INHERITANCE TAX
Calculating IHT
Step 1 Identify the Transfer of Value
Deemed transfer of death estate on death OR
o When a person dies he is treated for IHT purposes as having made a transfer of value.
o Estate is defined by IHTA 1984 s.5(1).
Things such as car, house and money.
Charged at 40%.
Lifetime Transfer
o Potentially Exempt Transfer (PET)
(transfer to an individual)
PET is only chargeable if the transferor dies within 7 years of making it.
Annual exemption applies to PET.
Charged at 40%.
o Lifetime Chargeable Transfer (LCT)
Gift or transfer of wealth to a trust or company.
A trust is a legal arrangement where one or more people (the trustees) hold assets on
behalf of another person(s) (beneficiaries).
Give rise to IHT at the time they were made.
At the time LCT is made it is taxed at 20% after the NRB has been used.
40% after death – tapering relief applies.
Find the value transferred
Step 2
Death estate –
Work out the value of all death estates and add them together then deduct debts and funeral expenses.
Lifetime transfers –
The reduction in value of the transferors estate.
Valuing quoted shares
o When prices are shown for listed shares two prices are reported
E.g. 530-540p.
o We take the lower price and then add one quarter of the difference between the two prices
E.g. 530 + ¼ (540-530) = 532.5p
Apply exemptions and reliefs
Step 3
Spouse and civil partner exemption – s.18 IHTA 1984
Any gift to a spouse is completely exempt from IHT.
o Survivorship.
Charity exemption – s.23(1) IHTA 1984
Any gift to charity it exempt from IHT.
o Property which passes to charity under the deceased’s will.
Gifts to museums, art galleries and political parties.
Business property relief –
Reduces the value transferred by a certain percentage, provided that the transferor owned the property for
the two years immediately before the transfer.
100% reduction for:
o A business or an interest in a business (such as shares in a partnership)
o Unquoted shares.
50% reduction for:
o Quoted shares which gave the transferor control of the company
o Certain land, buildings and machinery owned by the transferor but used in his company or
partnership.
Calculating IHT
Step 1 Identify the Transfer of Value
Deemed transfer of death estate on death OR
o When a person dies he is treated for IHT purposes as having made a transfer of value.
o Estate is defined by IHTA 1984 s.5(1).
Things such as car, house and money.
Charged at 40%.
Lifetime Transfer
o Potentially Exempt Transfer (PET)
(transfer to an individual)
PET is only chargeable if the transferor dies within 7 years of making it.
Annual exemption applies to PET.
Charged at 40%.
o Lifetime Chargeable Transfer (LCT)
Gift or transfer of wealth to a trust or company.
A trust is a legal arrangement where one or more people (the trustees) hold assets on
behalf of another person(s) (beneficiaries).
Give rise to IHT at the time they were made.
At the time LCT is made it is taxed at 20% after the NRB has been used.
40% after death – tapering relief applies.
Find the value transferred
Step 2
Death estate –
Work out the value of all death estates and add them together then deduct debts and funeral expenses.
Lifetime transfers –
The reduction in value of the transferors estate.
Valuing quoted shares
o When prices are shown for listed shares two prices are reported
E.g. 530-540p.
o We take the lower price and then add one quarter of the difference between the two prices
E.g. 530 + ¼ (540-530) = 532.5p
Apply exemptions and reliefs
Step 3
Spouse and civil partner exemption – s.18 IHTA 1984
Any gift to a spouse is completely exempt from IHT.
o Survivorship.
Charity exemption – s.23(1) IHTA 1984
Any gift to charity it exempt from IHT.
o Property which passes to charity under the deceased’s will.
Gifts to museums, art galleries and political parties.
Business property relief –
Reduces the value transferred by a certain percentage, provided that the transferor owned the property for
the two years immediately before the transfer.
100% reduction for:
o A business or an interest in a business (such as shares in a partnership)
o Unquoted shares.
50% reduction for:
o Quoted shares which gave the transferor control of the company
o Certain land, buildings and machinery owned by the transferor but used in his company or
partnership.
