4 - IHT: Exemptions and Reliefs

Question 1

What are exemptions and reliefs when calculating IHT?

Answer 1

When calculating the liability to IHT following a chargeable event (LCT, failed PET, or death) IHT exemptions and reliefs can be used to reduce or eliminate the charge.

Exemptions and reliefs work in slightly different ways (and are distinct from the nil rate band which is a 0% rate of tax and neither an exemption nor relief):
- Certain gifts to individuals or other entitles are exempt from IHT. They can be made completely free from IHT and have no effect on the NRB.
- Gifts of particular assets benefit from relief. This means that, where the conditions of the relief are met, the amount of IHT payable is reduced (sometimes by 100%).

Question 2

What are the common exemptions and reliefs for IHT?

Answer 2

• Spouse exemption (s 18)
• Charity exemption (s 23)
• Family maintenance exemption (s 11)
• Annual exemption (s 19)
• Small gifts allowance (s 20)
• Normal expenditure from income (s 21)
• Marriage exemption (s 22)
• Business property relief (s 104)
• Agricultural property relief (s 116)
• Taper relief (s 7)

Statutory requirements are outlined in the Inheritance Tax Act 1984 (IHTA).

Question 3

When do exemptions and reliefs apply in the context of IHT?

Answer 3

Some apply only during lifetime (failed PET, LCT, re-taxed LCT following death):
Cannot be used for calculating IHT due on the death estate.

Some apply only to the death estate and cannot be applied to failed PET or LCT.

Others apply to both lifetime transfers and the death estate.

Question 4

What are the exemptions and reliefs that can be applied for IHT which solicitors should be aware of?

Answer 4

A practitioner must be aware of:
- Which exemptions/reliefs exist
- When they apply (lifetime, death, or both)
- Criteria for their application

Advice on exemptions and reliefs is crucial for tax planning, calculating liabilities, making wills, or setting up trusts.

Question 5

What exemptions and reliefs are available for LCT, on death, and on both?

Answer 5

Lifetime transfers only: (failed PETs and LCTs).
- Annual exemption
- Family maintenance exemption
- Small gifts exemption
- Marriage exemption
- Normal expenditure out of income exemption
- Taper relief

Death estate only:
- Woodlands relief
- Quick succession relief
- Both lifetime and death estate:
- Spouse exemption
- Charity exemption
- Business property relief
- Agricultural property relief
- Political party exemption
- Exemptions for gifts to national purposes or heritage funds
- Gifts to EBTs
- Gifts to housing associations

Question 6

What is the Annual Exemption (AE) under s 19 IHTA?

Answer 6

• Allows individuals to make gifts of up to £3,000 each tax year free from IHT.
• Applied chronologically to transfers (PETs or LCTs) when made.
• If multiple transfers occur on the same day, AE is applied pro rata, regardless of the order.
• AE should be used after other exemptions/reliefs to keep AE available for later transfers.
• Can look back one tax year and use any unused AE from the previous year.
• Maximum available AE = £6,000 (if unused from the previous year).

Tax year runs from 6 April to 5 April the following year.

Question 7

Can you provide examples of how the AE works?

Answer 7

Example 1 (multiple gifts):
Gift 1: £1,000 (January) – AE covers full amount, £2,000 unused.
Gift 2: £4,500 (May) – AE from current tax year (£3,000) + £1,500 from previous tax year = full coverage.
Remaining £500 unused from the previous AE is wasted.

Example 2 (large gift):
Gift: £10,000 – AE of £3,000 (current year) + £3,000 (previous year) = £6,000 applied.
Remaining £4,000 is a PET, subject to IHT if the donor dies within 7 years.

Question 8

What is the family maintenance exemption under s 11 IHTA?

Answer 8

Maintenance payments are not treated as transfers for IHT if made to:
- Spouse or former spouse (divorce settlement).
- Minor child of either party for education, training, or if over 18, still in full-time education.
- Dependent relatives for reasonable care, e.g., services or institutional care.

Spouse exemption normally applies but family maintenance exemption can be used where the spouse exemption doesn’t, e.g., if the recipient is domiciled outside the UK.

Question 9

What is the small gifts allowance under exemptions and relief (s20 IHTA)?

Answer 9

Gifts up to £250 per recipient are exempt from IHT.
No limit on the number of recipients.
Different from AE: AE covers total value of transfers, small gifts cover each recipient separately.
Small gifts allowance cannot be combined with other exemptions, e.g., AE.

Question 10

How is the small gifts allowance under exemptions and relief commonly used?

Answer 10

Useful for those wishing to make gifts to multiple people, e.g., large families or grandchildren.
Commonly used for birthday or Christmas presents.
If gifts to a person exceed £250, the small gifts exemption does not apply for that donee.

Example: £251 given to B – small gifts exemption does not apply.

Question 11

What is the marriage exemption under s 22 IHTA?

Answer 11

A gift in consideration of a marriage is exempt up to:
- £5,000 by a parent.
- £2,500 by a grandparent or party to the marriage.
- £1,000 in any other case.

Marriage and annual exemptions can both be applied to the same gift.

The gift must be related to a specific marriage and made contemporaneously, before or after the event, if it satisfies a prior obligation.

Question 12

What is the normal expenditure out of income exemption under s 21 IHTA?

Answer 12

Exempts transfers if they:
- Are made from income (not capital).
- Are part of a normal pattern of giving.
- Do not affect the donor’s standard of living.

There is no upper limit to this exemption.
Typically accepted when transfers are made under a legal obligation or follow a settled pattern.

Question 13

What is taper relief, and when does it apply?

Answer 13

Taper relief reduces IHT on lifetime transfers made 3-7 years before death.

Applies if:
- The transfer was large enough to trigger IHT (i.e., exceeded the NRB).
- IHT is payable in addition to tax on the death estate.

Does not reduce the value of the transfer or the IHT rate, but proportionally reduces the tax bill based on time between transfer and death.

Question 14

What are the rates of taper relief based on time between transfer and death?

Answer 14

3-4 years: 20% reduction in tax due.
4-5 years: 40% reduction in tax due.
5-6 years: 60% reduction in tax due.
6-7 years: 80% reduction in tax due.
Over 7 years: No IHT due.

Question 15

What are the benefits of lifetime exemptions and reliefs?

Answer 15

Reduces the taxable value of a PET or LCT, lowering the potential IHT bill.

Even if no IHT is triggered by the transfer, these exemptions preserve the Nil Rate Band (NRB) for the death estate, minimizing the amount taxed at 40%.

Question 16

What exemptions and reliefs are available for both lifetime transfers and death?

Answer 16

• Spouse exemption
• Charity exemption
• Business property relief
• Agricultural property relief
• Political party exemption
• Exemptions for gifts for national purposes or to heritage maintenance funds
• Exemption for gifts to EBTs
• Exemption for gifts to housing associations

The most common exemptions are spouse and charity, however, it is important to be aware of all of them.

Question 17

What is the spouse exemption?

Answer 17

• Definition: Gifts between spouses (during life and following death) are completely exempt from IHT.
• Key condition: Both spouses must be domiciled in the UK.
• Unlimited exemption: There is no upper limit to the value of the exemption.
• Inheritance types: The spouse exemption applies regardless of how the spouse inherits (e.g. will, intestacy, survivorship).
• No unmarried couples: Unmarried couples, regardless of how long they’ve lived together, cannot claim this exemption.
• Conditional gifts: A gift can be conditional (e.g., a survivorship clause), provided the condition is met within 12 months of death.

Example: A man gives his spouse £1M during his lifetime and leaves a £3M painting collection upon his death. Additionally, his spouse inherits the house via survivorship. All of these transfers are entirely exempt from IHT.

Question 18

How does the spouse exemption apply to life interest trusts?

Answer 18

Life Interest Trust: Transfers to a life interest trust are eligible for the spouse exemption if the surviving spouse receives a life interest (i.e., right to income).

Remainder Interest: Spouse exemption does not apply if the spouse receives a remainder interest (right to capital on the end of the life interest).

Example: A woman leaves her £2M estate “on trust to my husband for his life, remainder to my children.” The entire estate qualifies for spouse exemption because her husband has a life interest.

Question 19

What is the charity exemption and how does it apply to IHT?

Answer 19

Definition: All transfers to registered charities during life and following death are exempt from IHT, provided the gift is used exclusively for the charity’s purposes.

Conditions:
- The gift must be immediate and absolute.
- If conditional, the condition must be fulfilled within 12 months.

Charitable status: It’s essential to verify the recipient’s charitable status in the UK (via the national register).

Example: “I GIVE to RSPCA of Wilberforce Way, Southwater, Horsham RH13 9RS RCN: 219099 the sum of £100,000 absolutely for its general purposes.”

Question 20

What are key considerations in determining whether a gift qualifies for the charity exemption?

Answer 20

Charitable purpose: The gift must be made for exclusively charitable purposes, and the charitable status must be verified (e.g., UK-registered charity).

Legal concerns: If there’s ambiguity about the purpose (private vs charitable), the gift might fail to qualify for the exemption.

Additional requirements: Even if the gift is charitable, it must meet statutory requirements for IHT exemption.

Question 21

What should be considered when leaving an estate to charity?

Answer 21

Reduced IHT rate: If at least 10% of the estate is left to charity, the IHT rate on the remaining chargeable estate can be reduced from 40% to 36%.

Threshold check: It’s worth calculating how close a gift comes to the 10% threshold, as increasing the charitable gift could trigger the reduced rate.

Question 22

When are gifts to political parties exempt from IHT?

Answer 22

Conditions for exemption: The party must meet one of the following conditions at the last general election:

1. At least two MPs were elected.
2. At least one MP was elected, and the party received 150,000 votes or more.

Question 23

How does IHT exemption apply to gifts of land to housing associations?

Answer 23

Exemption: Gifts of land are exempt from IHT if made to:
- A housing association.
- A registered social landlord.

Question 24

What qualifies a gift for national purposes to be exempt from IHT?

Answer 24

Exempt bodies: Gifts made for designated ‘national purposes’ are exempt from IHT.

Schedule 3 bodies: The list includes institutions such as museums and galleries (e.g., National Gallery, British Museum) that serve the public benefit.

Question 25

When are gifts to heritage maintenance funds exempt from IHT?

Answer 25

Heritage maintenance funds: Gifts to these funds, which maintain historic buildings or land of public interest, are exempt from IHT.

Ongoing exemption: The fund itself is exempt from IHT as long as it continues to meet approval criteria.

Question 26

What are the conditions for gifts to Employee Benefit Trusts (EBTs) to be exempt from IHT, and what are the related practice alerts?

Answer 26

EBT Exemption: Transfers of shares into EBTs are exempt from IHT if they meet the strict conditions of s28 IHTA.

Practice alert:
- EBTs have historically been used for tax avoidance, leading to HMRC litigation and anti-avoidance rules.
- Attempts to use EBTs to avoid employment taxes can unintentionally trigger IHT charges.
- Advisory: Seek specialist tax advice when dealing with EBTs, especially in corporate or employment matters.

Question 27

Which reliefs are available on death and lifetime transfers?

Answer 27

• Business property relief.
• Agricultural property relief.

Question 28

What is Business Property Relief?

Answer 28

• Business Property Relief (BPR) reduces the Inheritance Tax (IHT) payable on qualifying business property.
• It is a relief, not an exemption, allowing up to 100% reduction in the value of a taxable transfer for qualifying business property.
• A person must have owned the qualifying business assets for the required period to benefit from BPR.

Question 29

What are Qualifying Business Assets for BPR?

Answer 29

Unquoted shares: All private company shares, regardless of size or value.

Quoted shares: Shares on a recognised stock exchange, but only if the taxpayer controls the company (50%+ shareholding).

Business or interest in a business: Applies to sole traders or partners.

Assets used in a business: Land, buildings, or machinery owned by a taxpayer but used for business purposes by a company the transferor controlled or a partnership where the transferor was a partner.

Question 30

What are the Rates of Relief under BPR?

Answer 30

The rates of relief under BPR are:

100% relief: Applies to unquoted shares, business or interest in a business.

50% relief: Applies to assets owned by the taxpayer but used for business purposes (land/buildings/machinery).

Question 31

What are Investment Assets under BPR?

Answer 31

• BPR does not apply to businesses that consist mainly of dealing in securities, stocks, land, buildings, or making/holding investments.
• Rental property is considered an investment asset.
• This exclusion causes complications for property management companies, furnished holiday lets, and caravan sites.

Question 32

What is the Qualifying Period of Ownership for BPR?

Answer 32

The transferor must have owned the business assets continuously for at least 2 years before the transfer.

Exceptions:
- Replacing qualifying assets maintains the ownership period.
- Inherited business assets are deemed to be acquired from the date of the original owner’s death or from when a deceased spouse acquired them.

Question 33

Can You Provide Examples of BPR?

Answer 33

Example 1: A sells business assets and buys quoted shares without control. No BPR applies on death, as no qualifying assets are owned.

Example 2: B sells qualifying assets after 1 year, buys replacements, and dies later. The ownership period of the original assets counts.

Example 3: C leaves business assets to child D, who sells part. BPR applies only to the proportion retained by D.

Question 34

How Does BPR Apply to Lifetime Transfers?

Answer 34

• BPR is available on a lifetime transfer (failed PET/LCT) if the assets are still owned by the transferee at the time of the transferor’s death.
• There is no minimum ownership period for the transferee.
• If part of the transferred assets is sold, BPR only applies to the remaining assets.

Question 35

What is Agricultural Property Relief (APR)?

Answer 35

• Agricultural Property Relief (APR) reduces IHT on the agricultural value of qualifying assets.
• It applies to the agricultural value of the land, which may differ from market value of the land.
• APR is a relief, not an exemption, and applies to agricultural land, buildings, and other qualifying agricultural property.

Example: A man dies, leaving agricultural land valued at £2 million (agricultural value) and £2.3 million (market value).
His estate also includes £500,000 in non-agricultural assets.
APR of £2 million is claimed at 100%, and the remaining £500,000 is subject to IHT.

Question 36

What is Qualifying Agricultural Property under APR?

Answer 36

Qualifying agricultural property includes:

• Agricultural land and buildings used for agricultural activity.
• Farmhouses and cottages of character appropriate to the land, occupied for agricultural purposes by farm workers or their surviving spouse.

Question 37

What are the Qualifying Periods of Ownership and Rates of Relief for APR?

Answer 37

The property must be:
- Occupied for agricultural purposes for the last 2 years before transfer, or
- Owned and occupied for 7 years if rented.

100% relief applies if the owner is entitled to vacant possession or the property is let after 1995.
50% relief applies less frequently, typically for tenancies before 1995.

Question 38

How Does APR Apply to Lifetime Transfers?

Answer 38

• APR applies to lifetime transfers (PET/LCT) if the qualifying agricultural property or its replacement is still owned by the transferee at the transferor’s death.
• If part of the property is sold, APR applies to the proportion retained

Question 39

What is the Interaction Between APR and BPR?

Answer 39

• APR takes priority over BPR where both could apply.
• It is not possible to claim BPR on assets that qualify for APR.
• In commercial farming enterprises, some assets may qualify for both APR and BPR, while others may qualify for only one.

For example, livestock qualifies for BPR, but agricultural buildings may qualify for both.

Question 40

Which exemptions are available on death only?

Answer 40

• Woodlands relief
• Quick succession relief

Question 41

What is Woodlands Relief?

Answer 41

Woodlands relief is available for gifts of woodland following a person’s death.

• The deceased must have owned the woodland for at least 5 years if they purchased it themselves.
• If the deceased inherited the woodland following someone else’s death, there is no qualifying ownership period required.
• The relief defers the IHT payable on the value of the woodland’s timber (not the land itself).
• To claim the relief, the estate’s administrators must elect to exclude the value of the timber from the death estate.
• IHT is deferred until the timber is either sold or given away.
• The relief applies only to the timber, making it a deferral, not a reduction of IHT liability.

Question 42

What are alternatives to Woodlands Relief?

Answer 42

Business Property Relief (BPR): Applicable where the woodland is used for commercial purposes such as fishing or timber harvesting.

Agricultural Property Relief (APR): Can be claimed if the woodland qualifies as agricultural land or is ancillary to agricultural activities.

Both BPR and APR provide more generous reliefs than woodlands relief and are usually preferable if they apply.

Question 43

What is Quick Succession Relief (QSR)?

Answer 43

Quick Succession Relief (QSR) reduces the IHT payable on assets that were previously subject to IHT within the last 5 years.

QSR applies where:
- The deceased’s estate includes inherited or gifted assets from another person’s death estate.
- The assets were subject to IHT when transferred to the deceased.

IHT must have been payable both on the original transfer and at the time of the subsequent death.

Relief Calculation:
- If death occurs within 1 year of the previous IHT charge, relief is calculated with reference to 100% of the previously paid IHT.
- The relief reduces each year, reaching 20% for deaths occurring 4-5 years after the original charge.

Question 44

What are the main stages of the administration process carried out by PRs and their duties related to IHT?

Answer 44

The administration process is divided into two key stages:

1. From death to the issue of the grant of representation:

This includes the submission of the account and payment of inheritance tax (IHT).

2. From the issue of the grant to completion of the administration.
   PRs’ duties under s.216 Inheritance Tax Act 1984:

Deliver an account to HMRC regarding the deceased’s estate.
Pay any IHT due in respect of the estate.
The account must include:
- All taxable property in the estate and its value immediately before death.

Any exemptions or reliefs that apply.
IHT is calculated as follows:
- Value of taxable assets minus debts and applying exemptions/reliefs.
- No IHT on assets passing to a spouse or charity.

Apply tax rates:
- 0% for amounts under the Nil Rate Band (NRB) (£325,000).
- 40% on any amount above the NRB.

Transferable NRB (TNRB): The unused NRB of a pre-deceased spouse may be claimed by the deceased’s estate

Key Deadlines:
- IHT account submission: Within 12 months from the end of the month of death.
- IHT payment: Within 6 months from the end of the month of death (interest charged after).

Question 45

What are the deadlines for submitting the IHT account and paying IHT?

Answer 45

IHT account submission deadline:
12 months from the end of the month in which the death occurred.

IHT payment deadline: 6 months from the end of the month of death.
Interest applies to unpaid tax after this period.

Example:
Deceased died on 18 January:
IHT account due: 31 January the following year.
IHT payment due: 31 July.

PRs should aim to submit the account and pay IHT before these deadlines to: Ensure the grant is issued, and to avoid interest charges.

Question 46

Under what circumstances can IHT be paid by instalments, and what assets qualify for this option?

Answer 46

IHT can be paid by 10 equal annual instalments for certain assets under ss. 227-228 IHTA 1984.
- First instalment due within 6 months after the end of the month of death.
Interest is usually charged on unpaid - IHT after this deadline.

Qualifying assets:
- Land and buildings.
- Company shares/securities giving the deceased control.
- Some unquoted shares/securities (specific conditions apply).
- Farms or interest in a farming business.
- Business or interest in a business.
- Timber.

Instalment option ceases if the asset is sold, and the outstanding IHT becomes payable immediately.

Question 47

When must the PRs complete an IHT400, and what are the key factors?

Answer 47

IHT400 must be completed unless the estate is excepted.
- PRs report assets and liabilities using this form.
- Supplemental schedules (IHT401 - IHT420) may need to be completed based on the estate’s assets.

Excepted estates:
Two types for UK domiciled individuals:
Low value excepted estate:
- Gross value below the NRB and no IHT payable.

Exempt excepted estate:
- Gross value not exceeding £3 million, and after exemptions (spouse/charity), the net estate falls below the NRB.

Key factors for excepted estate:
- No gifts with reservation of benefit.
- Foreign assets below £100,000.
- No claim for Residence Nil Rate Band (RNRB).

Question 48

What is a corrective account (Form C4) and when must it be filed?

Answer 48

A corrective account (Form C4) is used to inform HMRC of:
- Additional assets/liabilities discovered after the IHT400 submission.
- Changes to asset values or exemptions/reliefs originally claimed.
- Variations in beneficiary entitlements affecting IHT liability.

If too much or too little IHT has been paid based on the original IHT400, the PRs must correct the error:
- Additional IHT due if the estate value increases.
- Refund of IHT if the estate value decreases.

Question 49

How can PRs raise funds to pay IHT before obtaining a grant of representation?

Answer 49

PRs need to pay IHT before obtaining a grant but may not have access to estate funds.

Options for raising funds:
- Direct Payment Scheme: Banks/building societies make direct payments from the deceased’s accounts to HMRC.

Borrowing:
- From a beneficiary (often interest-free).
- From a bank (commercial rates of interest apply).

PRs can request a direct payment using Schedule IHT 423.