Advanced Taxation (UK) · Mitigation of tax by numerical analysis and reasoned argument

Capital Gains Tax and Inheritance Tax Planning Measures for ATX

Updated 11 October 2026 · Fact-checked

CGT and IHT planning means arranging gifts or sales so that less tax is paid. You use the annual exempt amount, business asset disposal relief, investors' relief, nil rate bands and taper relief. To solve a question, compute the tax under each option, compare the totals, and recommend the cheapest with reasons.

Understand Capital Gains Tax and Inheritance Tax Planning Measures

Tax planning in ATX is a comparison exercise. The examiner gives you two or more ways to dispose of an asset, such as selling now or later, giving it away or selling it, or splitting it between spouses. You calculate the tax on each and argue for one.

For capital gains tax (CGT), the main levers are the annual exempt amount (£3,000 per person), the rate bands (18% lower rate, 24% higher rate) and the reduced 14% rate under business asset disposal relief (BADR) and investors' relief. Each person has their own annual exempt amount and basic rate band. Transfers between spouses or civil partners living together are on a no gain, no loss basis. So moving part of an asset to a spouse with unused allowances or lower income can save tax.

BADR and investors' relief both give a 14% rate on qualifying gains, with a £1,000,000 lifetime limit each. BADR is for people who dispose of a business, or shares in their personal trading company, after meeting the ownership and involvement conditions. In broad terms you must have held the business or the shares for at least two years before the disposal. For shares, you must be an officer or employee and hold at least 5% of the ordinary share capital and voting rights. Investors' relief is for outside investors. It covers newly subscribed ordinary shares in an unlisted trading company, held for at least three years, where the investor is not an employee or officer. Check each condition against the facts given.

For inheritance tax (IHT), the nil rate band is £325,000 and the residence nil rate band is £175,000. The residence nil rate band applies on death where a home passes to direct descendants, so it does not help lifetime gifts. The lifetime rate is 20% and the death rate is 40%. A gift to an individual is usually a potentially exempt transfer (PET). It is free of tax if the donor survives seven years. A gift into most trusts is a chargeable lifetime transfer (CLT) taxed at once at 20% above the nil rate band. Gifts made within seven years before death use up the nil rate band first, and tax on them is recalculated at 40%.

Taper relief reduces the death tax on a gift made three to seven years before death. It cuts the tax, not the value of the gift. It only matters where the gift is more than the available nil rate band. Good answers do the numbers, then add reasoned comments on risk, cash flow and the client's wishes.

Key rules to remember

CGT rates: Lower rate 18%; higher rate 24%; BADR and investors' relief 14%; Lower rate applies only to the extent the basic rate band (£37,700) is unused after taxable income. Gains qualifying for the 14% rate use the basic rate band first, so the remaining band for other gains is smaller.
Annual exempt amount: £3,000 per individual, per tax year; Set it against the gains taxed at the highest rate first. It cannot be carried forward.
BADR and investors' relief limits: Lifetime limit £1,000,000 for each relief; rate 14%; Gains above the limit are taxed at 18% or 24%. Earlier qualifying gains count towards the limit.
BADR share conditions: At least 2 years' holding; officer or employee; at least 5% ordinary shares and votes; trading company; State the conditions in plain words and test each one against the scenario.
Investors' relief conditions: New ordinary shares subscribed for in an unlisted trading company; held at least 3 years; not an officer or employee; Used where BADR is not available, for example a small outside investor.
IHT nil rate bands and rates: NRB £325,000; RNRB £175,000; lifetime rate 20%; death rate 40%; The nil rate band is used against transfers in the previous 7 years, oldest first.
Lifetime tax on a CLT: Tax = 20% × (cumulative chargeable transfers − available NRB). If the donor pays, gross up: tax = 20 ÷ 80 × excess net of NRB; The donee-pays case is 20% of the excess. If the donor pays, the tax paid is part of the transfer.
Taper relief: 3–4 years 20%; 4–5 years 40%; 5–6 years 60%; 6–7 years 80% reduction in the death tax; Applies to the tax, not to the gift. No relief if death is within 3 years.
Death tax on a gift: 40% × (gift − remaining NRB) × (1 − taper %) − lifetime tax paid; Lifetime tax paid is credited but never refunded, so the extra tax cannot be below nil.

How to solve Capital Gains Tax and Inheritance Tax Planning Measures questions

Use this method for any CGT or IHT planning requirement that asks you to compare options.

1Read the requirement. Note whether it asks for a calculation, a recommendation or both, and which taxes are involved.
2List the facts for each person: income, rate band used, AEA, earlier gifts in the last 7 years, and the asset or share details.
3Test the reliefs. For BADR or investors' relief, check each condition (holding period, 5%, office or employment, trading company). For IHT, check whether each gift is a PET, a CLT or exempt.
4Compute the tax under each option with clear workings. For CGT, apply the AEA to the highest-rate gains first and use the basic rate band correctly. For IHT, show the nil rate band used, the tax at 20% or 40%, and taper relief.
5Compare the results in a short table of figures or a list, with the saving shown as a number.
6Recommend the best option and give reasons beyond tax: cash flow, timing, risk of death within 7 years, loss of control and the client's wishes.
7Add a short caveat about assumptions and the need for the conditions to be met.

Quickest way: Option comparison in four lines

When to use it: Use when time is short and you need a clear number for each option.

Write the gain or transfer for each option on one line, per person.
Strip off the AEA (£3,000 each) or the nil rate band first, then apply the rate to what is left.
Apply 14% only to the qualifying part of the gain, 24% or 18% to the rest, and 20% or 40% for IHT.
Subtract one total from the other, state the saving, and write two sentences of non-tax reasoning.

Common mistakes in Capital Gains Tax and Inheritance Tax Planning Measures

Applying BADR without checking the conditions.
Students see a business sale and assume the 14% rate applies.
Fix: Write each condition and tick it against the facts: holding period, trading company, 5% of shares and votes, officer or employee.
Applying the AEA to the lowest-rate gain.
Students deduct it from the first gain listed.
Fix: Use the AEA against the gain taxed at the highest rate first, because that saves the most tax.
Forgetting that BADR gains use up the basic rate band.
Students treat each gain separately.
Fix: Take 14% gains first, reduce the basic rate band, then check what is left for the 18% rate before applying 24%.
Applying taper relief to the value of the gift.
The name suggests the gift is reduced.
Fix: Work out the death tax first at 40%, then reduce that tax by the taper percentage. Only gifts above the nil rate band have tax to reduce.
Not grossing up when the donor pays the lifetime tax on a CLT.
Students apply 20% directly to the excess.
Fix: If the donor pays, the tax is 20 ÷ 80 of the excess over the nil rate band. State clearly who pays the tax.
Refunding lifetime tax when the death tax is lower.
Students subtract and show a negative figure.
Fix: Death tax after taper, less lifetime tax paid, cannot be below nil. Show nil extra tax.

Worked examples

Example 1

Ravi, a higher rate taxpayer, plans to sell an investment property for a gain of £50,000 in 2025/26. His wife Meera has no income and no other gains. Compare the CGT if Ravi sells alone with the CGT if he first gives half the property to Meera and each sells half. Assume both have a £3,000 AEA and use the CGT rates in the tax tables.

Show the solution

Option A, Ravi sells alone. Gain £50,000 less AEA £3,000 = £47,000.
His basic rate band is used up by income, so the whole £47,000 is taxed at 24%. £47,000 × 24% = £11,280.
Option B, transfer half to Meera. The transfer is on a no gain, no loss basis, so there is no tax on the gift. Each then has a gain of £25,000.
Ravi: £25,000 − £3,000 = £22,000 × 24% = £5,280.
Meera: £25,000 − £3,000 = £22,000. Her basic rate band of £37,700 is unused, so all of it is taxed at 18%. £22,000 × 18% = £3,960.
Total under Option B: £5,280 + £3,960 = £9,240.
Saving: £11,280 − £9,240 = £2,040.

Answer: Selling alone costs £11,280 of CGT. Giving half to Meera first costs £9,240, a saving of £2,040. This uses Meera's AEA and basic rate band. The gift must be genuine and unconditional, and Meera must be free to keep or spend her share.

Example 2

Nisha makes no gifts apart from the following and ignores annual exemptions. She gives £400,000 cash into a discretionary trust and pays any lifetime IHT herself. She has made no earlier transfers. Calculate the IHT on the gift at the time it is made, and the extra IHT payable if she dies (a) 3 years and 6 months or (b) 5 years and 6 months after the gift. Use a nil rate band of £325,000.

Show the solution

The gift to a discretionary trust is a CLT. Net gift £400,000. Excess over the nil rate band: £400,000 − £325,000 = £75,000.
Nisha pays the tax, so gross up: £75,000 × 20 ÷ 80 = £18,750. Check: gross transfer £418,750 − £325,000 = £93,750 × 20% = £18,750.
Gross chargeable transfer = £400,000 + £18,750 = £418,750.
On death within seven years, tax is recalculated at 40%. £418,750 − £325,000 = £93,750 × 40% = £37,500.
(a) 3 years 6 months: taper relief is 20%. £37,500 × 80% = £30,000. Less lifetime tax paid £18,750 = £11,250 extra.
(b) 5 years 6 months: taper relief is 60%. £37,500 × 40% = £15,000. This is below the £18,750 already paid, so the extra tax is nil. There is no refund.
Note: the CLT uses the whole nil rate band in the seven years before death, so the death estate has none left and is taxed at 40% (apart from any residence nil rate band).

Answer: Lifetime IHT is £18,750. Extra IHT on death is £11,250 in case (a) and nil in case (b). Advise that the gift uses the nil rate band for seven years and that later gifts or the estate lose the benefit during that time.

Exam tips

Show the tax under each option in clear columns, then state the saving. The marker wants a number and a recommendation.
Use the tax tables provided for rates and limits. Do not rely on memory, and quote the figure you use.
For BADR and investors' relief, list the conditions in a short line and say whether each is met. Marks are given for the check.
In IHT answers, say whether each gift is a PET, a CLT or exempt, and state who pays the tax.
Finish with a short reasoned point on non-tax factors such as cash flow, risk of early death or loss of control. These earn professional skills marks.

Practice questions from Mitigation of tax by numerical analysis and reasoned argument

Capital Gains Tax and Inheritance Tax Planning Measures 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 SkillsInheritance Tax Planning Using Exemptions and Reliefs

Capital Gains Tax and Inheritance Tax Planning Measures: frequently asked questions

What are the main conditions for business asset disposal relief on shares?

The shares must be in the individual's personal trading company. The individual must be an officer or employee and hold at least 5% of the ordinary share capital with at least 5% of the voting rights. These conditions must be met for at least two years before the disposal. The lifetime limit is £1,000,000 and the rate is 14%.

What is the difference between business asset disposal relief and investors' relief?

BADR is for owners and working participants who dispose of a business or shares in their personal trading company. Investors' relief is for outside investors in newly subscribed ordinary shares of an unlisted trading company, held for at least three years. Both give a 14% rate and both have a £1,000,000 lifetime limit, applied separately.

How does taper relief work on lifetime gifts?

It reduces the IHT payable on a gift if the donor dies between three and seven years later. The reductions are 20%, 40%, 60% and 80% for each additional year from three to seven. It reduces the tax, not the value, so it only helps where the gift exceeds the available nil rate band.

How do I calculate IHT on lifetime transfers in ATX?

Classify each gift as exempt, a PET or a CLT. A PET has no tax unless the donor dies within seven years. For a CLT, apply 20% above the nil rate band, grossing up if the donor pays. If death occurs within seven years, recompute at 40%, apply taper relief and deduct the lifetime tax paid.