IHT is a tax that can apply on lifetime transfers, on an estate at death, on transfers into and out of trusts and on some transfers made by or to narrowly-owned companies. A transfer will either be a chargeable transfer, a potentially exempt transfer (PET) or exempt.
This note is for the use of individuals; the specialist rules for trusts and close companies are not covered. This note also does not cover issues relating to non-UK domiciled individuals.
IHT is calculated by reference to the reduction in value of the individual’s estate, being broadly his worldwide assets. IHT is generally chargeable at a rate of 20% during lifetime and 40% at death.
Chargeable lifetime transfer (CLT)
A CLT is a lifetime transfer, which is neither exempt nor potentially exempt, and includes gifts to establish or add property to a trust. IHT at 20% is due on the value of the transfer in excess of the unutilised nil-rate band (see below).
Potentially exempt transfers (PETs)
Outright gifts to individuals and transfers to some privileged trusts are exempt from IHT when made and will not become chargeable if the donor survives seven years from the date of the transfer.
Some transfers may be exempt from IHT in whole or in part, including gifts to a spouse or a civil partner and gifts to charities and qualifying political parties. There are a number of specific exemptions for lifetime transfers of value, such as:
- annual exemption covering gifts of up to £3,000;
- gifts in consideration of marriage. The exempt amount depends on the donor’s relation to thedonee;
- regular gifts out of income. This can be very valuable as it has no monetary limit; and
- exemptions applying to qualifying business assets, agricultural property and woodlands.
No IHT is due if a transfer falls within the nil-rate band, which is currently £325,000. The nil-rate band is used up by the cumulative value of the chargeable transfers made in the previous seven years.
When an individual dies, the unutilised nil-rate band can be used by a surviving spouse or civil partner on death.
Main residence nil-rate band
A transferable residence nil-rate band is also available when a qualifying residence is passed to a direct descendant or other qualifying person. The band is currently £125,000, rising to £150,000 from 6 April 2019.
IHT on death
On death IHT is charged on:
i. PETs and CLTs made within seven years of the date of death;
ii. the value of a person’s estate on death; and
iii. assets caught by the GWR provisions (see below).
Gifts (PETS and CLTs) made within seven years of the date of death
The value of every lifetime transfer made within seven years of death in excess of the nil-rate band is subject to IHT at 40%. The tax paid during lifetime on a CLT can be offset against the tax due on death. In the case of a PET, the rate of tax is tapered if the donor has survived for at least three years since the lifetime transfer.
The estate at death
IHT is charged at 40% on the value of the death estate after it has been reduced by appropriate exemptions and reliefs and by the unutilised nil-rate band.
A reduced IHT rate of 36% is applied to components of an estate where relevant charitable legacies exceed 10% of the value of the estate.
Gifts where the deceased retained a benefit are caught by the GWR provisions. Such gifts are deemed to form part of the donor’s estate immediately before death.
Deducting Liabilities for IHT purposes
The value of the death estate may be reduced by some outstanding liabilities of the deceased.
Reliefs for business and agricultural property
Reliefs may apply to qualifying business or agricultural property, which can reduce the amount chargeable to IHT by either 100% or 50%.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.