Inheritance Tax

Rate of Tax

IHT is charged at 40% on death, and at 20% on certain lifetime transfers. The first £300,000 is charged at a nil rate unless you are making a transfer to a spouse who is not domiciled in the UK, when the limit is £55,000..

Where someone making a lifetime  gift dies within seven years of making the gift, IHT may be due. The full rate of tax is reduced depending on the time between the gift and the date of death. If the gift, plus chargeable transfers in the previous seven years, is not more than £300,000, it is within the nil rate band and so there is no reduction.   This is a trap for the unwary, as many people believe that this taper applies to all gifts.

Period of years before death	% of full tax rates
Not more than 3	100
More than 3 but not more than 4	80
More than 4 but not more than 5	60
More than 5 but not more than 6	40
More than 6 but not more than 7	20

Valuation of assets

Assets are valued for IHT on the basis of 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.

Gifts with reservation

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.

Main exemptions

• Annual exemption for lifetime gifts of up to £3,000 per donor.
• Unlimited 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.
• Transfers between (UK domiciled) spouses.
• 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 to various public institutions).

Potentially exempt transfers

Certain gifts are "potentially exempt transfers". There is no immediate charge to tax, and no subsequent charge if the donor survives for seven years after making the gift. PETs can only be made to:

• Individuals.
• Accumulation and maintenance trusts.
• Disabled persons' trusts.
• Interest-in-possession trusts.
• 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 (for example a share in a partnership).
• Shares in unlisted and Alternative Investment Market (AIM) companies.

50% relief applies to:

• Assets (e.g. 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.

Shareholdings of less than 50% in a company are usually valued at less than a majority holding, but the individual shareholdings of a husband and wife will be traded as if they each owned the combined shareholding.