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LPC Law Notes Private Client Notes

Inheritance Tax Notes

Updated Inheritance Tax Notes

Private Client Notes

Private Client

Approximately 235 pages

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INHERITANCE TAX

1

Identify the transfer of value.

  • Inheritance Tax Act 1984 [IHTA] – s.1: Inheritance tax is charged on the value transferred by a chargeable transfer (following a disposition).

    • Transfer of value = disposition whereby the transferor’s estate immediately after the disposition is less than it would be but for the disposition – difference between value of the estate before and after the disposition = amount of the value transferred

    • Chargeable transfer = transfer of value made by an individual that is not an exempt transfer (e.g. spouse exemption, charity exemption, etc.) – s.2 IHTA

  • When an individual dies, they are deemed to make a disposition and therefore a transfer of value occurs on death.

2

Find the value transferred (assets less liabilities) of deceased’s estate, including any PETs and LCTs.

  • General rule: property is valued at its open market value – i.e. what price it might have fetched if it had been sold on the open market immediately before death

IHT is potentially chargeable on:
Assets which are owned by the individual e.g. land, shares, bank accounts, personal chattels and even foreign property ( if you are UK domiciled)
Joint property
  • If property owned as JTs, it passes by survivorship but a half share still forms part of the deceased’s estate for IHT purposes.

  • Where land is jointly owned, the value is discounted to reflect the difficulty of selling co-owned property

    • 10% for residential, 15% for business

    • discount does not apply where spouses own property together, but would if, e.g. father and son/brother and sister/co-habiting partners own property

Life Interests in Will Trusts/Pre-2006 Lifetime Trusts Where a beneficiary is given an interest in a deceased person’s trust assets for their lifetime (usually the entitlement to receive income and/or live in a property owned by the trust), all assets in the will trust are subject to IHT on the interested beneficiary’s death.

PETs* and LCTs** made within 7 years

of death

Property is still subject to IHT if gifted within 7 years of death.

BUT there may be taper relief available

Gifts with a Reservation of Benefit If the transferor retains a benefit from the property which has been gifted, it will be subject to IHT.

Extra Point:

  • Jane (UK resident and domiciles) owns a pair of Ming vases.

  • As a pair, they are valued at 500,000. Singly, they are valued at 100,000 each.

  • She gives one of the vases away to her daughter.

  • Although she has given away a vase worth 100,000, the value transferred for IHT purposes is calculated by the reduction in the value of her estate.

  • Jane is left with something worth 100,000 so the value transferred is actually 400,000.

3 Apply exemptions and reliefs.

Exemptions

Gifts to Charity
  • Gifts to charity during lifetime or on death are exempt from IHT.

  • If a person’s estate leaves more than 10% to charity, the rest of the estate is taxed at 36%

Transfers to Spouses and Civil Partners
  • Transfers to spouses and civil partners are exempt.

  • An unused NRB can be transferred from one spouse/civil partner to another.

  • If on death, everything passes on to a spouse/civil partner, no IHT will be payable.

  • The assets now form part of the survivor’s estate and whatever remains is taxed on the survivor’s death.

Lifetime Exemptions Annual
  • 3,000 per annum

  • Can be carried forward for one year if not used in any year but must use up current year’s exemption first

  • Cannot be set against tax liability on death but can be used against lifetime gifts brought into account on death

Small Gifts
  • For any number of small gifts up to 250 per tax year

Gifts in Consideration of Marriage
  • 5,000 from a parent to a child

  • 2,500 to a relative apart from a child

  • 1,000 to any individual

Normal Expenditure Out of Income
  • Allows people to habitually give away their surplus income without this being an event for IHT

  • Must leave the donor with sufficient income to maintain their usual standard of living

  • Very commonly used in connection with payment of premiums for life policies written in trust

Reliefs

What It Does/Conditions Application
Business Property Relief
  • Reduces the value transferred by a transfer of value by either:

    • 100% for ‘relevant business property’ (a business or interest in a business or unquoted shares); or

    • 50% for other relevant business property (quoted shares where transferor had voting control immediately before the transfer & land, buildings, machinery, or plant owned personally but used for business purposes of a business of which they had voting control)

  • Owned by the transferor for at least 2 years at time of transfer

  1. Need not be the transferor’s entire interest

  2. Not applicable where the person has entered into a contract of sale;

  • Partnership – a partnership agreement providing that the continuing partners will but the former partner’s share on a certain event e.g. death (not a mere option)

  • Company – a shareholders’ agreement that the remaining shareholders will buy the share on a certain event e.g. death...

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