Inheritance Tax (IHT) Overview

Inheritance Tax Overview

• Inheritance Tax (IHT) is explored in Lecture 13 of 20
• Ricky Tutin presents the information on this topic

Inheritance Tax Rates

• Death rate for inheritance tax is 40%
• Reduced rate is 36% for estates leaving 10% or more to charity
• Rate for chargeable lifetime transfers is 20%
• Nil rate band limit is £325,000
• Residence nil rate band is £175,000

Who, What, When, Where of IHT

• Who: UK domiciled individuals and overseas domiciles with property in the UK are subject to IHT.
• What: A "transfer of value" of property is subject to IHT.
• When: IHT applies at death and on lifetime transfers.
• Where:
  • UK domiciled individuals: worldwide property is subject to IHT, regardless of location.
  • Non-UK domiciled individuals: property located in the UK is subject to IHT.

Transfer of Value

• A transfer of value reduces an individual's estate value due to a gift or disposition.
• The reduction in the donor's estate value is the 'transfer of value' for IHT purposes.
• For transfers on death, the entire estate is treated as a transfer of value, calculated immediately before death.

Nil Rate Band

• A Nil Rate Band (NRB) potentially applies for any lifetime or death transfer.
• When a transfer is made, part is covered by the NRB, with the rest subject to IHT at 20%/40%.
• The available NRB is £325,000 minus any chargeable transfers in the seven years prior to the transfer.
• NRB is not a band available for every single transfer.
• NRB is recalculated at the point of every transfer, depending on transfers in the prior seven years.
• Tax planning opportunity: transfer £325,000 every seven years and one day to be taxed at 0%.
• If a person dies without fully using their Nil Rate Band, any unused proportion transfers to their spouse or civil partner.

Residence Nil Rate Band

• Residence Nil Rate Band (RNRB) applies when a residence is included in the death estate, and it's passed on to a direct descendant
• RNRB applies when the taxpayer downsizes and passes assets of equivalent value to the direct descendant(s)
• There is a tapered withdrawal of the main residence nil-rate band for estates worth over £2 million, at a rate of £1 for every £2 over that threshold
• Any unused band on death is transferred to a surviving spouse or civil partner.

"Death Tax" IHT Scope

• The total amount liable to IHT on death covers:
  • Chargeable transfers in the seven years before death.
  • The chargeable estate at death.
  • Property given away before death, subject to a 'reservation' for the donor/spouse/civil partner, anytime within seven years of the donor's death.

Exempt Transfers

• Transfers between spouses or registered civil partners.
• Normal gifts from income, like birthday presents, that don't undermine living standards.
• Payments for another person's living costs, such as an elderly relative or child under 18.
• Annual transfers up to £3,000 exemption.
• Small gifts to one person not exceeding £250.
• Transfers by way of normal expenditure out of taxed income.
• Gifts in consideration of marriage (max amounts vary depending on relationship to donor).
• Gifts to charities, political parties, or for public benefit.
• Property of individuals whose death was caused or hastened by injury on active service.

Lifetime Transfers

• Three types of transfer are defined

Chargeable Lifetime Transfers (CLTs)

• A Chargeable Lifetime Transfer is a transfer to a "Relevant Property Trust".
• A transfer by an individual to a company would also be a CLT.
• CLTs are taxable when made, at a rate of 20% (grossing up is needed if IHT is to be paid by the donor).
• Further IHT may become payable if the donor dies within 7 years of making the transfer.

IHT Taper Relief

• IHT payable upon death for chargeable transfers made within seven years of the donor's death is reduced.
• 0-3 years between transfer and death = 0% reduction
• 3-4 years = 20% reduction
• 4-5 years = 40% reduction
• 5-6 years = 60% reduction
• 6-7 years = 80% reduction