Inheritance Tax

What to Focus ?
IHT payable during an Individuals Lifetime on CLTs
IHT payable on Life time gifts as a result of death
Fall in Value(FIV) relief (new)
IHT payable on the death estate
Summary

The Charge to Inheritance Tax

Inheritance tax is charged on :
→ A transfer of value
→ Of chargeable property
→ By a chargeable person

A charge to IHT arises

→ On the death of an individual on the estate value
→ On lifetime gifts where the donor dies within seven years of date of gift
→ On some lifetime gifts which are taxed at the date of gift

Transfer of Value - diminution in value

A transfer of value is a gift of any asset which results in a reduction in the value of Donor's estate.
→ To be treated as a transfer of value the transfer must be a 'gratious disposition'.This basically means a gift
→ To calculate the transfer of value for IHT purposes, the loss to donor principle is used (also referred to as
the diminution in value concept).
Value of estate before gift XX
- Value of estate after gift (XX)
Transfer of value XXX

The loss to the donor is usually the open market value of the asset gifted

Test Your Understanding 1

 Value of estate before gift 156000
Value of estate after gift 60000
Transfer of Value 96000

Chargeable Property
All property to which a person is beneficially entitled is chargeable property and is deemed to form part of the
persons estate.
Therefore, a gift of any asset to which the person is beneficially entitled is a transfer of value, unless it is

Excluded property is not chargeable to IHT and Includes :

→ Property situated overseas where the owner is not UK domiciled
→ Reversionary Interests in trust funds

Chargeable Persons
A chargeable person includes individuals and trustees of certain trusts. (Focus on Individuals)

Individuals
All individuals are potentially liable to IHT on their transfer of Value.
→ An individual who is domiciled in the UK is liable to IHT on transfer of worldwide assets
→ If not UK domiciled, the individual is liable on transfers of UK asset only
NB : Spouses and partners in a registered civil partnership are chargeable to IHT separately.

Occasions of Charge
The main charge to IHT arises when individuals dies as they become liable on the following:
→ The value of all of their net assets in their estate at the date of death
→ Any lifetime gifts made in the seven years before their death, provided they are not exempt gifts.
However ,IHT also arises on certain lifetime gifts at the date of the gift.

Life time Gifts

There are three types of Lifetime gifts by an individual for IHT purpose :
Exempt → No IHT
Potentially Exempt Transfers (PETs) → Become Chargeable if the donor dies within 7 years of date of gift
Chargeable Lifetime Transfer (CLTs) → Taxed immediately & also on the death
 It is important to note that in practice, the majority of lifetime transfer made by individuals are :
→ Exempt trasnfers
→ Trasnfers from on individual to another (ie, PET)
NB : For ATX exam, all gifts into trusts will be treated as CLTs(Other than a trust for a charity which is exempt
or for a disabled person which is a PET).

Potentially exempt Transfers (PETs)

PETs have derived their name from the fact that if the donor lives for more than seven years after making the gift
the transfer is exempt (Free from IHT)
Therefore, at the time of such transfer ,It has the potential to be exempt.

However, if the donor dies within seven years of making the gift, then IHT may become chargeable on these gifts.

Note : the transfers on death can never be PETs.

Exemptions & Reliefs for IHT

Small Gift Exemption
Lifetime gifts are exempt if they are :
→ an outright gift to an individual of no more than $250
→ Per recipient
→ Per tax year

The small gift exemption does not apply if the gift is in excess of $250

Marriage/Civil partnership exemption

A lifetime transfer made ' In consideration of a marriage' (or Registration of civil partnership) is exempt upto :
→ Parent - $5000
→ Grandparent / Remoter ancestor - $2500
→ Party to the marriage or civil patnership - $2500 (from groom to bride)
→ Anyone else - $1000
The exemption is conditional on the marriage taking place

Normal Expenditure out of Income

IHT is relieved on transfers of capital wealth
Therefore, a lifetime transfer will be exempt if it can be shown the gift :
→ is made as part of a persons normal expenditure out of income
→ does not affect the donoro standard of living
To be treated as 'normal' gifts must be habitual(ie there is regular pattern of giving).
eg: payment of school fees for grandchild or annual payments into a life assurance policy for the benefit
of a child are usually exempt uder this rule

The Annual Exemption

The annual exemption (AE) is an exemption available against lifetime transfers and operates as follows:
The AE :
→ Exempt the first $3000 of lifetime transfer in any one tax year
→ Is applied chronologically to the first gift in the tax year, then (If there is any left) the second gift and so on
→ Must be applied to the first gift each year, even if the gift is a PET and never becomes chargeable.
 Any unused AE :
→ May be carried forward to the next year
→ However, it can be carried forward for one year only, and
→ Can only be used after the current years AE

NB : Other exemptionor reliefs, if available, are given before AE

Note : That as the AE is used by PETs as well as by CLTs, Where more than one transfer is to be made during
a tax year, CLTs should be made before PETs to ensure that the optimum use is made of the AE.

Inter - Spouse exemption

Transfers between spouses and partners in a registered civil partnership are exempt whether they are made during
the individuals lifetime or on death.
→ There is no maximum limit to this exemption unless
→ The transferor is uk domiciled and
→ The transferee spouse or civil partner is non- UK domiciled

In this case maximum exemption limit which is equal to the current nil rate band of $325000 can be deduct from
the transfer of value

However, an election is available whereby a non-UK domiciled individual with a UK domiciled spouse or civil
partner can elect to be treated as domiciled in the UK for IHT purposes

This may be beneficial where assets of more than 325000 are transferred to a non uk domiciled spouse. This is
because if the election is made, there would no limit to the exempt amount and the whole transfer would be exempt.

Political party exemption

Gifts to qualifying political parties are exempt whether they are made during the individuals lifetime or on death.
→ There is no maximum limit to this exemption
→ A donation to a political party qualifies for exemption if, at the last general election preceding the transfer of valu
either of the following conditions are met :
Two members were elected to the house of commons, or
One member was so elected and at least 150000 votes were cast for the party

Charity Exemption
Gift to recognised UK charities are exempt whether they are made during the individuals lifetime or on death.
→ There is no maximum limit to this exemption
→ In addition, there is a reduced death rate of inheritance tax for estates in which at least 10% of the taxable
estate is left to charity

Gift for the public benefit or for national purposes

→ Gifts to non-profit making institution are,with treasury approval,exempt.
→ Examples could include land and buildings of outstandin beauty, or of historic interest
→ undertakings are required concerning the use, preservation and public access of the property.

IHT payable during Individuals Lifetime on CLTs

The procedure to calculate the lifetime IHT on a CLT
The lifetime tax should be calculated on each gift separately, in chronological order, as follows :
(1) First Consider the specific exemptions, because if the gift is completely exempt,there is no need to quantify
the gift
(2) Calculate the chargeable amount of each CLT and PET

Value of estate before transfer XX

- Value of estate after transfer (XX)
Transfer of value XXX
- Business property relief & agricultural property relie (XX)
-Marriage exemption (XX)
-Annual exemption (XX)
Chargeable amount XXX

(3) Calculate the amount of nil rate band (NRB) available after deducting gross chargeable transfer (GCTs) in the
previous seven years
(4) Calculate the tax on the excess at either 20% or 25% depending on who has agreed to pay the tax; the donor
or the donee
(5) Calculate the gross amount of the gift to carry forward for future computations
(6) If required by the examination question, state the due date of payment of the IHT.

Nil Rate band(NRB)

325000

The appropriate rate of tax

The appropriate rate of tax to apply to lifetime gifts depends on who has agreed to pay the tax due

Trustees pay the tax

If the trustees of the trust (donee) agree to pay the tax :
→ The gift is referred to as a gross gift
→ The appropriate rate of tax is 20%

Donar pays the tax

→ The gift is referred to as a net gift
As result of the gift, the donors estate is being reduced by :
The value of the gift and the associate tax payable on the gift.
→ Accordingly to calculate the gross amount of the gift, It needs to be grossed up to include the amount of tax that
the donor has to pay
→ The appropriate rate of tax is 25%
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