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Inheritance Tax Notes

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This is an extract of our Inheritance Tax document, which we sell as part of our Tax Law Notes collection written by the top tier of Oxford students.

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Inheritance Tax
Introductory Points - Who bears the tax? - Transfers on Death - Transfers in Life (PETs; CLTs) - Liability and Administration INTRODUCTORY POINTS
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Since 1894 there has been a tax aimed at non-commercial transfers of capital,
charging tax on the whole of the value transferred = currently inheritance tax.
But it is neither calculated by reference to what a person inherits nor limited to inheritance on death.

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Different from capital gains since that taxes only the gain on a transfer, does not apply on death and applies in the main to commercial transfers of capital. The relationship between the two taxes is usually complementary, but there are overlaps in lifetime gifts. …
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Throughout this course we have considered the tax treatment of the creation of wealth. In some contexts, as we have seen, an increase in wealth is taxed immediately as it accrues
(e.g. particularly where business accounts are used as a basis for the calculation of income for income tax purposes). In other contexts, an increase in wealth is taxed only when it is converted into cash form (e.g. particularly in capital gains situations where rollover relief is available).

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Inheritance tax is different and applies to the transfer, not to the creation, of wealth.

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We could imagine a third type of tax, whereby a person would be charged to tax based on their holding of wealth. This is commonly known as a 'wealth tax'. There have been various proposals from the left wing of the political spectrum to introduce a wealth tax in the UK, but by and large these have not been successful. The land value taxes of the
Finance (1909-10) Act 1910 form a partial exception to this statement; the political upheaval that they generated led to the Parliament Act 1911, which you have probably covered in Constitutional Law. HISTORY
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There have been taxes on the transfer of wealth by succession since 1694. That year saw the introduction of death duties, which were a type of stamp duty on wills and letters of administration (equity cases like Grey v IRC are about them trying to get out of paying stamp duty). This initial connection with stamp duties is intelligible, as stamp duties are also taxes on transfers of wealth. This link, however, was lost long ago.

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Estate duty (at the time there was a flat rate tax - people wanted a progressive tax and so this is what they got), a tax on a deceased's property and recognisably similar to modern inheritance tax, was introduced in 1894. It raised a good deal of revenue to begin with, but became complicated. It was a mutation duty (one charged on the property passing from the deceased)
and not an acquisition duty (one charged according to the amount each person acquired on death).

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In the face of sustained criticism, the Labour Government in 1975 replaced estate duty with
Capital Transfer Tax, which also taxed life-time gifts (In principle any transfer of wealth could be caught by CGT). The idea, which never came to fruition, was to turn CTT into a true wealth tax
(this never happened, but it was introduced under this pretext). The central idea of this tax was to charge all non-commercial transfers of capital (chargeable transfers) made by an individual throughout his lifetime, with death being regarded as the final transfer. All such transfers were taxed on a cumulative basis Consolidated into the Capital Transfers Act 1984. Instead things rather went back in the direction of the old estate duty.

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By the time of the CTA the cumulative principle was restricted to transfers in the previous 10 years. …
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In 1986 even more fundamental changes were made, resulting in the inheritance tax we have today.

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In 1986 CTT was replaced with Inheritance Tax with respect to transfers on or after 18 March 1986. Instead of drafting a new statute, the Conservative (Thatcher) government took the Capital Transfer Tax Act 1984,
amended it and renamed it the Inheritance Tax Act 1984. Inheritance tax is often shortened to "IHT" to distinguish it from "IT"

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One of the major changes was to take some transfers out of the charge to tax altogether. Life-time transfers only chargeable if either they were made within 7 years prior to the death of the transferor or the transferor has retained a benefit in the property transferred.

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Partial retreat to Estate Duty:
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Flat rate above the nil-rate band

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Still cumulative

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Most lifetime transfers out of the tax

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IHT has therefore resurrected the old estate duty concepts that a death rather than a lifetime transfer is the major trigger for a charge to the tax and that gifts made within seven years become chargeable on that death.

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But many aspects of capital transfer tax also remain - charges on death and discretionary trusts remain the same, it is still calculated by reference to the loss to the transferor, there is still a limited form of accumulation,
and in certain cases there is a charge even though no death has occurred.

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It is therefore a HYBRID BETWEEN ESTATE DUTY AND CAPITAL TRANSFER TAX - which charges more than just an inheritance on death, and which does so by reference to the amount inherited; i.e. it is still a mutation and not an acquisitions tax. …
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2006 changes to trusts

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2008 - in response to political pressure from the rapid advance in domestic house prices, which, unlike CGT, are not exempt from IHT. The percentage of the nil band (effectively the IHT threshold) unused by a spouse of civil partner on their death could be carried forward and added to that of the survivor.
Effectively doubled the tax threshold for most couples

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In 2010, following the banking crisis, the nil-rate band was frozen at £325k until 2015 - this has been extended (see later stuff about the 2015 Budget) Tiley (2007) BTR "Death and Taxes"
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Some of the features of today's IHT can be traced back to estate duty, e.g. the potentially exempt transfer.
Others can be traced back to CTT, not surprisingly since the primary inheritance tax legislation for the 1986 tax is technically the inheritance tax of 1984, renamed in 1986 and which had begun life as the consolidated
Capital Transfer Tax Act of 1984. These features include not only the concept of the transfer of value but also the regime for discretionary trusts.

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It is now time to turn to legacy duty (1780-1949)and succession duty(1853-1949). Unlike most of the duties listed above these are donee-based, i.e. in general, they taxed the property passing or transferred by reference to the circumstances of the recipient legatee or successor.
Naturally this gave rise to many rules about valuation but it also enabled the rules to vary the total amount of tax according to the pattern of the donor's bequests: the rate structure was doctrinally based on the correctness of leaving property to those to whom one was nearest in blood.

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When looking at the taxes we find a number of issues which gave rise to difficult questions some of law and others of policy. One was to define the basic concepts and to decide what was meant by a "legacy" and what a
"succession" was. Another was to recognise that, having decided that both are accessions taxes charged by reference to the circumstances of the recipient, this would require one to be able to identify the actual recipient. A third was to decide what if any exemptions and reliefs there should be; as we have seen Gladstone did not favour an exemption for charities. A fourth was to take note of the number of taxes there might be on death and decide how they should interact, this was a particular problem in 1894 with the introduction of estate duty. A fifth was to decide the rate structure: these duties have differentiation by consanguinity not graduation, i.e. that the different rates are defined by reference to degrees of consanguinity; the more remote the degree, the higher the rate of tax. There were no elements of graduation in the rate structure (distinguish the accessions tax noted above) though the effect some of the smaller estate rules was to provide what used to be called "degressive". A sixth was to have rules about collection and administration. A seventh was to address the problem of avoidance: the duties have rules on reservation of benefits.

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