Inheritance Tax

Question 1

What is the IHT rate?

Answer 1

40%

Question 2

What is subject to IHT?

Answer 2

(1) Transfers of an individuals property on death (to the extent it exceeds the nil rate band of £325k + any available reliefs).

(2) Lifetime gifts
- Transfers to a TRUST are chargeable when made (and may be subject to an additional tax if the transferor dies within 7 years).
- Transfer to an INDIVIDUAL are only chargeable if they exceed the nil rate band (£325k) and were made within 7 years of the donor’s death.

Question 3

If an individual makes a transfer without gratuitous intent, how does this effect the IHT due?

Answer 3

That transfer is disregarded for IHT purposes.

HOWEVER, maintenance of one’s family is not treated as a gift for IHT.

Question 4

How do we measure the value of a gift for IHT purposes?

Answer 4

By the loss to the donor (rather than the value received by the recipient)

Question 5

When valuing a gift for IHT purposes, what is the Related Property Rule?

Answer 5

If the donor’s spouse/civil partner owns similar property to the donor (e.g., shares in a company), we would aggregate the value of that property if it would be more valuable.

EXAMPLE:
Company X has an issued capital of 20,000 shares. A husband (H) owns 12,000 shares, and his wife (W) owns 2,000 shares.

If W dies, the related property rule would mean that the value of her 2,000 shares would be calculated by considering the combined holding of H and W (14,000 shares), not just W’s 2,000 shares individually.

Question 6

What transfers are exempt from IHT altogether?

Answer 6

1) Gifts to the donor’s spouse or civil partner, unless the recipient spouse is not domiciled in the UK (then only up to £325k is exempt)

2) Gifts to charities

3) Gifts of £250 or less
- All or nothing, a gift of £300 is fully taxed (not just for the £50 difference)
- Any number of recipients

4) Wedding gifts
- Parents: up to £5k
- Grandparent: up to £2.5k
- Bride to. groom (or vice versa) before wedding: £2.5k
- Others: £1k

5) Normal expenditure of income
- E.g., Christmas presents, regular gifts

Question 7

What is the annual exemption amount for IHT purposes?

Answer 7

£3,000

Question 8

How is the annual exemption applied?

Answer 8

• Set against gifts in chronological order in the tax year (earlier gifts -> later gifts)
• Can be carried forward ONE YEAR ONLY (so max exemption is £6,000, assuming none used the year before)