More on inheritance tax – mainly for advisers

Inheritance tax is complicated because:

• The tax can be payable by the person making the gift, the person who receives the gift or by the estate of someone who dies. It all depends on the exact circumstances and train of events – there is no simple rule.
• The amount of tax due on a gift or on an estate at death is affected by gifts in the previous 7 years. So you need to know about what has happened in the past, and what is likely to happen in the future, before you can tell what the inheritance tax position will be.
• There are a wide number of reliefs and exemptions which affect the value and the amount of tax due in specific circumstances. These include quick succession relief, business property relief, annual exemption, small gifts exemption etc.
• Inheritance tax is aimed at the rich. There have been many complicated schemes designed to avoid it. This has resulted in tax anti-avoidance rules which add a further layer of complexity. Though not targeted at less well off people, the rules can sometimes have unexpected consequences for people who are not aiming to avoid inheritance tax.

In the following sections we take an overview of inheritance tax which should cater for the most frequently arising issues. It must be stressed that in all but the most straightforward cases it will probably be necessary to take advice.

Overview of inheritance tax

Inheritance tax is a tax on gifts made by people who are resident in the UK. Gifts can be made on death or during a person’s lifetime. Tax is not normally due on lifetime gifts at the time the gift is made as gifts between individuals are ‘potentially exempt transfers’.

Tax will only be due on a potentially exempt transfer if the person making the gift dies within 7 years of making the gift. Even if the person making the gift dies, there may be no tax to pay, as the gifts made by that person may been below the Inheritance tax threshold. If tax is due on a potentially exempt transfer, then the person who received the gift will normally have to pay the tax. This is considered in more detail below in the section on Lifetime Gifts.

On death any tax due is normally paid by from the person’s estate. It is possible to specify in a will who pays the tax, so in some cases, the tax will be paid by the recipient of the gift.

No tax is due unless the value of gifts made is above a certain amount. This level, the Inheritance tax threshold, is £325,000 (from April 2009 to 5 April 2015). When deciding whether this limit has been exceeded, lifetime gifts in the previous seven years are considered as well as the estate at death.

Above this level, inheritance tax is payable at 40% on death and at 20% on lifetime transfers. As mentioned above, tax is rarely due on lifetime transfers as most lifetime transfers are ‘potentially exempt transfers’.

There is a reduced rate of  Inheritance Tax of 36% from 6 April 2012 for people who leave 10 per cent or more of their net estate to charity.

Following Topics

• Lifetime gifts
• Taper relief on lifetime transfers
• Exemptions and exempt gifts
• Tax on estates at death
• IHT reliefs – which affect the value of assets for Inheritance tax
• IHT and property
• Paying IHT