SQE Prep – Inheritance Tax (IHT) Notes
Chapters 1–3: Introduction • Nil Rate Bands • Calculating IHT on the Death
Estate
At-a-Glance Reference
Item Key Figure / Rule
Tax year 6 April – 5 April (following year)
Nil Rate Band (NRB) £325,000 (0% rate)
Residence NRB (RNRB) £175,000 (conditions apply)
Lifetime rate 20% (for LCTs when made)
Death rate 40% (on chargeable value at death)
Cumulation window 7 years before the transfer/death
Chapter 1: Introduction to Inheritance Tax (IHT)
What is IHT?
• A UK tax primarily charged on a deceased person’s estate.
• It can also be triggered during lifetime events.
• Scope is broad to prevent avoidance by lifetime value reductions.
Scope and Key Concepts
• Applies to worldwide assets of long-term UK resident taxpayers.
• Lifetime events can also trigger IHT; rates depend on the trigger.
• Know which transfers trigger IHT, applicable rates, and the available
exemptions/reliefs.
Rates of Tax
Band / Event Rate
Nil rate band 0%
Lifetime rate (on LCTs) 20%
Death rate 40%
The rates are set annually by the Budget for each tax year.
IHT Trigger Events
• The first amount of chargeable transfers (failed PETs, LCTs, or death estate value) is
taxed at 0% NRB.
• Anything above it is taxed at 20% (LCTs) or 40% (death).
• Potentially Exempt Transfers (PETs): Lifetime gifts to individuals that become
chargeable if the donor dies within 7 years.
• Tax at the time of the gift: None
• Lifetime Chargeable Transfers (LCTs): Lifetime gifts to most trusts (since 22 March
2006) – chargeable at 20% when made; reassessed at death rate if death within 7
years.
• Immediately chargeable
• If the donor dies after 7 years: no further IHT
• If the donor dies within 7 years: LCTs are reassessed
, • Death: Deemed transfer of all assets owned at death; taxed at 40% above available
NRBs.
• After exemptions/relief and applying RNRB/NRM, any excess is at 40%.
Example:
Transfers of Value & Chargeable Transfers
• A ‘transfer of value’ is any disposition that reduces the value of the transferor’s estate
immediately.
• A ‘chargeable transfer’ is a transfer of value that is not exempt (e.g. not covered by
spouse/charity exemptions, annual exemption, etc.)
• What becomes chargeable when:
• PETs: Only if they fail (death within 7 years).
• LCTs: Immediately chargeable when made.
• Death: The deemed transfer is chargeable (subject to exemptions/reliefs and
NRBs).
• Covers gifts and undervalue transactions (e.g. selling to family below market value).
• Valuation basis:
• Lifetime transfers: Measure the loss to the donor (what their estate dropped
by).
• Death estate: Use open market value at death (s.160 IHTA).
Nil Rate Bands Overview
• Basic NRB: £325,000 – available to each individual;
• £325,000 of chargeable transfers at a rate of 0%
• Unused proportion transferable (TNRB) to the surviving spouse or civil
partner
• Residence NRB (RNRB): £175,000 – where a qualifying residential interest passes
to direct descendants;
• unused proportion transferable to the surviving spouse or civil partner
PETs – Tax Treatment
• No tax when made; becomes exempt if transferor survives 7 years.
• If death within 7 years, the PET ‘fails’ and is charged alongside the death estate.
Chapters 1–3: Introduction • Nil Rate Bands • Calculating IHT on the Death
Estate
At-a-Glance Reference
Item Key Figure / Rule
Tax year 6 April – 5 April (following year)
Nil Rate Band (NRB) £325,000 (0% rate)
Residence NRB (RNRB) £175,000 (conditions apply)
Lifetime rate 20% (for LCTs when made)
Death rate 40% (on chargeable value at death)
Cumulation window 7 years before the transfer/death
Chapter 1: Introduction to Inheritance Tax (IHT)
What is IHT?
• A UK tax primarily charged on a deceased person’s estate.
• It can also be triggered during lifetime events.
• Scope is broad to prevent avoidance by lifetime value reductions.
Scope and Key Concepts
• Applies to worldwide assets of long-term UK resident taxpayers.
• Lifetime events can also trigger IHT; rates depend on the trigger.
• Know which transfers trigger IHT, applicable rates, and the available
exemptions/reliefs.
Rates of Tax
Band / Event Rate
Nil rate band 0%
Lifetime rate (on LCTs) 20%
Death rate 40%
The rates are set annually by the Budget for each tax year.
IHT Trigger Events
• The first amount of chargeable transfers (failed PETs, LCTs, or death estate value) is
taxed at 0% NRB.
• Anything above it is taxed at 20% (LCTs) or 40% (death).
• Potentially Exempt Transfers (PETs): Lifetime gifts to individuals that become
chargeable if the donor dies within 7 years.
• Tax at the time of the gift: None
• Lifetime Chargeable Transfers (LCTs): Lifetime gifts to most trusts (since 22 March
2006) – chargeable at 20% when made; reassessed at death rate if death within 7
years.
• Immediately chargeable
• If the donor dies after 7 years: no further IHT
• If the donor dies within 7 years: LCTs are reassessed
, • Death: Deemed transfer of all assets owned at death; taxed at 40% above available
NRBs.
• After exemptions/relief and applying RNRB/NRM, any excess is at 40%.
Example:
Transfers of Value & Chargeable Transfers
• A ‘transfer of value’ is any disposition that reduces the value of the transferor’s estate
immediately.
• A ‘chargeable transfer’ is a transfer of value that is not exempt (e.g. not covered by
spouse/charity exemptions, annual exemption, etc.)
• What becomes chargeable when:
• PETs: Only if they fail (death within 7 years).
• LCTs: Immediately chargeable when made.
• Death: The deemed transfer is chargeable (subject to exemptions/reliefs and
NRBs).
• Covers gifts and undervalue transactions (e.g. selling to family below market value).
• Valuation basis:
• Lifetime transfers: Measure the loss to the donor (what their estate dropped
by).
• Death estate: Use open market value at death (s.160 IHTA).
Nil Rate Bands Overview
• Basic NRB: £325,000 – available to each individual;
• £325,000 of chargeable transfers at a rate of 0%
• Unused proportion transferable (TNRB) to the surviving spouse or civil
partner
• Residence NRB (RNRB): £175,000 – where a qualifying residential interest passes
to direct descendants;
• unused proportion transferable to the surviving spouse or civil partner
PETs – Tax Treatment
• No tax when made; becomes exempt if transferor survives 7 years.
• If death within 7 years, the PET ‘fails’ and is charged alongside the death estate.
