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Date of publication: January 2012

Inheritance tax (IHT) is charged on the transfer of value of property. UK domiciles are chargeable on their world wide assets. Non-domiciles, who have lived in the UK less than 17 years, are only charged on UK assets.

It is charged on transfers made when someone dies, but also on certain lifetime transfers (mainly transfers to trusts), and transfers made within the seven years before death.

The rate of tax is 40% on transfers at death and 20% on lifetime transfers.

Exemptions:

• First £325,000 per person is not chargeable. The proportion of any unused nil rate band at death can be transferred to the surviving spouse.
• Annual exemption of £3,000. Unused exemption can be carried forward one year.
• Small gifts, under £250 per recipient.
• Normal expenditure out of income is not treated as a transfer of value. Donor needs to have sufficient retained other income to live on in addition to that donated.
• Gifts in consideration of marriage, depending upon relationship between donor and recipient, between £5,000 and £1,000.
• Transfers to spouse are exempt without limit unless the spouse is not domiciled in the UK, in which case limited to £55,000.
• Gifts to charities and political parties fully exempt.

Reliefs:

There are two key reliefs for IHT, one for Business Property and one for Agricultural Property, both of which give relief at either 50% or 100%.

Business Property Relief

50% relief for:

• Shares in a listed company transferred by a controlling shareholder.
• Assets used in a company controlled by the transferor.

100% relief for:

• Shares in an unlisted company.
• Business carried on by a sole trader.
• Interest in a business, e.g. share in a partnership.

Only trading businesses/ companies are eligible for business property relief. Investment companies do not qualify. Relief is restricted if a trading company has substantial (broadly speaking over 20%) non-trading assets or activities.

The property must have been held for a two year period immediately prior to the transfer.

Agricultural Property Relief

50% relief for:

• Certain tenanted agricultural land where vacant possession cannot be attained within 24 months.

100% relief for:

• Agricultural land, except as described above.

Agricultural land can include farm houses and other farm buildings as well as pasture and woodland.

The property must have been held for a two year period immediately prior to the transfer. This increases to seven years in the case of tenanted agricultural land.

Potentially exempt transfers (PETs):

A PET is a transfer that will be subject to IHT if the transferor dies within seven years of the transfer. This prevents tax being evaded by individuals gifting their assets before death. Additional rules prevent tax avoidance where an asset is gifted prior to the seven year period, but some benefit from the asset is retained by the giver.

Gifts may also be subject to capital gains tax based on market value, so careful consideration is needed before attempting to mitigate IHT by way of gifts of assets.