20.5 Inheritance Tax: Lifetime Transfers, Death and Reliefs

FLK2 taxation of estates is a classification subject. If you can put a transaction into the right box — immediately chargeable, potentially exempt, reserved, or a transfer on death — the computational consequences follow from HMRC's published rates. This section teaches that machinery. Where a figure is used, it is taken from current GOV.UK or HMRC manual pages opened for this chapter (thresholds page updated 6 April 2026; gifts guide; excepted-estate manuals updated 7 April 2026; Capital Gains Manual CG30700 updated 14 September 2026).

The charge in outline

Inheritance Tax is charged on the value transferred by a chargeable transfer (IHTA 1984 s.1–3). A transfer of value is a disposition that reduces the transferor's estate. Some transfers are exempt. Some are potentially exempt. The rest are chargeable. On death, s.4 deems a transfer of everything in the Inheritance Tax estate immediately before death. Lifetime and death transfers then share one nil-rate band, currently £325,000 from 6 April 2009 to 5 April 2031 on HMRC's thresholds page. The residence nil-rate band is an additional threshold of £175,000 from 6 April 2020 to 5 April 2030 for a qualifying residence left to direct descendants, tapered for estates over £2 million. Unused bands can transfer to a spouse or civil partner.

GOV.UK states the standard death rate as 40% on the slice above the threshold, reduced to 36% where 10% or more of the net value goes to charity. Lifetime chargeable transfers are charged at half the death rate when they are made; if the donor then dies within seven years, the transfer is recomputed at death rates, with credit for tax already paid.

Immediately chargeable lifetime transfers

A lifetime transfer that is not a potentially exempt transfer, and is not covered by an exemption, is immediately chargeable. The working examples for FLK2 are:

• a gift into a relevant-property trust (a typical discretionary trust, and most lifetime interest-in-possession trusts created after 21 March 2006);
• a gift to a close company;
• certain premium payments that the legislation refuses to treat as potentially exempt.

The transferor is primarily liable (IHTA s.199). Trustees of the settlement that receives the property are also in the liability net. The transfer uses up nil-rate band as it goes. A later death within seven years does not turn the transfer into a PET; it is already chargeable, and the death calculation may produce a further bill.

Potentially exempt transfers

IHTA 1984 s.3A(1A) (the version that applies to transfers on or after 22 March 2006) treats as a potentially exempt transfer a transfer of value by an individual that would otherwise be chargeable, to the extent it is:

• a gift to another individual;
• a gift into a disabled trust; or
• a gift into a bereaved minor's trust on the coming to an end of an immediate post-death interest.

A PET is not a chargeable transfer when it is made. No IHT is then due. If the transferor survives seven years, the PET becomes an exempt transfer and drops out of the seven-year cumulation. If the transferor dies within seven years, the PET becomes a chargeable transfer. It uses nil-rate band in chronological order with other transfers in the seven years before death. GOV.UK's gifts page is explicit that taper relief is a reduction in the rate of tax on the gift, not a reduction in the value that uses up nil-rate band, and that it only applies once lifetime gifts in the seven years exceed the £325,000 threshold:

Failed PETs are cumulated before the death estate. That is why a large PET three years before death can leave the death estate sitting entirely above the nil-rate band even if the death estate itself looks modest.

Gifts with reservation of benefit

Finance Act 1986 s.102 is a separate anti-avoidance charge, not a third species of PET. GOV.UK describes a gift with reservation as a gift the donor still benefits from, and gives the textbook illustrations: giving a home to a relative but still living there; giving away a caravan but still using it for free; giving away a painting but still hanging it in the donor's house.

The statutory consequences you must be able to apply:

• If the reserved benefit still exists immediately before death, s.102(3) treats the property as property to which the deceased was beneficially entitled. It is in the s.4 death estate. It is valued at the death-date value of the reserved property, not at the original gift-date value.
• If the reserved benefit ceases during the donor's lifetime, s.102(4) treats the donor as making a PET at the date the reservation ceases. The seven-year clock for that deemed PET starts then, not at the original gift.
• Double-charges relief exists so that the same slice of value is not taxed both as a failed PET of the original gift and as reserved property in the death estate. You are not expected to compute the statutory instrument in detail; you are expected to spot that both analyses are in play and that relief against a double charge must be considered.
• A gift with reservation stops the estate being excepted (IHTM06012 and IHTM06013). That is why the house-with-daughter fact pattern belongs in both this section and the grants section.

Occupation at a full market rent, or a genuine exclusion of the donor from benefit, can keep s.102 from applying. Sharing arrangements are fact-sensitive; FLK2 favours clean facts (rent-free occupation versus a full rent).

Transfers on death

IHTA 1984 s.4 is a deemed transfer of the whole Inheritance Tax estate immediately before death. Build that estate in layers:

1. Property in the deceased's sole name (the probate estate).
2. The deceased's share of joint property, even though survivorship takes it outside the grant.
3. Property subject to a reservation of benefit.
4. Settled property in which the deceased had a chargeable interest in possession (an immediate post-death interest, a transitional serial interest, or a disabled person's interest — not a typical post-2006 lifetime interest in possession).
5. Less liabilities that meet the deduction rules, and less exemptions and reliefs.

Do not put nominated pensions, discretionary pension lump sums or trust property in which the deceased had no chargeable interest into the IHT estate just because the family talk about them as "Dad's money". FLK2 also tells you that you will not be examined on foreign law, foreign assets or foreign taxes; keep the death estate on the England and Wales / UK-resident facts the question gives you.

Exemptions and reliefs

Exemptions take property out of the charge. Reliefs reduce the value that is charged. Learn which is which.

Exemptions (GOV.UK gifts guide and IHTA):

• Spouse or civil partner exemption — lifetime and on death, without a pound limit, provided the recipient spouse or civil partner meets the long-term UK residence / domicile conditions that the current rules require. The excepted-estate manuals now test this by reference to long-term UK residence for deaths on or after 6 April 2025.
• Charity exemption — absolute gifts to qualifying charities; also the gateway to the 36% estate rate if the 10% net-value test is met.
• Annual exemption — £3,000 per tax year, with one year of unused exemption carried forward (GOV.UK).
• Small gifts — up to £250 per donee per tax year, not combinable with another allowance on the same person.
• Normal expenditure out of income — regular payments from surplus income after usual living costs; no fixed ceiling, but the regularity and surplus-income conditions are strict.
• Wedding or civil partnership gifts — £5,000 to a child, £2,500 to a grandchild or great-grandchild, £1,000 to anyone else (GOV.UK).

Reliefs you must recognise without inventing a rate the question does not supply:

• Business relief and agricultural relief reduce the value of qualifying property. The percentage and any cap in force at the date of the transfer must be taken from the question or from a current official source; from 6 April 2026 the instalment and interest rules for those assets also change (GOV.UK instalments page). If an exam question does not state the percentage, describe the relief rather than guess.
• Residence nil-rate band — extra band for a qualifying residence closely inherited by direct descendants, tapered for valuable estates, transferable between spouses and civil partners.
• Quick succession relief — a scale reduction where property inherited is itself taxed again on a second death within five years.
• Taper relief — on the tax on failed lifetime gifts, as in the table above, not on the death estate itself.

Scope of anti-avoidance

FLK2 asks for the scope of anti-avoidance, not a dissertation. The provisions that actually appear in probate files are:

• Gifts with reservation (FA 1986 s.102 and Sch 20) — the donor cannot give an asset away and keep the enjoyment.
• Pre-owned assets income tax (FA 2004 Sch 15) — an income tax charge where the donor still enjoys property in circumstances that fall outside s.102. It is a backstop, not an Inheritance Tax assessment.
• Associated operations (IHTA s.268) — a series of operations can be treated as a single disposition, stopping a value-split that would otherwise manufacture extra nil-rate band.
• Liabilities rules in Finance Act 2013 — a debt is not deducted if it was incurred to acquire excluded property or is not in fact discharged.
• General anti-abuse rule (FA 2013) — abusive arrangements that defeat the rules of the tax in a way that is not reasonable in relation to the relevant provisions.
• 1975 Act ss.10–13 — not IHT, but the same fact pattern (last-minute gifts to defeat a dependant) can be clawed back for family provision.

A commercial sale at full value is not a transfer of value (IHTA s.10). A sale to a child at an undervalue is a gift of the difference (GOV.UK gifts page).