SQE1 inheritance tax: what you must know and how it is tested

SQE1 inheritance tax questions test how death and lifetime gifts are taxed, using the nil rate band, exemptions and taper relief. Since September 2026 the exam gives you the rates and thresholds, so the work is in applying the method. Read it with the wider Wills and Administration of Estates guide.

The rules to apply

Inheritance tax (IHT) is charged on the value of an estate on death and on certain lifetime transfers. Tax on death is charged on the estate above the nil rate band, at 40%. The nil rate band is £325,000 per person and any unused part transfers to a surviving spouse or civil partner. A residence nil rate band (£175,000) is added when the home passes to direct descendants, and it tapers away for large estates. Transfers between spouses or civil partners are exempt (subject to a limit where the recipient is not a long-term UK resident). Gifts to charity are exempt, and a lower rate applies to the estate if enough is left to charity. The question will state the figures to use.

Lifetime gifts. A gift to an individual is a potentially exempt transfer (PET). It is exempt if the donor survives seven years. If the donor dies within seven years it becomes chargeable, using the nil rate band first, and taper relief reduces the tax (not the value) if death is more than three years later. Gifts into most trusts are chargeable lifetime transfers, taxed at a lifetime rate when made, with further tax at death if within seven years. Exemptions include the annual exemption (£3,000, with one year carry forward), small gifts (£250), gifts in consideration of marriage, and normal expenditure out of income.

A gift with reservation of benefit (for example giving away a house and continuing to live there rent free) remains in the donor's estate. Property held as joint tenants passes by survivorship, but the deceased's share still counts in their estate for IHT. Business and agricultural property relief is available in defined cases, and its terms changed from April 2026, so use the figures in the question. Personal representatives pay the tax on the estate, usually within six months from the end of the month of death, and the recipients of failed PETs are liable for the tax on them.

Traps examiners use

• Taxing the whole estate and ignoring the nil rate band.
• Applying taper relief to the value rather than the tax.
• Forgetting that a failed PET uses the nil rate band before the death estate.
• Ignoring the gift with reservation rule.
• Taxing transfers between spouses.
• Counting gifts older than seven years.

Worked question 1

Hugh dies with an estate of £900,000, all left to his adult children. He made no lifetime gifts. Assume the nil rate band is £325,000, there is no residence nil rate band, and the rate is 40%. What is the IHT?

• A. £360,000
• B. £230,000
• C. £130,000
• D. £300,000
• E. £0

Answer: B. Tax is on the estate above the nil rate band: £900,000 less £325,000 is £575,000, and 40% of that is £230,000. A taxes the whole estate. C applies 40% to the band, and E would apply only if the whole estate went to a spouse or charity.

Worked question 2

Fran gave £400,000 to her son and died five years and six months later. She made no other gifts. Ignore the annual exemption and any other exemptions. Assume the nil rate band is £325,000, the death rate is 40%, and the taper relief reduces the tax by 40% for death between four and five years, 60% for five to six years, and 80% for six to seven years. How much tax is due on the gift?

• A. £30,000
• B. £12,000
• C. £4,800
• D. £160,000
• E. £0

Answer: B. The PET fails because Fran died within seven years. The gift exceeds the nil rate band by £75,000, and 40% of that is £30,000. Death came between five and six years, so taper relief reduces the tax by 60%, leaving £12,000. A ignores taper. E would be right only if she had lived seven years.

Checklist before you move on

• Estate on death: value, reliefs, exemptions, nil rate band.
• Lifetime gifts: PET or chargeable transfer?
• Died within seven years of a PET?
• Use nil rate band first, then taper relief on tax.
• Gift with reservation of benefit?
• Who pays and when?

Test yourself on more original questions in our SQE1 practice questions.

Questions

Related

• SQE1 Wills and Administration of Estates
• SQE1 practice questions: how to answer single best answer items
• SQE1 mock: how to time, pace and review it

Sources: SRA: SQE1 Assessment Specification (from 1 September 2026); Inheritance Tax Act 1984; GOV.UK: Inheritance Tax. Checked 10 November 2026.