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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.
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%.
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 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.
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.
This guide does not contain a full statement of the law and it does not constitute legal advice. Please seek legal advice if you have any questions about the information set out above.