Inheritance tax (IHT) is charged on the gifting of assets by individuals during their lifetime and at death. A UK domiciliary is taxable on his worldwide assets whereas a non-domiciliary is taxed only on his UK situs assets. Individuals who have been resident in the UK for 16 tax years are classified as UK domiciled from the beginning of the 17th tax year. As from 6th April 2017 this will be 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:
Only trading businesses/companies are eligible for BPR. Investment companies do not qualify. Relief is restricted if a trading company has substantial (broadly speaking over 20%) non-trading assets or activities.
In order to qualify for the relief the property/shares must have been held for a minimum 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 avoided by individuals gifting their assets in the period before death. Transfers of an asset where the transferor retains any form of interest in it are completely ineffective.
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.
Disclaimer: This note 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.
Copyright © 2013 - Oury Clark.