Dyer Logo People 1Building 1People 2Building 2 Inheritance Tax
Dot Stroke
Home
Dot Stroke
Latest News
Dot Stroke
UK Tax Guide
Dot Stroke
UK Services
Dot Stroke
US to UK
Dot Stroke
Contact Us

Links
Inland Revenue
VAT Office
DTI
Liability to inheritance tax (IHT)

IHT may arise when a person dies or on certain lifetime gifts which are not exempt or potentially exempt.
  • Individuals domiciled in the UK may be subject to IHT on their worldwide assets.
  • Non-UK domiciled individuals are generally only subject to IHT on their UK assets.
  • Individuals who have been resident in the UK in 17 out of the previous 20 years are treated as UK domiciled for IHT purposes.
Husbands and wives are taxed separately; however, there is no IHT on transfers between spouses, provided the recipient is domiciled in the UK.

Rate of tax

IHT is charged at 40% on death, and at 20% on certain lifetime transfers. The first £250,000 is charged at a nil rate.
Where a donor of a lifetime gift dies within seven years of making the gift, IHT may be due on the gift. The full rate of tax is reduced depending on the interval between the gift and the date of death. If the gift, plus chargeable transfers in the previous seven years, is less than £250,000, it is within the nil rate band and so there is no reduction.

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

The value of assets for IHT is their open 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.
For example, where a husband and wife both hold 45% of the shares in a company, the value of each holding will be based on a 90% valuation.

Gifts with reservation (GWR)

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

  • Transfers between UK domiciled spouses.
  • Annual exemption for lifetime gifts of up to £3,000 per donor.
  • 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.
  • 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 for national purposes (eg to various public institutions).
Potentially exempt transfers (PETs)

There is no immediate liability to IHT on a PET and no subsequent charge so long as 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.
Quick succession relief

Where an individual dies within five years of receiving a chargeable transfer from another person, credit is given for part of the IHT paid on the previous transfer.

Maximum time between transfers (years) 1 2 3 4 5
Credit (%) 100 80 60 40 20

Agricultural property relief

For transfers of owner-occupied farms and tenanted farms, 100% relief is potentially available where the transferor has vacant possession of the land, or could have within 12 months.
  • 100% relief is also available where this condition is not met but the land is tenanted under a lease that started after 31 August 1995.
  • 50% relief is available for tenanted land where the lease started before 1 September 1995.
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 (eg a partnership share).
  • Shares in unlisted and Alternative Investment Market (AIM) companies.
50% relief applies to:
  • Assets (eg 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.

Copyright © 2003 SharmanS Tel: +44 (0) 207 5836388    Fax: +44 (0) 207 353 9742  Address: 39-40 Temple Chambers, Temple Avenue, Embankment, London EC4Y0HP