Inheritance Tax and Administration of Estates

A set of vocabulary-style flashcards covering the core principles of Inheritance Tax (IHT) as applicable to the SQE1 syllabus, including lifetime transfers, death estates, exemptions, and reliefs.

Inheritance Tax (IHT)

A tax governed principally by the Inheritance Tax Act $1984$ that applies to the value of an individual's estate on death and to certain transfers made during their lifetime.

Chargeable Transfer

A transfer of value which is made by an individual but is not an exempt transfer, encompassing transfers on death and specific lifetime gifts.

Transfer of Value

Any disposition which reduces the value of the transferor’s estate, with the value transferred measured as the loss to the estate.

Potentially Exempt Transfer (PET)

A lifetime gift made by an individual to another individual or a disabled trust; it is not immediately taxable and becomes fully exempt if the donor survives for $7$ years.

Lifetime Chargeable Transfer (LCT)

A lifetime transfer that is immediately chargeable to tax, most commonly a transfer made into a trust (other than a disabled trust) or to a company.

Estate

All the property to which a deceased person was beneficially entitled immediately before death, excluding 'excluded property'.

Excluded Property

Property defined by IHTA $1984$ as not being part of the estate for IHT purposes, such as a reversionary interest created before $22$ March $2006$.

Qualifying Interest in Possession

A beneficial interest where the beneficiary is entitled to the income from trust property (or use of it) without trustee discretion; the beneficiary is treated as owning the underlying capital for IHT purposes.

Immediate Post-Death Interest (IPDI)

A type of qualifying interest in possession that arises on the death of a settlor under their will or intestacy.

Property Subject to a Reservation

Property given away during a person's lifetime where the donor did not transfer full possession and enjoyment or was not entirely excluded from it; it is treated as part of the donor's estate on death.

Probate Value

The value of an asset agreed with HMRC for IHT purposes, typically based on the open market value immediately before death.

Spouse or Civil Partner Exemption

An exemption under section $18$ IHTA $1984$ for property passing to the deceased’s spouse or civil partner, though it may be limited to $£325,000$ if the transferee is not a long-term UK resident.

Charity Exemption

An exemption under section $23(1)$ IHTA $1984$ for property given to charities, which may also reduce the tax rate on the rest of the death estate to $36$ if the gift is at least $10$ of a defined component.

Business Property Relief (BPR)

A relief that reduces the value of relevant business property (such as unquoted shares or a partnership share) by either $100\%$ or $50\%$ for tax purposes, provided the asset was owned for at least $2$ years.

Agricultural Property Relief (APR)

A relief that reduces the 'agricultural value' of agricultural property by $100\%$ or $50\%$ depending on vacancy possession and when letting commenced.

Nil Rate Band (NRB)

The amount of a person's estate (currently $£325,000$) that is taxed at $0\%$, available for all transfers of value.

Residence Nil Rate Band (RNRB)

An additional nil rate band (currently $£175,000$) available on death if the deceased's interest in a dwelling-house is 'closely inherited' by lineal descendants.

Cumulation

The process of looking back $7$ years prior to a transfer to identify previous chargeable transfers, which reduces the amount of Nil Rate Band available for the current transfer.

Tapering Relief

A reduction in tax payable on a PET or LCT that becomes chargeable on death, applicable if the transferor survived for more than $3$ years after making the transfer.

Annual Exemption

A lifetime-only exemption that applies to the first $£3,000$ transferred in each tax year; unused amounts can be carried forward for one year.

Small Gifts Exemption

An exemption for lifetime gifts of $£250$ or less per recipient per tax year, which cannot be used to reduce a larger gift.

Estate Rate

The average rate of tax applicable to each item of property in a death estate, calculated as (Total Tax Bill / Total Chargeable Estate) $\times 100$.

Instalment Option

The option to pay IHT attributable to specific assets, like land and certain business properties, in $10$ equal yearly instalments starting six months after the month of death.

Disclosure of Tax Avoidance Schemes (DOTAS)

Regulations requiring that schemes designed to obtain a tax advantage involve 'contrived or abnormal steps' be reported to HMRC at an early stage.

General Anti-Avoidance Rule (GAAR)

A rule allowing HMRC to counteract 'abusive' tax arrangements where obtaining a tax advantage was the main purpose and it failed the 'double reasonableness' test.