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IHT

IHT - UK Tax Notes

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22 views3 pages

IHT

IHT - UK Tax Notes

Uploaded by

mazharsabura
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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### Inheritance Tax (IHT) Overview

**What is IHT?**
- A tax on the transfer of wealth, primarily levied on a person's estate at death.
- Applies to certain lifetime gifts to prevent avoiding tax by giving away assets before death.

**Categories of Lifetime Transfers:**


1. **Chargeable Lifetime Transfers (CLT)**:
- Liable to IHT at the time of the gift at a reduced rate.
- Additional IHT if the donor dies within seven years.
2. **Potentially Exempt Transfers (PET)**:
- No immediate IHT, but becomes chargeable if the donor dies within seven years.
3. **Exempt Transfers**:
- No IHT is applied.

**Key Concepts:**
- **Diminution in Value**: Measures the reduction in the transferor's estate due to the gift.
- **Market Value**: Used to value the asset transferred, both for lifetime gifts and property held
at death.

**Lifetime Transfer Taxation:**


- CLTs are taxed immediately at 20% if the transferor pays the tax, otherwise at 25%.
- PETs are not taxed at the time of the gift but can be taxed if the transferor dies within seven
years.
- IHT applies to the estate and any chargeable transfers within seven years before death.

**Exemptions:**
1. **Gifts Out of Income**: Regular gifts that don't reduce the transferor's standard of living.
2. **Small Gifts Exemption**: Gifts up to £250 per person per tax year.
3. **Marriage Gifts**: Exemptions vary by relationship (e.g., £5,000 from parents).
4. **Annual Exemption**: First £3,000 of lifetime transfers per tax year.

**Nil Rate Band (NRB):**


- The amount on which no IHT is payable, currently £325,000.
- Used over a seven-year period for calculating IHT on gifts and estates.

**Trusts:**
- Transfers into trusts are always CLTs and are immediately taxable.
- Trusts are managed by trustees for the beneficiaries.

**Special Rules:**
- Spouses/Civil Partners: Transfers between them are exempt from IHT.
- Chargeable assets for IHT include private residences, bonds, cars, and cash.
**Exam Tips:**
- Understand the categories of transfers and exemptions.
- Learn how to calculate the IHT on lifetime transfers and on the death estate.
- Remember to assume the transferor pays the tax unless stated otherwise.

This simplified guide should make studying IHT more manageable by focusing on the core
principles, key definitions, and essential rules.

### Simplified Guide to Inheritance Tax (IHT) on Death and Lifetime Transfers

#### IHT on Death


1. **When IHT Arises:**
- If a person dies within 7 years of making a gift.
- PETs (Potentially Exempt Transfers) become chargeable.
- Additional IHT may be due on CLTs (Chargeable Lifetime Transfers).
- IHT is also payable on the deceased's estate.

#### Calculating IHT on Lifetime Transfers


1. **Transfers in the Last 7 Years:**
- Identify all gifts within 7 years before death.
- Delete any PETs made more than 7 years before death.

2. **Steps for Calculation:**


- Calculate the gross chargeable amount of each gift.
- Deduct any exemptions and lifetime tax paid.
- Calculate the available NRB (Nil Rate Band) after deducting earlier transfers.
- Apply the death rate of tax (40%) to the excess over the NRB.
- Deduct any taper relief and lifetime tax paid on CLTs.

3. **Gross Chargeable Amount:**


- PETs: Gift amount minus exemptions.
- CLTs: Gross chargeable value from initial computation.

4. **Accumulation Principle:**
- Include all chargeable transfers in the 7 years before each gift.

#### Calculating IHT on the Death Estate


1. **Components of the Estate:**
- Value of all assets minus debts and exemptions.

2. **Valuation:**
- Most assets are valued at market value.
- Life insurance is valued at the payout amount.
3. **Deductible Debts:**
- Legally enforceable debts (e.g., unpaid taxes, household bills).
- Non-deductible: Promises without consideration, non-legal gambling debts.

4. **Exemptions:**
- Spouse exemption: Unlimited transfers between spouses.
- RNRB (Residence Nil Rate Band): For qualifying residential property passed to direct
descendants, up to £175,000.

#### Important Points


1. **NRB and RNRB:**
- Each person has a £325,000 NRB.
- Married couples can combine their NRBs, allowing up to £650,000 tax-free.

2. **Personal Representatives:**
- Executors or administrators are responsible for filing IHT returns and paying due taxes.

3. **Planning Tips:**
- Use exemptions and make gifts early to potentially benefit from taper relief.
- Consider impact on both IHT and CGT (Capital Gains Tax).

4. **Married Couples:**
- Can transfer unused NRB and RNRB to the surviving spouse.

This simplified guide covers the essential points of IHT on death and lifetime transfers, focusing
on practical steps and key exemptions.

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