Inheritance tax
Inheritance tax generally
Inheritance tax is governed principally by the Inheritance Tax Act 1984 (IHTA 1984).
Despite its name, the tax does not apply only to death estates but can also catch transfers made during life.
There are 3 main occasions when IHT may be charged:
on death
on lifetime gifts made to individuals WITHIN 7 YEARS PRIOR to death
on lifetime gifts to a company or into a trust
On death Lifetime gifts made to individuals within 7 years Lifetime gifts to a company or
prior to death into a trust
Transfers on death Potentially exempt transfers (PET) Lifetime chargeable transfers (LCT)
Inheritance tax is intended If IHT were limited to a charge on death, one way to Inheritance tax might also be
primarily to take effect on avoid tax would be to reduce the size of one’s estate by avoided by the use of a trust or
death. making lifetime gifts corporate entity.
When an individual dies, IHT is therefore also charged on certain lifetime At present a lifetime gift to a
IHT is charged on the gifts or ‘transfers’ if the donor dies WITHIN 7 company or into a trust is
value of his estate YEARS AFTER MAKING THEM. immediately chargeable to IHT
(broadly, his assets less At the time when the transfer is made NO IHT is at the time when it is made,
his liabilities) subject to chargeable, the transfer is ‘potentially exempt’. UNLESS the trust is for a
various exemptions and If the transferor survives for 7 years, the transfer disabled person.
reliefs. becomes EXEMPT.
If transferor dies within 7 years, transfer is
chargeable.
The main charging provisions
STEP Identify the A lifetime transfer of value is any disposition which reduces the value of the transferor’s estate.
1 transfer of On death, tax is charged as if the deceased had made a transfer of value of his estate.
value
STEP Find the For a lifetime transfer, this is the amount of the reduction in the transferor’s estate.
2 value On death, it is the value of the estate.
transferred
STEP Apply any Various exemptions and reliefs exist for public policy reasons which can reduce or eliminate the IHT charge on
3 relevant any given transfer.
exemptions Some exemptions apply both to lifetime transfers and to the transfer on death (e.g. to spouse or civil partner).
and reliefs Others are more restricted, and many apply only to lifetime transfers (eg annual exemption).
The main reliefs are business and agricultural property relief, which may apply BOTH to lifetime transfers of
such property and to the transfer on death.
STEP Calculate RATE OF TAX: A range of tax rates apply to IHT, the lowest being 0%– there are two bands
4 tax at the 1 the residence nil rate band (currently £175,000) – available ONLY on a transfer on death where there is a
appropriate ‘qualifying residential interest’.
rate (a) Qualifying residential interest = deceased’s residential property and must be inherited by a linear
descendant
(b) Does NOT apply to lifetime transfers
The rate of tax that applies in excess of the nil rate band and the residence nil rate band (where applicable)
varies according to the type of transfer (see below).
2 the nil rate band (currently £325,000) – available for all transfers of value;
CUMULATION: whether the nil rate band is available for any chargeable transfer.
1
, The nil rate band will not be available in full (or at all) for any given transfer.
In order to calculate the available NRB on any transfer, whether during lifetime or on death, one must FIRST
look back over the 7 YEARS immediately preceding the transfer.
Any chargeable transfers made by the transferor during the 7 year period must be taken into account in
order to determine how much of the nil rate band remains available.
As the residence nil rate band is NOT available for lifetime transfers, it will be available in full on death,
subject to any adjustments in relation to estates over £2 million. Cumulation is not relevant.
Transfers on death
The charging provision steps
Step 1: identify the transfer of value
When someone dies, he is treated as having made a transfer of value immediately before his death:
“X is deemed to make a transfer of value on death of everything to which he was beneficially entitled”.
Step 2: find the value transferred
“Value transferred” = “Value transferred” = value of the deceased estate immediately before his death.
The deceased estate “Estate” = all the property to which he was beneficially entitled immediately before his death.
o Property which passes under the deceased’s will or on intestacy.
o Property to which deceased was ‘beneficially entitled’ immediately before his death but which
does not pass under his will or intestacy, e.g. joint tenancy.
o Deceased is not entitled to an interest under trust which has not vested.
o Property included because of special statutory provisions, e.g.:
Under the Finance Act 1986, if property is gifted but the donor still actually enjoys
possession and enjoyment of it at the time of death, it is “subject to reservation” and
still forms part of estate.
Some trust interests if they are qualifying interests in possession.
How are assets Assets are valued at “the price which the property might reasonably be expected to fetch if sold in the
valued? open market” immediately before death: s160 IHTA
o Change in value on death (increase or decrease) should be considered: s171
o Quoted shares: normally two prices are given, so take ¼ of difference between lower and higher
price and add it to lower price. DEDUCT:
Liabilities owed by the deceased at the time of time: s505
Reasonable funeral expenses: s162
Step 3: apply exemptions/relief
Spouse or civil s18: Any property included in the estate is EXEMPT if it passes to the deceased’s spouse or CP under the
partner exemption deceased’s will or intestacy, or survivorship (joint property/property held as JT).
Charity exemption s23(1): Any property included in deceased’s estate is EXEMPT if it passes to charity.
Business and Applies to reduce the value of ‘relevant business property’ by a certain percentage, provided that the
agricultural property transferor owned the property for the 2 YEARS IMMEDIATELY BEFORE the transfer.
o Reduction of 100% for:
A business or interest in a business (incl. partnership share); and
Unquoted shares company shares that are NOT listed on a recognised stock
exchange
o Reduction of 50% for:
Quoted shares which gave the transferor voting control of the company; and
o Ability to exercise 50%+ of the votes on ALL resolutions
o If spouses/CPs COMBINED shareholdings is 50%+, test SATISFIED (s.269)
Certain land, buildings and machinery owned by the transferor but used for business
purposes in his company (with voting control) or partnership
Step 4: calculate tax at appropriate rate
Rate of tax If the deceased has made no chargeable transfers in the seven years before death, the rate of tax on the
first £325,000 of his estate is 0% (nil rate band).
o If the date of death is AFTER 6 April 2017 and the deceased owned a qualifying residential
interest and being closely inherited (child or grandchild), the new ‘RESIDENCE NIL RATE BAND
will be available IN ADDITION to the nil rate band in the following amounts:
6 April 2017 – 5 April 2018: £100,000
6 April 2018 – 5 April 2019: £125,000
6 April 2019 – 5 April 2020: £150,000
2
Inheritance tax generally
Inheritance tax is governed principally by the Inheritance Tax Act 1984 (IHTA 1984).
Despite its name, the tax does not apply only to death estates but can also catch transfers made during life.
There are 3 main occasions when IHT may be charged:
on death
on lifetime gifts made to individuals WITHIN 7 YEARS PRIOR to death
on lifetime gifts to a company or into a trust
On death Lifetime gifts made to individuals within 7 years Lifetime gifts to a company or
prior to death into a trust
Transfers on death Potentially exempt transfers (PET) Lifetime chargeable transfers (LCT)
Inheritance tax is intended If IHT were limited to a charge on death, one way to Inheritance tax might also be
primarily to take effect on avoid tax would be to reduce the size of one’s estate by avoided by the use of a trust or
death. making lifetime gifts corporate entity.
When an individual dies, IHT is therefore also charged on certain lifetime At present a lifetime gift to a
IHT is charged on the gifts or ‘transfers’ if the donor dies WITHIN 7 company or into a trust is
value of his estate YEARS AFTER MAKING THEM. immediately chargeable to IHT
(broadly, his assets less At the time when the transfer is made NO IHT is at the time when it is made,
his liabilities) subject to chargeable, the transfer is ‘potentially exempt’. UNLESS the trust is for a
various exemptions and If the transferor survives for 7 years, the transfer disabled person.
reliefs. becomes EXEMPT.
If transferor dies within 7 years, transfer is
chargeable.
The main charging provisions
STEP Identify the A lifetime transfer of value is any disposition which reduces the value of the transferor’s estate.
1 transfer of On death, tax is charged as if the deceased had made a transfer of value of his estate.
value
STEP Find the For a lifetime transfer, this is the amount of the reduction in the transferor’s estate.
2 value On death, it is the value of the estate.
transferred
STEP Apply any Various exemptions and reliefs exist for public policy reasons which can reduce or eliminate the IHT charge on
3 relevant any given transfer.
exemptions Some exemptions apply both to lifetime transfers and to the transfer on death (e.g. to spouse or civil partner).
and reliefs Others are more restricted, and many apply only to lifetime transfers (eg annual exemption).
The main reliefs are business and agricultural property relief, which may apply BOTH to lifetime transfers of
such property and to the transfer on death.
STEP Calculate RATE OF TAX: A range of tax rates apply to IHT, the lowest being 0%– there are two bands
4 tax at the 1 the residence nil rate band (currently £175,000) – available ONLY on a transfer on death where there is a
appropriate ‘qualifying residential interest’.
rate (a) Qualifying residential interest = deceased’s residential property and must be inherited by a linear
descendant
(b) Does NOT apply to lifetime transfers
The rate of tax that applies in excess of the nil rate band and the residence nil rate band (where applicable)
varies according to the type of transfer (see below).
2 the nil rate band (currently £325,000) – available for all transfers of value;
CUMULATION: whether the nil rate band is available for any chargeable transfer.
1
, The nil rate band will not be available in full (or at all) for any given transfer.
In order to calculate the available NRB on any transfer, whether during lifetime or on death, one must FIRST
look back over the 7 YEARS immediately preceding the transfer.
Any chargeable transfers made by the transferor during the 7 year period must be taken into account in
order to determine how much of the nil rate band remains available.
As the residence nil rate band is NOT available for lifetime transfers, it will be available in full on death,
subject to any adjustments in relation to estates over £2 million. Cumulation is not relevant.
Transfers on death
The charging provision steps
Step 1: identify the transfer of value
When someone dies, he is treated as having made a transfer of value immediately before his death:
“X is deemed to make a transfer of value on death of everything to which he was beneficially entitled”.
Step 2: find the value transferred
“Value transferred” = “Value transferred” = value of the deceased estate immediately before his death.
The deceased estate “Estate” = all the property to which he was beneficially entitled immediately before his death.
o Property which passes under the deceased’s will or on intestacy.
o Property to which deceased was ‘beneficially entitled’ immediately before his death but which
does not pass under his will or intestacy, e.g. joint tenancy.
o Deceased is not entitled to an interest under trust which has not vested.
o Property included because of special statutory provisions, e.g.:
Under the Finance Act 1986, if property is gifted but the donor still actually enjoys
possession and enjoyment of it at the time of death, it is “subject to reservation” and
still forms part of estate.
Some trust interests if they are qualifying interests in possession.
How are assets Assets are valued at “the price which the property might reasonably be expected to fetch if sold in the
valued? open market” immediately before death: s160 IHTA
o Change in value on death (increase or decrease) should be considered: s171
o Quoted shares: normally two prices are given, so take ¼ of difference between lower and higher
price and add it to lower price. DEDUCT:
Liabilities owed by the deceased at the time of time: s505
Reasonable funeral expenses: s162
Step 3: apply exemptions/relief
Spouse or civil s18: Any property included in the estate is EXEMPT if it passes to the deceased’s spouse or CP under the
partner exemption deceased’s will or intestacy, or survivorship (joint property/property held as JT).
Charity exemption s23(1): Any property included in deceased’s estate is EXEMPT if it passes to charity.
Business and Applies to reduce the value of ‘relevant business property’ by a certain percentage, provided that the
agricultural property transferor owned the property for the 2 YEARS IMMEDIATELY BEFORE the transfer.
o Reduction of 100% for:
A business or interest in a business (incl. partnership share); and
Unquoted shares company shares that are NOT listed on a recognised stock
exchange
o Reduction of 50% for:
Quoted shares which gave the transferor voting control of the company; and
o Ability to exercise 50%+ of the votes on ALL resolutions
o If spouses/CPs COMBINED shareholdings is 50%+, test SATISFIED (s.269)
Certain land, buildings and machinery owned by the transferor but used for business
purposes in his company (with voting control) or partnership
Step 4: calculate tax at appropriate rate
Rate of tax If the deceased has made no chargeable transfers in the seven years before death, the rate of tax on the
first £325,000 of his estate is 0% (nil rate band).
o If the date of death is AFTER 6 April 2017 and the deceased owned a qualifying residential
interest and being closely inherited (child or grandchild), the new ‘RESIDENCE NIL RATE BAND
will be available IN ADDITION to the nil rate band in the following amounts:
6 April 2017 – 5 April 2018: £100,000
6 April 2018 – 5 April 2019: £125,000
6 April 2019 – 5 April 2020: £150,000
2
