Inheritance tax
Transfer on death
Step 1: Identify the transfer of value
● Estate included
1. Property passes under the deceased’s will or on intestacy
2. Property the deceased was ‘beneficially entitled’ immediately before death but which does not
pass under by will or on intestacy
■ interest in any joint property passing on death by survivorship
■ Trust property → qualifying interest in possession (life interest)
■ Property subject to a reservation → possession and enjoyment
3. Property included because of special statutory provisions
● Not included
○ Pension fund
○ Life insurance
○ Excluded property = reversionary interest / interest in remainder
Step 2: Find the value transferred
● Probate value = value of an asset agreed for IHT purposes
○ Basic valuation principle = value at open market
○ For sale of share of jointly owned land = discount applied is normally up to 10% for commercial
property / 15% for residential property
○ For value of quoted share = take one-quarter of the difference between the lower and higher
price + then add it to the lower price
● Deduct debts and expenses
○ reasonable funeral expenses
○ Outstanding debt
○ Outstanding income tax
Step 3: Apply any relevant exemptions and reliefs
1. Spouse or civil partner exemption
2. Charity exemption
3. Business property relief (‘BPR’)
a. Requirement 1: Relevant business property
i. only applies where the business is ‘trading’ in nature
ii. Reduction of 100%
1. interest in a business – partnership shares
2. unlisted / unquoted company shares
iii. Reduction of 50%
1. listed company shares + voting control
2. land, buildings, machinery or plant + partnership / company + voting control
iv. Voting control = over 50% (include spouse’s shareholding)
b. Requirement 2: Time limit
i. owned by the transferor for at least 2 years at the time of the transfer
, ii. must be a replacement for relevant business property where the combined period of
ownership is 2 years
iii. Can include spouse ownership period → only for transfer on death
4. Agricultural property relief
a. property were subject to a perpetual covenant prohibiting its use other than for agriculture
b. Reduction of 100%
i. transferor had the right to vacant possession immediately before the transfer
ii. property was subject to a letting commencing on or after 1 September 1995
c. Reduction of 50%
i. other cases
d. Time limit
i. property was occupied by the transferor for the purposes of agriculture for the 2 years
prior to the transfer
ii. was owned by the transferor for the 7 years prior to the transfer + was occupied by
someone throughout that period for the purposes of agriculture
Step 4: Calculate tax at the appropriate rate
1. Nil rate band (NRB)
a. Rate
i. If no chargeable transfers 7 years prior to death = first £325,000 of the estate is 0%
ii. exceeds the NRB → IHT = charged on the excess at 40%
iii. Special rate = 36% → 10% of estate passed to charity
b. died on or after 9 October 2007 → can transfer unused NRB of spouse
c. Cumulation
i. lifetime transfers use up the deceased’s NRB first
ii. Applies to both types of transfer = PET / LCT
2. Residence nil rate band (RNRB)
a. ONLY available for transfer for death
b. deaths after 6 April 2017, the RNRB is available in addition to the NRB
c. RNRB for 2022/23 = £175,000
i. First RNRB tax at 0%
ii. Remaining tax at 40%
d. Requirement
i. Qualifying residential interest → dwelling house
ii. Closely inherited
1. Pass to child / grandchild / other lineal descendant - include step-children
2. current spouse or civil partner of the deceased’s lineal descendants
3. widow of lineal descendant who predeceased the deceased → unless
remarried before death
e. If estate £2 million or more → RNRB is reduced by £1 for every £2 over the £2 million threshold
f. can transfer unused NRB of spouse
, Lifetime transfers: Potentially exempt transfers (PET)
Step 1: Identify the transfer of value
● any lifetime disposition made by deceased which reduces the value of his estate
● Excluded transfer
○ maintenance, education or training of the transferor’s child under 18 / full-time education or
training over that age
○ maintenance of a dependent relative
Step 2: Find the value transferred
● Value transferred = loss in value to the estate of the transferor brought about by the transfer
● related property rules
○ Apply to property transferred between husband and wife
○ Value transferred = not how much each item costs BUT how much losses it brought to the
estate
Step 3: Apply any relevant exemptions and reliefs
1. Spouse or civil partner and charity exemptions
a. applied before reliefs
2. Business and agricultural property relief
3. Lifetime only exemptions
a. Annual exemption = £3,000
i. applies to the first £3,000 transferred by lifetime transfers in each tax year
ii. unused annual exemption may be carried forward for 1 year only
iii. current year’s exemption must be used before the previous year’s exemption can be
carried forward
iv. exemption is used to reduce the first transfer
b. Small gifts
i. £250 or less to any one person
ii. cannot be set against a gift which exceeds £250
c. Normal expenditure out of income
i. normal expenditure + made out of the transferor’s income + transferor was left with
sufficient income to maintain their living
d. Gifts in consideration of marriage
i. £5,000 by a parent of a party to the marriage
ii. £2,500 by a remoter ancestor of a party to the marriage (eg a grandparent)
iii. £1,000 in any other case
if the transferor dies within the seven-year period, the transfer becomes chargeable and must be
assessed as such
Transfer on death
Step 1: Identify the transfer of value
● Estate included
1. Property passes under the deceased’s will or on intestacy
2. Property the deceased was ‘beneficially entitled’ immediately before death but which does not
pass under by will or on intestacy
■ interest in any joint property passing on death by survivorship
■ Trust property → qualifying interest in possession (life interest)
■ Property subject to a reservation → possession and enjoyment
3. Property included because of special statutory provisions
● Not included
○ Pension fund
○ Life insurance
○ Excluded property = reversionary interest / interest in remainder
Step 2: Find the value transferred
● Probate value = value of an asset agreed for IHT purposes
○ Basic valuation principle = value at open market
○ For sale of share of jointly owned land = discount applied is normally up to 10% for commercial
property / 15% for residential property
○ For value of quoted share = take one-quarter of the difference between the lower and higher
price + then add it to the lower price
● Deduct debts and expenses
○ reasonable funeral expenses
○ Outstanding debt
○ Outstanding income tax
Step 3: Apply any relevant exemptions and reliefs
1. Spouse or civil partner exemption
2. Charity exemption
3. Business property relief (‘BPR’)
a. Requirement 1: Relevant business property
i. only applies where the business is ‘trading’ in nature
ii. Reduction of 100%
1. interest in a business – partnership shares
2. unlisted / unquoted company shares
iii. Reduction of 50%
1. listed company shares + voting control
2. land, buildings, machinery or plant + partnership / company + voting control
iv. Voting control = over 50% (include spouse’s shareholding)
b. Requirement 2: Time limit
i. owned by the transferor for at least 2 years at the time of the transfer
, ii. must be a replacement for relevant business property where the combined period of
ownership is 2 years
iii. Can include spouse ownership period → only for transfer on death
4. Agricultural property relief
a. property were subject to a perpetual covenant prohibiting its use other than for agriculture
b. Reduction of 100%
i. transferor had the right to vacant possession immediately before the transfer
ii. property was subject to a letting commencing on or after 1 September 1995
c. Reduction of 50%
i. other cases
d. Time limit
i. property was occupied by the transferor for the purposes of agriculture for the 2 years
prior to the transfer
ii. was owned by the transferor for the 7 years prior to the transfer + was occupied by
someone throughout that period for the purposes of agriculture
Step 4: Calculate tax at the appropriate rate
1. Nil rate band (NRB)
a. Rate
i. If no chargeable transfers 7 years prior to death = first £325,000 of the estate is 0%
ii. exceeds the NRB → IHT = charged on the excess at 40%
iii. Special rate = 36% → 10% of estate passed to charity
b. died on or after 9 October 2007 → can transfer unused NRB of spouse
c. Cumulation
i. lifetime transfers use up the deceased’s NRB first
ii. Applies to both types of transfer = PET / LCT
2. Residence nil rate band (RNRB)
a. ONLY available for transfer for death
b. deaths after 6 April 2017, the RNRB is available in addition to the NRB
c. RNRB for 2022/23 = £175,000
i. First RNRB tax at 0%
ii. Remaining tax at 40%
d. Requirement
i. Qualifying residential interest → dwelling house
ii. Closely inherited
1. Pass to child / grandchild / other lineal descendant - include step-children
2. current spouse or civil partner of the deceased’s lineal descendants
3. widow of lineal descendant who predeceased the deceased → unless
remarried before death
e. If estate £2 million or more → RNRB is reduced by £1 for every £2 over the £2 million threshold
f. can transfer unused NRB of spouse
, Lifetime transfers: Potentially exempt transfers (PET)
Step 1: Identify the transfer of value
● any lifetime disposition made by deceased which reduces the value of his estate
● Excluded transfer
○ maintenance, education or training of the transferor’s child under 18 / full-time education or
training over that age
○ maintenance of a dependent relative
Step 2: Find the value transferred
● Value transferred = loss in value to the estate of the transferor brought about by the transfer
● related property rules
○ Apply to property transferred between husband and wife
○ Value transferred = not how much each item costs BUT how much losses it brought to the
estate
Step 3: Apply any relevant exemptions and reliefs
1. Spouse or civil partner and charity exemptions
a. applied before reliefs
2. Business and agricultural property relief
3. Lifetime only exemptions
a. Annual exemption = £3,000
i. applies to the first £3,000 transferred by lifetime transfers in each tax year
ii. unused annual exemption may be carried forward for 1 year only
iii. current year’s exemption must be used before the previous year’s exemption can be
carried forward
iv. exemption is used to reduce the first transfer
b. Small gifts
i. £250 or less to any one person
ii. cannot be set against a gift which exceeds £250
c. Normal expenditure out of income
i. normal expenditure + made out of the transferor’s income + transferor was left with
sufficient income to maintain their living
d. Gifts in consideration of marriage
i. £5,000 by a parent of a party to the marriage
ii. £2,500 by a remoter ancestor of a party to the marriage (eg a grandparent)
iii. £1,000 in any other case
if the transferor dies within the seven-year period, the transfer becomes chargeable and must be
assessed as such
