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IHT (Part 1) (1)

The document outlines the concept of Inheritance Tax (IHT) and the calculation of chargeable amounts for gifts, including exemptions and reliefs. It details types of gifts, such as Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs), and various exemptions like small gifts, marriage exemptions, and the annual exemption. Additionally, it explains the Nil Rate Band (NRB), the rate of IHT, and the implications of lifetime gifts in relation to death, including taper relief.

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20 views12 pages

IHT (Part 1) (1)

The document outlines the concept of Inheritance Tax (IHT) and the calculation of chargeable amounts for gifts, including exemptions and reliefs. It details types of gifts, such as Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs), and various exemptions like small gifts, marriage exemptions, and the annual exemption. Additionally, it explains the Nil Rate Band (NRB), the rate of IHT, and the implications of lifetime gifts in relation to death, including taper relief.

Uploaded by

paralleldesktopuser
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Inheritance Tax

Concept of ‘Transfer of Value’

Diminution in value or transfer of value

= Value of estate before gift


Less: Value of estate after gift
Calculation of chargeable amount for each gift

Transfers between spouses and civil partners are always exempt


Types of Gifts

Lifetime Gifts Death Estate

PETs CLTs
(Potentially Exempt (Chargeable Lifetime
Transfers) Transfers)

Gift by an individual to
another individual Gift to a trust
Exemptions and reliefs from IHT

Small gifts exemption

Lifetime gifts are exempt if they are:


❖ gift to an individual of ≤ £250
❖ per recipient
❖ per tax year

In case the gifts in total to an individual in a year, exceed £250, all


the gifts become chargeable
Exemptions and reliefs from IHT

Marriage exemption

A lifetime transfer made 'in consideration of a marriage' is exempt up to the following maximum limits:
❖ £5,000 by a parent
❖ £2,500 by a grandparent or remoter ancestor
❖ £2,500 by a party to the marriage or civil partnership (e.g. from the groom to the bride)
❖ £1,000 by anyone else

Note : The exemption is applicable only when the marriage takes place

Normal expenditure out of income

A lifetime transfer is exempt if it:


❖ is made as part of a person’s normal expenditure out of income, and
❖ does not affect the donor’s standard of living

Remember: Gifts must be habitual


Exemptions and reliefs from IHT

The annual exemption

– first £3,000 of lifetime transfers in any one tax year are exempt

– the AE is applied chronologically to gifts of a year, i.e. must be applied to the first gift each year, even if the first gift is a PET and
never becomes chargeable

Unused AE:

– can be carried forward to the next one year only


– can only be used after the current year’s AE has been used

Point to note: Other exemptions are given before the AE


The Nil Rate Band (‘NRB’)

Available from the value of CLT

The current NRB is = £325,000 (given in the exam)

Note that:

• The NRB is available for a 'seven year cumulation period’

• Although PETs may use the AE during the donor's lifetime, they do not
use NRB, as they are not yet chargeable
Rate of IHT

When Donor pays the tax


When Donee pays the tax
❖ The gift is referred to as a net gift.
❖ the gift is referred to as a gross gift, and ❖ As a result of the gift, the donor's estate is
❖ the rate of tax is 20% reduced by:
– the value of the gift, and
– tax payable on the gift @ 25%

Note that the tax due on a CLT is primarily the responsibility of the donor
IHT payable on lifetime gifts as a result of death - Performa
IHT payable on lifetime gifts as a result of death

IHT arises in relation to lifetime gifts within 7 years of death as follows:

❖ PETs become chargeable for the first time

❖ Additional tax may be due on a CLT

The IHT payable on lifetime gifts as a result of death is always paid by the recipient of the gift

Taper relief (given in the exam)


Available on any lifetime transfer (both CLTs and PETs ) due to death, whereby the amount of IHT payable on death is reduced by this relief
Thank you

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