Wills and Estates Revision
Section B
*IHTA = Inheritance Tax Act 1984
When is inheritance tax payable?
• IHTA states that all transfers of value made by an individual are chargeable to inheritance
tax unless exempt – need to know when IHT is triggered and what exemptions or reliefs
there are
• Three kinds of transfer:
1. Potentially exempt transfers (‘PET’)
2. Lifetime chargeable transfers (‘LCT’)
3. Death
*PETs and LCTs are made by a person during their life
Potentially Exempt Transfers (PETs)
• PET is a transfer of value made by a person during their lifetime (inter vivos) to another
individual
Tax treatment of PETs:
• No IHT is payable at the time the PET is made as the transfer is not chargeable at this point
• No IHT is payable at all if the transferor survives 7 years from the date of the PET (the
transfer becomes fully exempt)
• If the transferor dies within 7 years of making the PET, the PET fails and becomes a
chargeable transfer and thus subject to IHT at the death rate of 40%
Lifetime Chargeable Transfers (LCTs)
• All inter vivos transfers of value made by a person into a trust on or after 22 nd March 2006
will give rise to an LCT
Tax treatment of LCTs:
• An LCT is a chargeable transfer when it is made and IHT is payable at this time at the
lifetime rate of half the death rate (i.e. 20%)
• IHT at 20% is applied to the chargeable value of the LCT above the available nil rate band
• The person making the LCT is primarily liable to pay the IHT
• If the transferor survives 7 years following the LCT there is no further charge to tax
• If the transferor dies within 7 years of making the LCT the tax liability is re-assessed at the
death rate of 40%
Death
• When a person dies there is a deemed transfer of all the assets that they own at the date of
their death – this gives rise to IHT
• IHT is payable on a person’s death estate at 40% of the value of the estate above the
available nil rate band
Value of Transfer
• PETs and LCTs = the amount by which the transferor’s estate is reduced, rather than the
face value of asset or the amount the transferee gains. E.g. if the transferrer gives away
, one item out of a complete set, the loss to the transferor may be more than the value of the
one item given away
• Death = Property in the taxable estate is valued at the price it might reasonably be
expected to get if sold on the open market immediately before the death
Rates of tax
Lifetime
2019/20 tax rates:
• £0 - £325,000 at 0% nil rate band (NRB)
• Above £325,000 taxed at half of death rate – 20 % (for LCTs only)
Death
2019/20 tax rates:
• £0 - £325,000 at 0% NRB
• Above £325,000 at 40%
• Reduced rate of 36% IHT if 10% of assets/cash left to charity – will never need to apply
36% tax rate in exam
Cumulative Total
• Cumulative total = the total chargeable value of all the chargeable transfers made in
the previous 7 years
• This includes any LCT’s and failed PETs
• Do not assume that the chargeable value of a transfer is simply equal to the amount
transferred. Exemptions and reliefs are considered before arriving at the chargeable value
• The effect of the cumulative total is to reduce the NRB available for the current transfer. So,
you must calculate the value of the cumulative total before you can work out the NRB
available
Exemptions and Reliefs for LIFETIME transfers only
The following exemptions can be applied to LCTs and failed PETs but cannot be deducted
when calculating the IHT due in respect of the death estate
Annual Exemption (AE)
• The AE is £3,000 for each tax year
• A person can give away £3,000 each year and all of which will be exempt from IHT
• Tax year = 6th April – 5th April
• AE is applied chronologically to gifts when they are made in a tax year
• If a person does not use all the £3,000 allowance, they may transfer it to the following year
– however there is a maximum of 2 years’ worth of AE
• AE should be used after any other applicable exemption or relief; this ensures the AE is
available for later transfers
• AE cannot be applied to the death estate itself
Small gifts allowance
• Transfers up to £250 per person each tax year
• Can make multiple gifts of up to £250 to as many different people as they like
• Not available when the gift exceeds £250
• Cannot be used in conjunction with another exemption, particularly AE
Section B
*IHTA = Inheritance Tax Act 1984
When is inheritance tax payable?
• IHTA states that all transfers of value made by an individual are chargeable to inheritance
tax unless exempt – need to know when IHT is triggered and what exemptions or reliefs
there are
• Three kinds of transfer:
1. Potentially exempt transfers (‘PET’)
2. Lifetime chargeable transfers (‘LCT’)
3. Death
*PETs and LCTs are made by a person during their life
Potentially Exempt Transfers (PETs)
• PET is a transfer of value made by a person during their lifetime (inter vivos) to another
individual
Tax treatment of PETs:
• No IHT is payable at the time the PET is made as the transfer is not chargeable at this point
• No IHT is payable at all if the transferor survives 7 years from the date of the PET (the
transfer becomes fully exempt)
• If the transferor dies within 7 years of making the PET, the PET fails and becomes a
chargeable transfer and thus subject to IHT at the death rate of 40%
Lifetime Chargeable Transfers (LCTs)
• All inter vivos transfers of value made by a person into a trust on or after 22 nd March 2006
will give rise to an LCT
Tax treatment of LCTs:
• An LCT is a chargeable transfer when it is made and IHT is payable at this time at the
lifetime rate of half the death rate (i.e. 20%)
• IHT at 20% is applied to the chargeable value of the LCT above the available nil rate band
• The person making the LCT is primarily liable to pay the IHT
• If the transferor survives 7 years following the LCT there is no further charge to tax
• If the transferor dies within 7 years of making the LCT the tax liability is re-assessed at the
death rate of 40%
Death
• When a person dies there is a deemed transfer of all the assets that they own at the date of
their death – this gives rise to IHT
• IHT is payable on a person’s death estate at 40% of the value of the estate above the
available nil rate band
Value of Transfer
• PETs and LCTs = the amount by which the transferor’s estate is reduced, rather than the
face value of asset or the amount the transferee gains. E.g. if the transferrer gives away
, one item out of a complete set, the loss to the transferor may be more than the value of the
one item given away
• Death = Property in the taxable estate is valued at the price it might reasonably be
expected to get if sold on the open market immediately before the death
Rates of tax
Lifetime
2019/20 tax rates:
• £0 - £325,000 at 0% nil rate band (NRB)
• Above £325,000 taxed at half of death rate – 20 % (for LCTs only)
Death
2019/20 tax rates:
• £0 - £325,000 at 0% NRB
• Above £325,000 at 40%
• Reduced rate of 36% IHT if 10% of assets/cash left to charity – will never need to apply
36% tax rate in exam
Cumulative Total
• Cumulative total = the total chargeable value of all the chargeable transfers made in
the previous 7 years
• This includes any LCT’s and failed PETs
• Do not assume that the chargeable value of a transfer is simply equal to the amount
transferred. Exemptions and reliefs are considered before arriving at the chargeable value
• The effect of the cumulative total is to reduce the NRB available for the current transfer. So,
you must calculate the value of the cumulative total before you can work out the NRB
available
Exemptions and Reliefs for LIFETIME transfers only
The following exemptions can be applied to LCTs and failed PETs but cannot be deducted
when calculating the IHT due in respect of the death estate
Annual Exemption (AE)
• The AE is £3,000 for each tax year
• A person can give away £3,000 each year and all of which will be exempt from IHT
• Tax year = 6th April – 5th April
• AE is applied chronologically to gifts when they are made in a tax year
• If a person does not use all the £3,000 allowance, they may transfer it to the following year
– however there is a maximum of 2 years’ worth of AE
• AE should be used after any other applicable exemption or relief; this ensures the AE is
available for later transfers
• AE cannot be applied to the death estate itself
Small gifts allowance
• Transfers up to £250 per person each tax year
• Can make multiple gifts of up to £250 to as many different people as they like
• Not available when the gift exceeds £250
• Cannot be used in conjunction with another exemption, particularly AE
