That is why timing and order matter.

Taper relief is the most misunderstood point. It reduces the tax payable on a gift, not the value of the gift. It applies only where the gift is taxed at death and only to gifts made more than three years before death. If the gift is covered by the NRB, there is no tax to reduce, so taper relief gives nothing. The gift still uses up the NRB, so the estate may pay more.

Planning uses these rules. Make gifts early and use the annual exemptions each year. Use the residence nil rate band (RNRB) of £175,000 where the home passes to direct descendants. Leave unused bands to a surviving spouse or civil partner, as unused NRB and RNRB can generally be transferred. In the exam you must also weigh up non-tax factors, such as whether the client can afford to give assets away.

Key rules to remember

Nil rate band and rates
NRB = £325,000; tax = (chargeable amount − available NRB) × rate; lifetime rate 20%, death rate 40%
Both figures are in the tax tables given in the exam. Available NRB is £325,000 less chargeable transfers in the previous seven years.
Residence nil rate band
RNRB = £175,000
Given in the tax tables. It applies on death where a home passes to direct descendants. It is reduced for large estates (taper at £1 for every £2 over £2,000,000). Unused RNRB can be transferred to a spouse or civil partner.
Taper relief on death tax
Tax after taper = death tax on the gift × (100% − reduction)
Reduction: more than 3 but less than 4 years 20%; more than 4 but less than 5 years 40%; more than 5 but less than 6 years 60%; more than 6 but less than 7 years 80%. Gifts made 3 years or less before death get no relief.
Seven-year cumulation
Available NRB = £325,000 − chargeable transfers in the 7 years before the gift
Look back seven years from each gift. A PET that becomes chargeable counts in this total.
Main lifetime exemptions
Spouse/civil partner: exempt (if UK domiciled); annual exemption £3,000 (plus unused amount from the previous year); small gifts £250 per person; normal expenditure out of income
Gifts in consideration of marriage: £5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else. Charity gifts are exempt. Apply the annual exemption to the earliest gift in the tax year.
Death estate with transferred bands
Total bands = NRB + RNRB + unused bands from a late spouse, less NRB used by gifts in the previous 7 years
Gifts made in the seven years before death use the NRB first. The estate gets only what is left.

How to solve Inheritance Tax Planning: Lifetime Gifts and Nil Rate Bands questions

Use this order for any question on gifts, bands and tax at death. It works for lifetime planning questions too.

  1. 1List every gift in date order. Mark each as exempt, PET or CLT. Note the donee and the value transferred after any loss to the donor's estate.
  2. 2Deduct exemptions. Apply the annual exemption (current year, then the previous year's unused amount) to the earliest gift in each tax year. Apply other exemptions where the facts fit.
  3. 3Work out the seven-year look-back for each gift. Find the NRB available at each gift by deducting chargeable transfers in the previous seven years.
  4. 4Treat PETs as exempt if the donor survives seven years. If death occurs within seven years, treat them as chargeable. Calculate tax at 40% on the part above the available NRB.
  5. 5Apply taper relief to the tax on each gift using the years between gift and death. Do not apply it to the gift value. Do not apply it if the gift is within the NRB.
  6. 6Calculate tax on the death estate. Use the NRB left after earlier gifts. Add RNRB if the home goes to direct descendants. Add transferred bands from a late spouse or civil partner.
  7. 7Credit any lifetime tax already paid on CLTs. Total the tax and say who pays it.
  8. 8Give your recommendation. State what to do differently, such as giving earlier, using exemptions or using the spouse exemption. Note any non-tax risks.

Quickest way: Date, band, tax, taper

When to use it: Use this when the question gives a list of gifts, a death date and asks for the IHT payable. It saves time if you set it out as a short table.

  1. Write each gift with its date and the years to death. Cross out any gift more than seven years before death.
  2. Cross out amounts covered by exemptions. Remember the £3,000 annual exemption and the carry-forward.
  3. Fill the NRB for the earliest remaining gift. Work forward. Show how much NRB is used and how much is left.
  4. Tax only the excess over the NRB at 40%. Apply the taper percentage to that tax.
  5. Give the estate whatever NRB remains. Add RNRB if it applies. Tax the rest at 40%.

Common mistakes in Inheritance Tax Planning: Lifetime Gifts and Nil Rate Bands

  • Applying taper relief to the value of the gift or to gifts within the NRB.

    Students read 'taper relief' as a reduction in the gift, and forget it only reduces tax.

    Fix: First calculate tax at 40% on the part above the NRB. Then apply the percentage reduction to that tax. If the tax is nil, there is nothing to reduce.

  • Giving the death estate a full £325,000 NRB when PETs were made in the previous seven years.

    Students look only at the estate and forget the gifts use the NRB first.

    Fix: Work out the cumulative total of gifts in the seven years before death. Subtract it from the NRB before taxing the estate.

  • Taxing a PET at the time it is made.

    Students mix up PETs with CLTs, which are taxed at 20% above the NRB when made.

    Fix: A PET has no tax when made. Treat it as chargeable only if the donor dies within seven years.

  • Using the wrong year count for taper relief.

    Students round years or count from the wrong date.

    Fix: Count the full period from the date of the gift to the date of death. Then use the table. Three years or less gives no relief.

  • Applying the annual exemption to the wrong gift or forgetting the carry-forward.

    Students apply the exemption to the largest gift, or ignore the unused amount from the previous year.

    Fix: Apply the £3,000 current-year exemption to the earliest gift first. Then use any unused amount from the previous year. Check whether the earlier year's exemption was already used.

  • Claiming RNRB where the home does not pass to direct descendants.

    Students assume the £175,000 always applies.

    Fix: Check who inherits the home. If it goes to a nephew, friend or charity, no RNRB is available. Also check for the large estate reduction.

Worked examples

Example 1

Ravi made a gift of £500,000 to his daughter on 1 June 2020. He made no other gifts. He died on 1 December 2025, leaving an estate of £400,000 to his son. Annual exemptions were already used and no RNRB is available. Calculate the IHT payable on the gift and on the estate.

Show the solution
  1. The gift to his daughter is a PET. Ravi died 5 years and 6 months later, within seven years, so the PET is chargeable.
  2. The NRB is £325,000 and there were no earlier transfers. The excess is £500,000 − £325,000 = £175,000.
  3. Tax at the death rate: £175,000 × 40% = £70,000.
  4. Years between gift and death are more than 5 but less than 6, so taper relief is 60%. Tax payable: £70,000 × 40% = £28,000.
  5. The gift used all of the NRB (£325,000). The estate has no NRB left.
  6. Estate tax: £400,000 × 40% = £160,000.
  7. Total IHT: £28,000 + £160,000 = £188,000.

Answer: IHT on the gift is £28,000 and IHT on the estate is £160,000. Total £188,000. Taper relief reduced the tax on the gift, but it did not restore the NRB to the estate.

Example 2

Mary made a gift of £60,000 to her nephew on 10 May 2025. She had made no earlier gifts and had not used her 2024/25 annual exemption. She died on 2 November 2027. Her estate was £700,000, with no RNRB available. Calculate the IHT payable.

Show the solution
  1. The gift is a PET. Mary died within seven years, so it is chargeable.
  2. Apply the annual exemption to the gift. 2025/26 exemption £3,000 first, then the unused 2024/25 exemption of £3,000. Total relief £6,000.
  3. Chargeable PET: £60,000 − £6,000 = £54,000.
  4. Tax on the gift: the NRB is £325,000, so £54,000 is fully covered. Tax is nil. The gift was made within three years of death, so taper relief is not relevant.
  5. NRB left for the estate: £325,000 − £54,000 = £271,000.
  6. Taxable estate: £700,000 − £271,000 = £429,000.
  7. Tax at 40%: £429,000 × 40% = £171,600.

Answer: No IHT on the gift. IHT on the estate is £171,600. The gift used £54,000 of the NRB.

Exam tips

  • Show the date count for every gift and state the taper percentage. Markers award marks for the correct years and percentage, even if arithmetic slips.
  • Use the tax table in the exam for the NRB, RNRB, rates and the taper table. Do not rely on memory. Exemption amounts such as £3,000 are not in the table, so learn them.
  • In planning questions, give advice as well as numbers. Recommend earlier gifts, use of exemptions, the spouse exemption and unused bands. Then mention non-tax risks, such as the donor needing the assets, to earn professional skills marks.
  • Always state your assumptions, for example that annual exemptions are used or that the donor is UK domiciled. Do not skip a gift because you are unsure. State the treatment and move on.
  • Compare the tax cost with and without the plan. Show the saving as a number, then give a clear recommendation.

Practice questions from Legitimate tax planning measures

Inheritance Tax Planning: Lifetime Gifts and Nil Rate Bands 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 Planning: Lifetime Gifts and Nil Rate Bands: frequently asked questions

What is a potentially exempt transfer?

A PET is a lifetime gift to an individual, or to certain trusts for disabled people. No IHT is due when it is made. If the donor survives seven years, it is fully exempt. If the donor dies within seven years, it becomes chargeable.

How does taper relief work for ACCA ATX?

Taper relief reduces the death tax on a gift made more than three years before death. The reduction is 20%, 40%, 60% or 80% depending on the number of full years. It only applies where the gift exceeds the NRB, and it reduces the tax, not the gift value.

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

The NRB is £325,000 and applies to all transfers. The RNRB is an extra £175,000 available on death where a home passes to direct descendants. The RNRB is not used against lifetime gifts. It is reduced for very large estates.

Does taper relief restore the nil rate band?

No. The gift still uses the NRB in the seven-year cumulation, even if taper relief reduces the tax. The estate gets only the NRB that remains after the gift.

How can I reduce inheritance tax with lifetime gifts?

Make gifts early so the donor survives seven years. Use the annual and other exemptions every year. Leave assets to a spouse or civil partner to transfer unused bands. Always check that the donor can afford the gifts.