INHERITANCE TAX
3 main occasion when IHT may be charged
- On the death estate, once someone has died
- On lifetime gifts made within 7 years of death – Potentially Exempt
Transfer (PET) – once the donor has dies.
- On lifetime gifts which will not be a PET (and are instead an LCT) – both
during life (20%) and upon death (40%) – money made into
trusts/company – apart from disabled trust.
Calculating IHT
Step1 – Identify the transfer of value
Step 2 – Find the value transferred
Step 3 – Apply exemptions and reliefs
Step 4 – Calculate tax at the appropriate rate
IHT is also chargeable on certain transfers made during someone’s lifetime.
Transfers upon death
- Triggered by the happening of an event.
Identify the transfer of value
Transfer of value – disposition which reduces the value of the transferor’s estate – in
other words a gift needs to be made.
Death – a deemed transfer of value.
Death Estate – all the assets to which the deceased was beneficially entitled
immediately before death.
Trustee of a trust – will not have a
Find the value transferred beneficial entitlement to the trust
property – it would therefore fall
outside of the death estate.
- Market value
- Less debts and funeral expenses
Apply Exemptions and Reliefs
Example
Two pensioners live in London in a small bungalow. Husband dies and the only
asset he owns is the bungalow which he leaves to his wife. If there were IHT
payable, he would have to sell it and wife would have nowhere to live. Status of
individual who receives the gift and nature of the asset will determine IHT
consequences.
, - Spousal exemption – any gift to spouse/CP is completely exempt. Not
cohabitees.
- Charity exemption – maximise money going to charities.
- Business Property Relief – not an exemption, more-so a relief. E.g. a family
owned business passed to next generation – provided business meets
certain requirements there will be no tax or less tax.
Calculate tax at the appropriate rate
- Taxed at 0% till a certain amount
- Taxed at 40% after balance after
- Residence nil rate band (only applies if certain requirements are met)
o Qualifying residential interest – estate includes an interest in property
which was the deceased home – which is being closely inherited (by a
lineal descendant).
o Tax first £150,000 at 0%.
- Nil Rate Band
o First £325,00 of the estate or the next £325,000 (if you have used RNRB),
will be taxed at 0%.
o Application of the NRB is cumulative.
- If you do not use the RNRB and the NRB – it can be passed onto your
spouse/civil partner.
- Example
o If a husband passed his property to his wife, due to spousal exemption he
would not have used his NRB. His wife would then have her own NRB
and her husbands’.
o Provided she meets all the requirements for passing her home onto her
children, she would then have a the £150,000 from her husband’s RNRB
and her own.
o Grand total of £950,000 (325,000 * 2 + 150,000 * 2)
o £950,000 of estate will be exempt from IHT. Anything above £950,000 will
be taxed at 40%.
Example
Ben dies – at time of death, House @ £500,000 and cash @ £100,000.
Will – Ben 20,000 to charity and rest of estate to brother
Ben’s debts and funeral expenses come to £5000.
Step 1 Death
Step 2 House 500,000
Cash 100,000
600,000
3 main occasion when IHT may be charged
- On the death estate, once someone has died
- On lifetime gifts made within 7 years of death – Potentially Exempt
Transfer (PET) – once the donor has dies.
- On lifetime gifts which will not be a PET (and are instead an LCT) – both
during life (20%) and upon death (40%) – money made into
trusts/company – apart from disabled trust.
Calculating IHT
Step1 – Identify the transfer of value
Step 2 – Find the value transferred
Step 3 – Apply exemptions and reliefs
Step 4 – Calculate tax at the appropriate rate
IHT is also chargeable on certain transfers made during someone’s lifetime.
Transfers upon death
- Triggered by the happening of an event.
Identify the transfer of value
Transfer of value – disposition which reduces the value of the transferor’s estate – in
other words a gift needs to be made.
Death – a deemed transfer of value.
Death Estate – all the assets to which the deceased was beneficially entitled
immediately before death.
Trustee of a trust – will not have a
Find the value transferred beneficial entitlement to the trust
property – it would therefore fall
outside of the death estate.
- Market value
- Less debts and funeral expenses
Apply Exemptions and Reliefs
Example
Two pensioners live in London in a small bungalow. Husband dies and the only
asset he owns is the bungalow which he leaves to his wife. If there were IHT
payable, he would have to sell it and wife would have nowhere to live. Status of
individual who receives the gift and nature of the asset will determine IHT
consequences.
, - Spousal exemption – any gift to spouse/CP is completely exempt. Not
cohabitees.
- Charity exemption – maximise money going to charities.
- Business Property Relief – not an exemption, more-so a relief. E.g. a family
owned business passed to next generation – provided business meets
certain requirements there will be no tax or less tax.
Calculate tax at the appropriate rate
- Taxed at 0% till a certain amount
- Taxed at 40% after balance after
- Residence nil rate band (only applies if certain requirements are met)
o Qualifying residential interest – estate includes an interest in property
which was the deceased home – which is being closely inherited (by a
lineal descendant).
o Tax first £150,000 at 0%.
- Nil Rate Band
o First £325,00 of the estate or the next £325,000 (if you have used RNRB),
will be taxed at 0%.
o Application of the NRB is cumulative.
- If you do not use the RNRB and the NRB – it can be passed onto your
spouse/civil partner.
- Example
o If a husband passed his property to his wife, due to spousal exemption he
would not have used his NRB. His wife would then have her own NRB
and her husbands’.
o Provided she meets all the requirements for passing her home onto her
children, she would then have a the £150,000 from her husband’s RNRB
and her own.
o Grand total of £950,000 (325,000 * 2 + 150,000 * 2)
o £950,000 of estate will be exempt from IHT. Anything above £950,000 will
be taxed at 40%.
Example
Ben dies – at time of death, House @ £500,000 and cash @ £100,000.
Will – Ben 20,000 to charity and rest of estate to brother
Ben’s debts and funeral expenses come to £5000.
Step 1 Death
Step 2 House 500,000
Cash 100,000
600,000
