Inheritance Tax — SQE1 FLK2 Wills and Administration of Estates

Your client's mother gave him £300,000. She died five years later. He has read about taper relief, and he knows that surviving a gift by more than five years cuts the tax on it by 60%. He wants to know how much that saves him. Nothing. Not a penny.

And there is worse coming, because that gift has quietly done something to the tax on the rest of her estate. This is Inheritance Tax, a topic made of thresholds, percentages and one seven-year window. Keep the son in mind. We are coming back for him.

Here is the route. The rates and the two nil-rate bands. Then lifetime transfers, and the difference between a gift that might become taxable and one that is taxable at once. Then the exemptions. Then cumulation and taper relief, which is where our son comes unstuck. Then business and agricultural relief, which changed this year. And finally the forms and the deadline.

Start with what the tax bites on. Inheritance tax is charged on transfers of value made by individuals: on the estate at death, and on certain lifetime gifts. Everyone has a nil-rate band below which nothing is payable. Transfers between spouses and civil partners are generally exempt.

Three rates to hold. The standard rate on death is 40%. A reduced rate of 36% applies where at least 10% of the net estate is left to charity. And a chargeable lifetime transfer is taxed at 20% when it is made, with a further 20% payable if the donor dies within seven years, which comes to 40% overall.

The nil-rate band is £325,000. No tax on the first £325,000 of an estate. Any unused part can be transferred to a surviving spouse or civil partner, so a couple can often reach £650,000 between them.

But that transfer is not automatic, and this is a marks point. It must be claimed within two years of the second death. It is expressed as a percentage of the band the first spouse left unused. That percentage is then applied to the band in force when the survivor dies, not the band at the first death.

On top of that sits the residence nil-rate band, an additional £175,000 where a residence is passed on death to direct descendants: children, grandchildren, stepchildren. It is transferable in the same way. And it tapers away for larger estates, withdrawn by £1 for every £2 by which the estate exceeds £2 million.

Now lifetime transfers, and there are two species. A potentially exempt transfer is most outright gifts to individuals. It becomes wholly exempt if the donor survives it by seven years, and it fails and becomes chargeable if the donor does not. Potentially exempt. The word is doing real work.

A chargeable lifetime transfer is the other kind, chiefly a gift into certain trusts. It is chargeable immediately, at 20%, to the extent it exceeds the available nil-rate band. If the donor then dies within seven years there is a further charge, bringing it up to the death rate.

The exemptions next, and they are worth learning as a list. Gifts to a spouse or civil partner. Gifts to charity. Gifts to political parties. Small gifts of up to £250 per person per tax year. And the annual exemption of £3,000 of gifts each tax year.

There is also normal expenditure out of income. Gifts forming part of the donor's normal expenditure from income are exempt, provided they do not reduce the donor's standard of living. Regular birthday cheques, regular premiums on a life policy. Regular, and out of income, are both doing work there.

The spouse exemption looks unlimited, and usually it is. But look at where the recipient lives. It is unlimited where the recipient spouse is a long-term resident of the United Kingdom. Where they are not, the exemption is capped at the nil-rate band in force at the transfer, currently £325,000. That cap is cumulative across lifetime gifts and the transfer on death together.

And note the change, because it is recent. From 6 April 2025, long-term residence in the United Kingdom replaced domicile as the test. Before that date the same cap applied by reference to the recipient's domicile. Same cap, different trigger.

Now cumulation, the engine of the whole calculation. Chargeable transfers made in the seven years before a transfer or a death are added together and use up the nil-rate band first. Whatever band is left is available against the estate. Gifts made more than seven years before the death drop out altogether.

Which brings us to taper relief. It reduces the tax on a failed gift according to how long the donor survived. Survive three to four years and the tax comes down to 32%. Four to five, 24%. Five to six, 16%. Six to seven, 8%. Survive only two? No relief at all. And at seven years the gift is exempt.

Now read that table again and notice what it does. It reduces the tax. It does not reduce the gift. And it follows that taper can only help you where there is tax to reduce in the first place. A gift that falls inside the available nil-rate band bears no tax, so there is nothing for taper to taper.

That is exactly our son's position, and there is a sting in it. The gift produced no tax, so taper gives him nothing. But the gift still used up the band. Three hundred thousand pounds of a £325,000 band is gone. The relief he was counting on was never available, and the gift left the estate worse off.

Business property relief now, and this reduces the value of the asset itself. It comes at two rates. 100% applies to a business or an interest in a business. That means a sole trader's business or a partnership share. It also applies to shares in an unquoted company, whatever the size of the holding.

50% applies to a controlling shareholding, more than half the votes, in a quoted company. It also applies to land, buildings, plant or machinery owned personally but used in a business the transferor controls. Now a minority holding in a quoted company. Full relief, half relief, or none? None at all. Unquoted anything, quoted only if controlling, minority quoted nothing.

Two restrictions apply from 6 April 2026, and they are new. First, the 100% rate is available only up to an allowance of £2.5 million, shared with agricultural property relief, with 50% relief on the excess. The allowance is transferable between spouses and civil partners.

Second, shares designated as not listed on a recognised stock exchange attract 50% in all circumstances, and that rate sits outside the allowance. So a qualifying trading business worth more than the allowance is relieved at 100% on the first £2.5 million, and 50% on the balance.

Two more conditions. The asset must have been owned for at least two years before the death or the gift, with some easing where one business asset replaced another. And the business must be trading. One consisting wholly or mainly of dealing in securities, or land, or of making or holding investments, gets no relief.

Agricultural property relief works alongside it. It applies to the agricultural value of land and pasture, not to development value, so what counts is what the land would fetch if it could only be farmed. 100% where the farmer occupies, covering farm buildings, workers' cottages and a farmhouse of a character appropriate to the holding.

And here is the point people get wrong. From 6 April 2026 agricultural property relief shares that same £2.5 million allowance with business property relief. The two reliefs draw on one combined allowance. Not one each.

A word on anti-avoidance. Under the gift with reservation of benefit rules, if you give property away but carry on benefiting from it, it is still treated as part of your estate. Give away the house and go on living in it rent-free, and you have achieved nothing for tax.

One computational point that catches people. Where a donor makes a chargeable lifetime transfer and pays the tax himself, the transfer must be grossed up. His estate falls by both the gift and the tax, so both form part of the transfer of value. A failed potentially exempt transfer is not grossed up. There the donee is primarily liable, and tax is charged on the value of the gift itself.

Finally the paperwork. A full inheritance tax account is required for every estate that is not an excepted estate. For deaths on or after 1 January 2022 the old short accounts were abolished. An excepted estate delivers no account at all: the personal representatives report the gross and net values on the probate application.

And the deadline. Inheritance tax must be paid within six months from the end of the month in which the death occurred, with interest running from the due date. Where property qualifies for payment by instalments, that six-month deadline still applies to the first instalment.

A word on how SQE1 tests this. You will not be asked to recall section numbers, and this topic has essentially no case law in it at all. What it has instead is figures, and the figures are the examinable content. Learn them, and learn which of them are thresholds and which are rates.

If you keep only three. The two bands: £325,000, and a further £175,000 where a residence passes to direct descendants. The seven-year window, with taper running from 32% down to 8% between three and seven years. And the £2.5 million allowance that business and agricultural relief now share between them.

Four traps the examiners set. One: a potentially exempt transfer is not a gift you can forget about. It is exempt only after seven years, and until then it sits there waiting. Every gift within seven years of the death is brought into account, and the earliest ones eat the band first.

Two: taper relief reduces the tax, not the gift, and it gives nothing at all in the first three years. Read any taper question by asking first whether the gift produced any tax. If the band covered it, taper has nothing to work on, however long the donor survived.

Three: the spouse exemption is not always unlimited. Where the recipient spouse is not a long-term resident of the United Kingdom it is capped at the nil-rate band in force. A scenario that tells you where the surviving spouse lives is telling you that for a reason.

Four: business relief and agricultural relief draw on one combined allowance, not one each. A farm with a trading business attached does not get £2.5 million twice. Above the allowance, both drop to 50%.

Quick check, and it is our son. A woman died having made just one lifetime gift, £300,000 to her son, five years before her death. She had made no other gifts, so her full £325,000 nil-rate band was available. Her death estate is worth £500,000. Her son expects taper relief to cut the tax on that gift substantially, because his mother survived it by more than five years.

What is the effect of taper relief on the tax attributable to the gift? Three candidate answers. One: it reduces the tax on the gift by 60%, a substantial saving. Two: it reduces the value of the gift itself by 60%, so only £120,000 enters the calculation. Three: taper gives no benefit, because the gift is within the nil-rate band, but the gift still uses £300,000 of the band. Pause here if you want a moment.

The answer is three. Taper relief reduces the tax payable on a failed potentially exempt transfer. It does not reduce the value of the gift, and it can only help where there is tax to reduce. The £300,000 gift is within the available £325,000 band, so no tax arises on it. There is nothing for taper to taper.

And now the part that costs real money. The gift still uses £300,000 of the band, leaving only £25,000 against a death estate of £500,000. So £475,000 is taxed at 40%. Why the others fail. One, because there is no tax on the gift for taper to reduce. Two, because taper operates on the tax, never on the value.

Five things to take away. One: 40% on death, 36% where at least a tenth of the net estate goes to charity, and 20% on a chargeable lifetime transfer when it is made. Two: the nil-rate band is £325,000 and transfers between spouses on a claim, with a further £175,000 where a residence passes to direct descendants.

Three: a potentially exempt transfer is exempt after seven years and chargeable if the donor dies inside them. Chargeable transfers in those seven years use up the band before the estate touches it. Four: taper reduces the tax on a failed gift, never its value, and never where the band already covered it.

Five: business and agricultural property relief give 100% or 50%. From 6 April 2026 the 100% rate runs only to a £2.5 million allowance, which the two reliefs share between them. Next time, Claims, Trusts and Post-Administration.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.