Lecture 10: Inheritance Tax

Question 1

When does inheritance tax arise?

Answer 1

Where there is a chargeable transfer

i.e. a transfer of value which is not exempt.

Question 2

What is a transfer of value?

Answer 2

• Gratuitous, element of bounty
• “the value of (a person’s) estate immediately after the disposition (transfer) is less than it would be but for the disposition (transfer); and the amount by which it is less is the value transferred by the transfer”

i.e. diminution of value concept

Question 3

Diminution in value question:
A gives B 4,000 shares out of his holding of 6,000 shares in F Ltd, an unquoted investment company. The company has 10,000 shares in issue.

Size of holding and related value per share: 
0%-10%   £10
25%-49.9%    £19
50%-74.9%     £32
75%-100%    £45

Calculate the value transferred for IHT purposes

Answer 3

Before 6,000*£32 = £192,000

After 2,000*£10 = £20,000

Value transferred £172,000

The tax is about what the donor is giving away.

Question 4

What transfers are exempt from IHT?

Answer 4

Annual Exemption
Small Gifts exemption
Gifts in the consideration of marriage.
Normal expenditure out of income.
Transfers between spouses (and civil partners).
Gifts to charity, political parties, etc.
Gifts to spouses and gifts to charities are exempt outright.

Question 5

What is the annual exemption?

Answer 5

Available in lifetime only:
£3,000 per donor per tax year (6/4-5/4)
if unused, carry forward 1 year only.
Current year annual exemption used first.

Question 6

What is the small gifts exemption?

Answer 6

£250 per donee per tax year and can’t reduce larger gifts.

Question 7

What are the exemptions for gifts in consideration of marriage?

Answer 7

£5,000 by a parent of bride or groom
£2,500 by a remoter ancestor (grandparents/ great gp), bride or groom to each other. 
£1,000 by anyone else

Used before AE

Question 8

What is the exemption for normal expenditure out of income?

Answer 8

Normal = 3 years +

After all such transfers the transferor must be left with sufficient income to maintain his usual standard of living

Question 9

What transfers between spouses (and civil partners) are exempt?

Answer 9

Exempt, except by a UK-domiciled spouse to a non UK-domiciled spouse, when only transfers up to £325,000 in total are exempt (over lifetime)

Question 10

When will a charge to inheritance tax arise?

Answer 10

A charge to IHT will arise in the following circumstances:-

• on the transfer of assets on death
• on lifetime gifts into a trust – i.e Chargeable Lifetime Transfers (CLTs) (relevant property trust - exempt trusts don’t apply)
• on lifetime gifts which become chargeable as a result of their having been made within the 7 years before the donor’s death (PET’s)

Question 11

What are potentially exempt transfers?

Answer 11

Individual -> Individual

Becomes an exempt transfer if the transferor survives 7 years from the date of the transfer

If the transferor survives 3-7 years, TAPER RELIEF is available

Question 12

What is the taper relief available if the transferor survives 3-7 years?

Answer 12

If the transferor survives 3-7 years, TAPER RELIEF is available as follows:- (need to remember)

Years between gift and death and the percentage reduction:

3 – 4         20%
4 – 5         40%
5 – 6         60%
6 – 7          80%

Question 13

What are the rates of IHT in lifetime?

Answer 13

£0-325,000:
Gross transfer (donee pays tax) - NIL
Net transfer (donor pays tax) - NIL

325,000 is not an annual amount

£325,000+:
Transfer is gross - 20%
Transfer is net - 25% (20/80)

Question 14

What are the rates of IHT in death?

Answer 14

£0-325,000:
Transfer is gross - NIL
Transfer is net - NIL

£325,000+:
Transfer is gross - 40%
Transfer is net - 40% of gross transfer.

Both donee and donor are liable to inheritance tax in lifetime. An agreement between them.
IHT operates on a cumulative and chronological basis over 7 years

Question 15

How is death dealt with for potentially exempt transfers and chargeable lifetime transfers?

Answer 15

Dealing with PETs and CLTs in chronological order,
PETs become chargeable if made in the 7 years before death
1. use value at date of PET (net of exemptions avail)
2. consider all CLTs, and other PETs now becoming chargeable, made in the 7 years before PET, and allocate nil rate band (£325,000) to them, using earliest transfers first (look back at previous 7 years to see how much of nil rate band (325,000) has been used) If 7 years between transfers, you get the nil rate every time.
3. deduct balance of nil rate band, if any, and calculate IHT at 40% (death rate)
deduct taper relief if available.

• Additional tax becomes payable on CLTs within the 7 years before death

1. take original transfer, net of exemptions, grossed up for tax if the original transfer was net (if donor paid the tax).
2. consider CLTs and PETs now chargeable made in the previous 7 years, and allocate nil rate band to them, using earliest transfers first
3. deduct balance of nil rate band, and calculate IHT at 40%
4. deduct taper relief if available.
5. deduct lifetime tax (No repayment of lifetime tax)

Question 16

How to deal with death estate?

Answer 16

Death estate:

1. consider gross taxable transfers of the previous 7 years, and allocate nil rate band to them, using earliest transfers first
2. deduct balance of nil rate band  and calculate IHT at 40%

If at least 10% of an estate is left to charity, then IHT is charged at 36% on the remainder of the chargeable estate.