Unit 3: Inheritance Tax

Flashcards covering occasions of charge, lifetime transfers (PETs and LCTs), valuation rules, reliefs, exemptions, cumulation, liability, and anti-avoidance under UK Inheritance Tax law.

What are the three occasions of charge for Inheritance Tax (IHT)?

1. Death (on the value of the estate, assets less liabilities); 2. Lifetime gifts to individuals within $7$ years of death (PETs, which become exempt if the donor survives $7$ years); 3. Lifetime gifts to a company or trust other than a disabled trust (LCTs, which are immediately chargeable).

What are the four steps followed in calculating Inheritance Tax?

1. Identify the transfer of value; 2. Find the value transferred (loss to the estate on lifetime transfer, or value of the estate on death); 3. Apply exemptions and reliefs; 4. Calculate tax.

What are the baseline amounts for the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB)?

The NRB is $£325,000$ and the RNRB is $£175,000$ ($2026/27$, frozen to $2030/31$). The RNRB is available on death only.

How does cumulation operate when calculating Inheritance Tax?

It looks back $7$ years for chargeable transfers to see how much NRB remains, and it is used for the NRB only.

What statutory additions are included in the deceased's estate on death?

Interest in possession trusts (qualifying IIPs, including IPDIs) and gifts with a reservation of benefit.

Which assets fall outside the estate on death for IHT purposes?

Life policies written in trust, discretionary pension lump sums, and excluded property (such as reversionary interests in trusts created before 22 March 2006).

How are quoted shares valued for IHT purposes on death?

Lower price $+$ $\frac{1}{4}$ of the difference between the two quoted prices.

What valuation discounts apply to a share in joint land, and when do they not apply?

A discount of up to $10\%$ for commercial land and $15\%$ for residential land, unless related property rules apply.

What are the limitations on the spouse or civil partner exemption?

It is fully exempt, but capped at $£325,000$ if the transferee is not a long-term UK resident (unless they elect). Cohabitants are not covered (Holland).

What charity exemption rule allows an estate to be taxed at the reduced rate of $36\%$?

Gifts to charity are exempt, and if at least $10\%$ of the net estate component goes to charity, the overall estate tax rate is reduced to $36\%$.

What are the rates and qualification conditions for Business Property Relief (BPR)?

$100\%$ relief for a business, partnership interest, and unquoted shares (not on a recognised exchange); $50\%$ relief for controlling quoted shares, AIM shares, and land or plant used by a controlled company or partnership. The business must be trading and owned for $2$ years.

What is the combined allowance cap for $100\%$ BPR and APR?

A $£2.5\text{m}$ allowance (combined, refreshes every $7$ years, transferable between spouses). Anything above this allowance receives $50\%$ relief.

What are the conditions and tapering rules for the Residence Nil Rate Band (RNRB)?

Requires a qualifying residential interest closely inherited by lineal descendants (and their spouses or widows). It is capped at the value of the home and tapered by $£1$ for every $£2$ of the estate value over $£2\text{m}$.

In what order are tax rates applied on death?

RNRB at $0\%$, then NRB at $0\%$ (after cumulation), then $40\%$.

What are the rules regarding the annual exemption for lifetime gifts?

The annual exemption is $£3,000$, with one year's unused amount carried forward (maximum $£6,000$). The current year's exemption is always used first.

What are the statutory exemption limits for marriage gifts?

$£5,000$ from a parent, $£2,500$ from a remoter ancestor, and $£1,000$ from any other person.

What rates of tax apply to Lifetime Chargeable Transfers (LCTs) at the time of transfer?

$0\%$ on the available NRB, and $20\%$ (half the death rate) on the excess.

What are the taper relief percentages for tax payable on gifts made before death?

$0\text{--}3$ years before death: $100\%$; $3\text{--}4$ years: $80\%$; $4\text{--}5$ years: $60\%$; $5\text{--}6$ years: $40\%$; $6\text{--}7$ years: $20\%$. Taper relief reduces the tax, not the value.

What is the distinction between tax liability and tax burden?

Liability defines who must pay HMRC and cannot be varied; burden defines who ultimately bears the cost of the tax and can be changed by the will.

Who is primarily liable to pay tax on a failed PET, and when does liability shift?

The transferee pays first. Personal Representatives (PRs) become liable if the tax remains unpaid $12$ months after the end of the month of death.

How is a lifetime transfer grossed up if the transferor pays the lifetime tax on an LCT?

The gift is grossed up using the formula: $\text{net gift} \times \frac{100}{80}$. For example, an $£80,000$ net gift becomes a $£100,000$ gross transfer taxed at $20\%$.

What is the deadline for paying Inheritance Tax on death?

$6$ months after the end of the month of death (interest runs on late payments, and the tax must be paid before obtaining the grant).

What are the payment deadlines for lifetime tax on Lifetime Chargeable Transfers (LCTs)?

For LCTs made between 6 April and 30 September, tax is due on 30 April of the following year. Otherwise, it is due $6$ months after the end of the month of transfer.

What assets qualify for the 10-year instalment option to pay IHT, and what are the interest terms?

Land, a business or interest in a business, BPR assets, and some shares. There is no interest on BPR/APR, business, or share instalments if paid on time, but interest runs on other land.

What standard must HMRC meet to counteract arrangements under the General Anti-Abuse Rule (GAAR)?

HMRC can counteract abusive arrangements using the double reasonableness test, and the burden of proof is on HMRC.