Harper Adams University - Inheritance Tax (IHT) Study Notes

Harper Adams University - Inheritance Tax (IHT) Study Notes

General Information

• Presenter: Stephen Hall

• Last Adjusted: January 2026

Apprentice Learning Outcomes

• K01 – Learners will understand the legal basis for Inheritance Tax and its relation to ownership of property.

Objectives of the Lecture

This session covers:

• An introduction to Inheritance Tax (IHT).

• Differentiating between exempt, potentially exempt, and chargeable lifetime transfers.

• Identifying what is chargeable to IHT upon death.

Introduction to Inheritance Tax

• Introduced: 1986 by the Inheritance Tax Act 1984.

• Previous Forms:

  • Estate Duty: first introduced in 1894.

  • Capital Transfer Tax: replaced Estate Duty in 1976.

• Definition: This tax is often misinterpreted; it is not a tax on inheritance itself and is not limited to transfers occurring upon death.

• IHT analysis consists of two main categories:

  • Wealth upon death.

  • Lifetime gifts.

Wealth on Death

• Tax Rates:

  • 40% tax on the total estate.

  • 36% tax if 10% or more of the estate is left to charity.

• Estate Definition:

  • Includes any gifts made within the last 7 years, which must be added back into the estate valuation.

• Nil Rate Band:

  • The initial threshold is £325,000 for the 2025/26 tax year, known as the Nil Rate Threshold or Nil Rate Band.

  • Can be transferred to surviving spouses if unused or partially unused.

Legal Basis for IHT on Death

• Legislative Reference: Section 4 of the IHTA 1984 states:

• Implications of Section 4:

  • Death is treated as a deemed transfer of value.

  • All owned assets immediately before death are within the scope of taxation.

  • Earlier lifetime transfers are managed separately under the 7-year rule.

  • Valuation is fixed at the moment before death.

  • Reliefs and exemptions apply after the charge is established.

Typical Items in an Estate

• Assets:

  • House

  • Cars

  • Cash in bank

  • Accrued interest at date of death

  • Investments

  • Chattels (personal effects)

  • Insurance proceeds

• Liabilities:

  • Loans/overdrafts (to be adjusted against secured assets)

  • Outstanding income tax and capital gains tax (CGT)

  • Reasonable funeral expenses including gravestone

• Legal Definition of Estate:

  • According to Section 5(1) IHTA 1984, the estate is defined as:

• Property Definition:

• By Section 272 IHTA 1984, “property” includes rights and interests of any description.

• Non-settled property, where a person has the power to dispose at will, is also considered property.

• For those with an interest in possession in settled property (e.g., life tenants), the estate includes the property where the interest subsists as per Section 49(1) IHTA 1984.

Lifetime Transfers

• Definition: Most lifetime transfers can evade tax, but many could be subject to it.

• Categories of Lifetime Transfers:

  • Exempt Transfers

  • Potentially Exempt Transfers (PETs)

  • Chargeable Transfers

Exempt Lifetime Transfers

1. Small Gifts: Allowable up to £250 per tax year.

2. Annual Exemption:

   • Up to £3,000 can be gifted annually without being added to the estate for IHT calculations.

   • Unused portions can be carried forward to the next tax year, not further.

3. Gifts for Marriage:

   • £5,000 per parent

   • £2,500 per grandparent

   • £1,000 from others

4. Maintenance Gifts:

   • Gifts made to help dependents with living costs can be exempt if paid from surplus income and made regularly.

   • Payments must consistently follow a pattern (monthly, quarterly, or annually) without relying on capital for essential living costs.

Lifetime Transfers Exempt During Lifetime and on Death

• Exempt Transfers:

  • Transfers between spouses or civil partners

  • Gifts to charities

  • Gifts to political parties

  • Transfers involving heritage property

  • Maintenance funds for heritage property

Potentially Exempt Transfers (PETs)

• Most other lifetime gifts are considered PETs.

• If the donor survives for 7 years post-gift, the gift becomes exempt from IHT.

• If the donor dies within 7 years, the gift becomes chargeable.

• Chargeability of PETs:

  • PETs that become chargeable are classified within the estate at death and are the first to offset the nil rate threshold.

• Taper Relief:

  • To alleviate tax burden on gifts made more than 3 years prior but within 7 years of death:

  • 3 to 4 years: 32% tax

  • 4 to 5 years: 24% tax

  • 5 to 6 years: 16% tax

  • 6 to 7 years: 8% tax

  • 7 years or more: 0% tax

Example Calculations for PETs

• Scenario: A mother gifts £400,000 to her daughter.

  • If she dies 10 years later: No IHT.

  • If she dies 1 year later: IHT due on £400,000 - £6,000 (annual exemption) - £325,000 (nil rate threshold) = £69,000.

  • IHT @ 40% on £69,000 = £27,600.

  • If she dies 4.5 years later: Taper Relief applies.

  • IHT @ 24% on £69,000 = £16,560.

Reservation of Benefit

• Purpose: If a gift is subject to reservation, the value is treated as part of the giftor's estate for IHT, as if the gift never occurred.

• Condition for Exemption: If the reservation ceases over 7 years before donor’s death, the gift qualifies as exempt.

• Example of Gift with Reservation:

  • A house gifted but still lived in may qualify as exempt if rental agreements are in place at market rates.

Reporting and Compliance

• HMRC Declaration: IHT operates as a “self-declaration” tax. Executors must accurately report lifetime gifts, PETs, and gifts with reservation when assessing the estate's size.

• Legal Obligations: Failure to report can result in criminal charges; solicitors must inquire regarding gifts accurately during estate administration to avoid professional misconduct.

Chargeable Transfers

• Common example includes the creation of a trust post-Finance Act 2006:

  • Lifetime Tax Rates: 20% above the nil rate threshold, rising to 40% if death occurs within 7 years.

• Trust Taxation: Chargeable transfers incur 10 yearly and exit charges to IHT (currently 6%).

• Bare Trust Definition: Where assets are held absolutely for beneficiaries, commonly used for minors, with administrative trustee powers only.

Quick Succession Relief

• Definition: Allows tax percentages paid on the first death to be credited against IHT on the second death.

• Applicable Percentages:

  • 100% if the second death is within 1 year of the first

  • 80% if within 1 to 2 years

  • 60% if within 2 to 3 years

  • 40% if within 3 to 4 years

  • 20% if within 4 to 5 years

• Calculation Formula for QSR:

• Definitions:

  • A = Increase in deceased’s estate

  • B = Tax from an earlier chargeable transfer

  • C = Applicable percentage

  • D = Value of the earlier chargeable transfer

Payment Dates for IHT

• IHT is generally due within six months from the end of the month of death. Post this duration, interest applies to the outstanding amount.

• Certain assets (like land, buildings) can defer payment with equal instalments over 10 years, though interest usually applies.

• Current Interest Rate: 7.75% on unpaid IHT accrues from the end of the sixth month post-death.

• When sorting an estate may take long, strategies can involve paying estimated dues and claiming back excess payments later (only earning 2.75% interest on those).

Transfer of Value - Loss to the Estate

• Example: A pair of Ming vases appraised at £1,000,000 with a single vase worth £300,000. Considerations on what the value of the transfer will be if one vase is given away.

Conclusion

• End of lecture.

• Presenter: Stephen Hall

• Harper Adams University