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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 £285,000
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 £285,000, it is within the nil rate band and so there is no
reduction.
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Period of years before death
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% of full tax rates
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Not
more than 3
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100
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More
than 3 but not more than 4
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80
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More
than 4 but not more than 5
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60
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More
than 5 but not more than 6
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40
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More
than 6 but not more than 7
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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.
Pre-owned
assets
A gift made after 17 March 1986 that does not fall
within the GWR definition may be liable to a special annual income tax
charge where the donor continues to enjoy a benefit from a previously owned
asset. Alternatively, the donor may elect, by 31 January 2007, for the
asset to be treated for as being within the donor’s estate.
Main exemptions
- Transfers
between UK
domiciled spouses or civil partners.
- 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. Since 22 March 2006
PETs can only be made to:
- Individuals,
including gifts made via bare trusts.
- Disabled
persons' 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.
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Maximum
time between transfers (years)
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1
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2
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3
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4
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5
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Credit
(%)
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100
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80
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60
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40
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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 - 2006 The Dyer Partnership
Limited
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