Lecture 17 Personal financial planning and inheritance tax

ACC3140 – Taxation
Unit 17 – Inheritance Tax

OUTCOMES
 Describe the principles of IHT
 Describe the main exemptions and reliefs from IHT
 Explain the consequences of lifetime transfers and deemed transfers on death
 Compute IHT liabilities on lifetime transfers, and on taxpayer’s estate on death
 Reconsider the incidence of IHT liabilities as a result of a taxpayer’s death within 7 years of a lifetime
transfer
 Advise a taxpayer on steps to mitigate IHT liabilities

TRANSFERS OF VALUE
• Occurs when a transferor makes a disposition
- lowering the value of his/her estate
• Value of transfer = fall in value of transferor’s estate
• If transferor pays IHT, this is included as part of the gift

CHARGEABLE TRANSFERS
Transfers may be
- during person’s life
- on person’s death
Not all transfers are chargeable, e.g.
- Dispositions without gratuitous intent (e.g. business transactions) are not chargeable
- Dispositions for maintenance of transferor’s family are not chargeable

CHARGEABLE PERSONS
 An individual who is domiciled in the UK is liable to IHT on all chargeable property situated throughout the
world
 A non-dom is chargeable on UK situated property only
 NB deemed domicile after 15 years of residence

EXEMPT TRANSFERS
 Exemptions for transfers to certain transferees ><Exemptions available to the transferor

EXEMPTIONS FOR TRANSFERS MADE TO CERTAIN TRANSFEREES
 Transfers to spouse or civil partner
 Gifts to political parties
 Gifts made to certain national bodies e.g. museums
 Gifts made to charities

EXEMPTIONS AVAILABLE TO THE TRANSFEROR
Available in relation to lifetime transfers only:
1. Small gifts
Up to £250 per transferee per year

2. Normal expenditure out of income (e.g. birthday and Christmas presents)
- Must leave sufficient income to maintain normal standard of living

3.Gifts in consideration of marriage
- £5,000 if made by a parent of the bride or groom
- £2,500 if made by grandparent
- £2,500 if made by the bride to the groom or vice versa

, - £1,000 in any other case

4. Annual exemption
- £3,000 per tax year
- Carry unused amount forward for one year

POTENTIALLY EXEMPT TRANSFERS (PETs)
 After applying all the exemptions, the balance of a gift will either be chargeable immediately or will
qualify as a ‘potentially exempt transfer’ (PET).
 All gifts to another individual qualify as PETs (irrespective of size)
 No need to inform HMRC
 They are initially exempt but become chargeable only if the donor dies within 7 years of making the gift
 Gifts to a trust do not qualify at PETs

RATES OF IHT
Lifetime transfers Death
£0 - £325,000 (nil-rate band) 0% 0%
£325,000 + 20% 40%

Taper relief (reduction in the tax) for PETs if donor dies within 7 years:

period between
transfer and death % tax reduction
3 years or less 0%
3 - 4 years 20%
4 - 5 years 40%
5 - 6 years 60%
6 - 7 years 80%

UNIT ACTIVITY 1
Jim gives a gift of £351,000 to his sister. What are the IHT consequences at the time of the gift? Assume no
previous gifts.
£
Chargeable transfer 351,000
Annual exemption (year of gift) (3,000)
Annual exemption (b/f) (3,000)
345,000

Potentially Exempt Transfer (PET) so no immediate IHT consequences.

What if Jim were to die within
(i) two years?
(ii) four years of the gift?




TAX ON THE ESTATE OF THE DECEASED PERSON