Inheritance Tax (IHT) Flashcards
What is inheritance tax?
A tax on wealth that is both transferred on death but also on gifts made during the persons lifetime
What rate is IHT charged at?
40%
How much is the IHT nil rate band?
£325,000
transfers as a % to spouse upon death if unused
How much is the resident’s nil rate band?
£175,000
What conditions apply to be able to claim the resident’s nil rate band?
1) Leave it to children (or grandchildren)
2) Estate is worth <£2m
What are the 4 types of transfers for IHT?
1) Exempt
2) Potentially Exempt
3) Chargeable Lifetime Transfers
4) Chargeable transfers on death
How does residence and domicile effect IHT?
Domiciled individuals are subject to IHT on their worldwide assets whilst resident non-doms are subject only to UK assets.
How can an individual lower their IHT rate?
Leaving 10% or more to charity lowers rate to 36%
What transfers are exempt from IHT?
1) Gifts for national benefit (e.g. a painting)
2) Gifts to political parties
3) Gifts to spouse
4) Small Gifts
5) Gifts out of regular income
6) Gifts on marriage
What are the rules on “gifts out of regular income”
1) Must be made out of normal income (not savings / cash)
2) Must be part of normal expenditure
3) Must not detereriate normal standard of living of gifter
What are the rules surrounding exemptions on gifts for marriage?
1) £5,000 if given by parent
2) £2,500 by grandparent / great-grandparent
3) £1,000 by anyone else
must be made before ceremony - and ceremony must actually take place for exemption to apply
What is a lifetime transfer sometimes known as?
a “potentially exempt transfer”
What is an example of a lifetime transfer that is immediately chargeable to IHT?
what rate is IHT charged at in this case?
A gift to certian types of trust above the NRB is charged @ 20% immediately
trusts other than bare trusts or trusts for a disabled person)
What principle is used to measure the value charged for IHT?
“loss to the estate principle”
When does a PET become exempt?
7 years after the gift was made
What are the tapering figures for IHT?
Up to 3yrs = 100%
3-4yrs = 80%
4-5yrs = 60%
5-6yrs = 40%
6-7yrs = 20%
percentages are the amount of IHT which is payable
What is a gift with reservation?
When the donee “gifts” an asset but retains some or all benefit from it
for example: gifting a house but continuing to live in it
very tax inefficient
How can a house be gifted - but the donee continues to live in it without being a gift with benefit?
1) donee pays rent at market level
2) pays their share of the bills
3) has lived in it for 7yrs
How does the NRB work between spouses?
The NRB can be transferred between spouses on death
The unused percentage of the NRB is what transfers
Must be used on 2nd death
e.g. if NRB increases or decreased the % is taken against whatever the NRB is at time of 2nd death
How does the RNRB taper?
£1 for every £2 over £2mil
value of estate is after deduction of funeral costs (but before deduction of NRB)
To calculate if a charitable gift qualifies for the reduced rate of CGT, what is deducted from the value of the estate first?
1) Funeral Costs
2) NRB
What releifs are available for IHT?
1) Successive Charge Relief
2) Business Relief
3) Agricultural Relief
What is successive charge relief?
Reduces IHT when an estate is subject to IHT twice in quick succession (5yrs)
What is the successive charge relief based upon?
Time elapsed between two deaths
What is the small gifts exemption for IHT?
£250 each to as many donees as wished
does not apply into trusts
What is the annual exemption to IHT?
£3,000
can be carried forward one year
cannot use £250 small gift exemption to give £3,250 to one person
What is business relief for IHT?
What two relief rates are applicable?
Reduced rate of IHT on assets used or related to a business?
100% or 50%
What garners 100% IHT relief under business relief?
Interests in unincorporated companies
Shares in unlisted or AIM companies
What qualifies for 50% IHT relief under business relief?
controlling shareholding in a listed company
plant, land & machinery wholly / mainly used for a business controlled by the donee
How is business relief changing from 2026?
100% will be capped at £1m
AIM shares will become 50%
past the £1m 50% relief still applies
What is agricultural relief?
Relief on IHT on agricultural assets
such as farmland
What gets 100% relief under agricultural relief?
owner occupied farmland
What gets 50% relief under agricultural relief?
interests in let farmland
How will agricultural relief change in 2026?
100% capped at £1m then rest 50% applies
What is a deed of variation?
Allows beneficaries to alter the distribution of an estate / will
Why might someone use a deed of variation?
1) Reduce IHT / CGT
2) Include someone who was left out of a will
3) Re-direct assets into a trust
What conditions must apply for a deed of variation to be succesful?
1) Anyone effected must agree
2) Must take place within 2yrs after death
3) Those giving away must be of sound mind and age
4) Cannot be paid for completing the deed
