Taxation and estate planning
Domain 3: Taxation and estate planning
This domain tests computational accuracy in UK income tax, capital gains tax and inheritance tax, and the planning that follows: wills, nil rate bands, lifetime gifts, trusts and the interaction of CGT with IHT. Figures below are for 2024/25 - always state the tax year you are applying.
Anchor figures
- Personal allowance £12,570, tapered £1 for every £2 of income above £100,000 (gone at £125,140). Basic rate band £37,700; dividend allowance £500; personal savings allowance £1,000/£500/£0.
- CGT annual exempt amount £3,000; rates 18%/24% for disposals on or after 30 October 2024 (residential property and carried interest have their own rules); UK residential property gains reported and paid within 60 days.
- IHT: nil rate band £325,000 and residence nil rate band £175,000, both transferable; RNRB tapers £1 for every £2 of estate above £2m and requires the home to be closely inherited. Taper relief on chargeable lifetime transfers and failed PETs: 20%, 40%, 60%, 80% for survival of 3-4, 4-5, 5-6 and 6-7 years.
Worked example: the 36% rate and a charitable legacy
Estate £1,500,000, including a £500,000 home left to children; no spouse. Without charity: NRB £325,000 + RNRB £175,000 = £500,000, tax = 40% x £1,000,000 = £400,000. Leaving £150,000 to charity is exactly 10% of the £1.5m baseline (the estate before deducting the charitable gift and, for current deaths, before deducting the nil rate bands), so the reduced rate applies: £1,500,000 - £150,000 - £500,000 = £850,000 x 36% = £306,000. The tax saved is £94,000, so the net cost of the £150,000 legacy to the family is £56,000.
Marks-losing traps
- Forgetting that a £2,350,000 estate loses the whole £175,000 RNRB to taper.
- Treating every PET as exempt: death within seven years brings it back into the cumulative total, using NRB first.
- Missing that RNRB needs closely inherited property, so lifetime downsizing or a gift of the home can lose it.
- Ignoring CGT on lifetime gifts of assets that qualify for IHT relief.
- Deducting the charitable legacy before testing the 10% baseline.