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Liability to inheritance tax (IHT)
IHT may arise when a person dies or on certain lifetime gifts which are not exempt or potentially exempt.
- Individuals domiciled in the UK may be subject to IHT on their worldwide assets.
- Non-UK domiciled individuals are generally only subject to IHT on their UK assets.
- Individuals who have been resident in the UK in 17 out of the previous 20 years are treated as UK domiciled for IHT purposes.
Husbands and wives are taxed separately; however, there is no IHT on transfers between spouses, provided the recipient is domiciled in the UK.
Rate of tax
IHT is charged at 40% on death, and at 20% on certain
lifetime transfers. The first £263,000 is charged at a nil rate.
Where a donor of a lifetime gift dies within seven years of making
the gift, IHT may be due on the gift. The full rate of tax is reduced
depending on the interval between the gift and the date of death.
If the gift, plus chargeable transfers in the previous seven years,
is not more than £263,000, it is within the nil rate band and so there
is no reduction.
| Period of years before death |
% of full tax rates |
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| Not more than 3 |
100 |
| More than 3 but not more than 4 |
80 |
| More than 4 but not more than 5 |
60 |
| More than 5 but not more than 6 |
40 |
| More than 6 but not more than 7 |
20 |
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Valuation of assets
The value of assets for IHT is their open market
value. However, the charge is based on the extent to which the value
of the donor's estate is reduced. Shareholdings of less than 50%
in a company are usually valued at less than a majority holding,
but the valuation may be affected by related property.
For example, where a husband and wife both hold
45% of the shares in a company, the value of each holding will be
based on a 90% valuation..
Gifts with reservation (GWR)
An asset that a person has given away may still
be treated as forming part of the donor's estate on death if he
or she has retained a benefit in the asset. An example is where
a donor makes a gift of property but then continues to live in it
rent-free. From 6 April 2005, a gift made after 17 March 1986 that
does not fall within the GWR definition may be liable to a special
income tax charge where the donor continues to enjoy a benefit.
Alternatively, by 31 January 2007 the donor may elect for the gift
to be treated as subject to IHT.
Main exemptions
- Transfers between UK domiciled spouses.
- Annual exemption for lifetime gifts of up to £3,000 per donor.
- Small gifts of up to £250 per donee.
- Normal expenditure that is regular, made out of income and does not reduce the donor's normal standard of living.
- Gifts in consideration of marriage:
- By a parent, up to £5,000.
- By a grandparent or a party to the marriage, up to £2,500.
- By another person, up to £1,000.
- Gifts to charity, major political parties or for national purposes (eg to various public institutions).
Potentially exempt transfers (PETs)
There is no immediate liability to IHT on a PET and no subsequent charge so long as the donor survives for seven years after making the gift. PETs can only be made to:
- Individuals.
- Accumulation and maintenance trusts.
- Disabled persons' trusts.
- Interest-in-possession trusts.
Quick succession relief
Where an individual dies within five years of receiving a chargeable transfer from another person, credit is given for part of the IHT paid on the previous transfer.
| Maximum time between transfers (years) |
1 |
2 |
3 |
4 |
5 |
|
| Credit (%) |
100 |
80 |
60 |
40 |
20 |
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Agricultural property relief
For transfers of owner-occupied farms and tenanted farms, 100% relief is potentially available where the transferor has vacant possession of the land, or could have within 12 months.
- 100% relief is also available where this condition is not met but the land is tenanted under a lease that started after 31 August 1995.
- 50% relief is available for tenanted land where the lease started before 1 September 1995.
Business property relief
Relief is given on transfers of business assets provided the transferor has owned them for at least two years. Relief is not available where the business consists of dealing in securities or land and buildings, or making investments.
100% relief applies to:
- A business or an interest in a business (eg a partnership share).
- Shares in unlisted and Alternative Investment Market (AIM) companies.
50% relief applies to:
- Assets (eg land or plant and machinery) owned by the transferor and used in a partnership in which the transferor is a partner, or a company controlled by the transferor.
- Controlling interests in listed companies.
The Dyer Partnership, 17
Westminster Court, Hipley Street, Old Woking, Surrey GU22 9LG
Copyright © 2002 - 2004
The Dyer Partnership Limited
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