Inheritance tax (IHT) is charged on the gifting of assets by individuals during their lifetime and at death. A UK domiciliary is taxable on their worldwide assets whereas a non-domiciliary is taxed only on their UK situs assets. Individuals who have been resident in the UK for 15 tax years are classified as UK domiciled from the beginning of the 16th tax year.
All lifetime transfers are treated as potentially exempt transfers (PETs) unless the transfer is to a trust in which case it is a chargeable transfer.
The rate of tax is 40% on transfers at death and 20% on chargeable 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%.
50% relief for:
100% relief for:
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.
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 avoided by individuals gifting their assets in the period before death.
Transfers of an asset where the transferor retains any form of benefit from the gifted asset are completely ineffective. These are called gifts with reservation and are added back in the death estate calculation.
Gifts may also be subject to capital gains tax based on the market value at the date of the gift, so careful consideration is needed before attempting to mitigate IHT by way of gifts of assets. However, if planned carefully, gifting assets in your lifetime can be a very effective way of minimising IHT.
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