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Advanced Taxation (UK) · Tax advantages and disadvantages of alternative courses of action

Inheritance Tax: Nil Rate Bands, Rates and Taper Relief

Updated 11 October 2026 · Fact-checked

Inheritance tax is charged on the value transferred above the nil rate band of £325,000. The rate is 20% on lifetime chargeable transfers and 40% on death. Taper relief reduces only the tax on gifts made 3 to 7 years before death. The residence nil rate band of £175,000 applies on death only.

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

Inheritance tax (IHT) is a tax on transfers of value. In ATX-UK you meet it when you compare giving assets away during life with leaving them on death.

Every person has a nil rate band (NRB) of £325,000. Tax is charged only on the amount above it. The tax tables give two rates on the excess: 20% for lifetime transfers and 40% on death. The lifetime rate is half the death rate.

A lifetime gift to an individual is usually a potentially exempt transfer (PET). No tax is due when it is made. If the donor survives seven years, it is exempt. If the donor dies within seven years, the PET becomes chargeable at death rates. A lifetime gift into a trust is usually a chargeable lifetime transfer (CLT). Tax at 20% is due at once on the excess over the available NRB. If the donor then dies within seven years, extra tax may arise on death.

Taper relief reduces the death tax on a gift made more than 3 years before death. It reduces the tax, not the value of the gift. It only helps when the gift exceeds the NRB available to it, because otherwise there is no tax to reduce. The table gives: 20% reduction for more than 3 but less than 4 years, 40% for 4 to 5 years, 60% for 5 to 6 years and 80% for 6 to 7 years.

The residence nil rate band (RNRB) is £175,000. It is a separate extra band on death. It is not available against lifetime transfers. The tax tables give only the amount, so the question will state whether the conditions are met. Do not assume it applies unless the facts say so.

Key rules to remember

Nil rate band
NRB = £325,000
Tax is charged only on value above the available NRB. Earlier chargeable transfers in the previous 7 years use it up first.
Residence nil rate band
RNRB = £175,000
Death estate only. Use it only if the question's facts support it. It is not used against lifetime transfers.
Rates of tax
Lifetime rate = 20%; Death rate = 40%
Both apply to the excess over the nil rate band. Lifetime tax on a CLT is 20% of the excess. Death tax on a PET or CLT uses 40%.
Taper relief
Death tax × (1 − relief %). Relief: over 3 to 4 years 20%; over 4 to 5 years 40%; over 5 to 6 years 60%; over 6 to 7 years 80%
Applies to the tax, not the gift. No relief if death is within 3 years. Gifts that fall inside the NRB have no tax to reduce.
Additional tax on a CLT at death
Additional tax = death tax after taper relief − lifetime tax paid (not below nil)
Compare after applying taper relief. Nothing is refunded if the lifetime tax was higher.

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

Use this method for any question comparing lifetime gifts with transfers on death. Work in date order and keep the NRB running total.

  1. 1List each transfer in date order. Mark each as a PET, a CLT or an exempt transfer, and deduct any available exemptions first.
  2. 2For each transfer, add up the chargeable transfers made in the 7 years before it. This shows how much NRB is left.
  3. 3Work out lifetime tax on CLTs only: 20% of the excess over the available NRB. PETs have no lifetime tax.
  4. 4Identify the date of death. Any transfer made more than 7 years earlier is dropped from the death calculation and from the NRB cumulation.
  5. 5Compute death tax on each transfer still in the 7-year window, in date order, using the NRB left after earlier transfers and the 40% rate.
  6. 6Apply taper relief to the tax on each gift according to the years between gift and death. Then deduct lifetime tax paid on a CLT, but not below nil.
  7. 7Tax the death estate last. Use the NRB remaining after the gifts in the 7 years before death, add the RNRB only if the question's facts allow, and apply 40%.
  8. 8Compare the totals with the alternative course of action and give a clear recommendation with the reasons.

Quickest way: NRB tracker with a timeline

When to use it: Use this when there are several gifts and you have a limited time to answer.

  1. Draw a timeline with gift dates and the date of death. Tick the gifts more than 7 years before death and drop them.
  2. Beside each gift, write the NRB left after earlier gifts in the 7-year window. Write nil if it is used up.
  3. Multiply only the taxable excess by 40%. Then multiply by the taper percentage payable, such as 60% payable for 80% relief.
  4. Check that the estate gets the NRB that remains after gifts, not a fresh £325,000.

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

  • Applying taper relief to the value of the gift

    The table is headed with a percentage reduction and students apply it to the amount gifted.

    Fix: Work out the tax first, then reduce the tax by the percentage. Gifts within the NRB have no tax to reduce.

  • Giving the estate a fresh NRB

    Students forget that gifts in the 7 years before death use the NRB first.

    Fix: Keep a running NRB balance. Chargeable gifts in the 7 years before death reduce the NRB available to the estate.

  • Using 20% on a PET

    Students confuse PETs with CLTs and charge lifetime tax on all gifts.

    Fix: PETs have no tax when made. If death occurs within 7 years, charge them at 40%, with taper relief where it applies. Only CLTs bear 20% in life.

  • Deducting lifetime tax before applying taper relief

    The order of the steps is not clear.

    Fix: Compute death tax, apply taper relief, then deduct lifetime tax paid. If the result is negative, the additional tax is nil.

  • Using the RNRB against lifetime gifts

    Students see it listed beside the NRB in the tax table.

    Fix: The RNRB is for the death estate only, and only where the facts support it. Never use it against a lifetime transfer.

  • Missing the 3 year rule

    Students apply a reduction to any gift made before death.

    Fix: Death within 3 years gives no taper relief. Relief starts for gifts made more than 3 years before death.

Worked examples

Example 1

Ravi made no earlier transfers. On 1 June 2020 he gave £425,000 in cash to his daughter. He died on 1 December 2025. Ignore exemptions and his estate. Calculate the IHT payable on the gift.

Show the solution
  1. The gift to an individual is a PET. No tax was due when it was made.
  2. Ravi died within 7 years, so the PET becomes chargeable. Time between gift and death is 5 years 6 months.
  3. The NRB is £325,000 and there were no earlier transfers. Taxable excess is £425,000 − £325,000 = £100,000.
  4. Death tax is 40% × £100,000 = £40,000.
  5. Taper relief for more than 5 but less than 6 years is 60%. Tax payable is £40,000 × 40% = £16,000.

Answer: IHT payable on the gift is £16,000.

Example 2

Meena gave £400,000 to a discretionary trust on 1 March 2019. She had made no earlier transfers. She died on 1 September 2024. Ignore exemptions and her estate. Calculate the lifetime tax and the additional tax on death.

Show the solution
  1. A gift to a trust is a CLT. Lifetime tax is due at 20% on the excess over the NRB.
  2. Excess is £400,000 − £325,000 = £75,000. Lifetime tax is 20% × £75,000 = £15,000.
  3. She died 5 years 6 months later, which is within 7 years, so the transfer is re-computed at death rates.
  4. Death tax is 40% × £75,000 = £30,000.
  5. Taper relief for more than 5 but less than 6 years is 60%. Tax after relief is £30,000 × 40% = £12,000.
  6. Lifetime tax paid was £15,000, which is more than £12,000. The additional tax is nil, and no refund is given.

Answer: Lifetime tax was £15,000. The additional tax on death is nil, and no refund is due.

Exam tips

  • Show the NRB left against every gift. Marks go for the running total even when a later figure is wrong.
  • State the years between gift and death, then give the taper percentage. This earns the mark even if the arithmetic goes wrong.
  • Only use the RNRB when the question facts support it. Say that you are assuming this if it is unclear.
  • For a recommendation, compare the total tax of each option and mention non-tax factors such as control of the asset and the donor's survival.

Practice questions from Tax advantages and disadvantages of alternative courses of action

Inheritance Tax: 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.

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

What is the difference between the lifetime and death IHT rates?

The lifetime rate is 20% and the death rate is 40%. Both apply to the value above the nil rate band. The lifetime rate applies to CLTs when made, and the death rate applies to the estate and to gifts that become chargeable on death within 7 years.

How does taper relief work in ATX-UK?

It reduces the death tax on a gift made more than 3 years before death. The reduction is 20%, 40%, 60% or 80% depending on the years. It reduces the tax, not the value of the gift, so it gives nothing where the gift is covered by the NRB.

Does the residence nil rate band apply to lifetime gifts?

No. It applies to the death estate only. Use the £175,000 figure only where the question's facts allow it.

Can taper relief create a refund of lifetime tax?

No. If the death tax after taper relief is lower than the lifetime tax already paid on a CLT, the additional tax is nil. The lifetime tax is not refunded.