lecture 13 (inheritance tax)

8/13/2019 Lecture 13 (Inheritance Tax)

1/6

INHERITANCE TAX

Inheritance tax is tax charged on the transfer of value made by a chargeable person

on chargeable property.

Usually inheritance tax is paid on the estate of the deceased or, the gifts he makes 7

years prior to his death.

Transfer of Value

This is the loss in value of the donors estatedue to the transfer of any capital

asset. It must be a gratuitous disposition. On most but not alloccasions it will

be eual to the gain by the donee. It usually takes the form of!

" #ifetime Transfers" $eath Transfers

Chargeable Property

This is any asset forming the estate of the deceased, which has otherwise not been

exempt.

Chargeable Persons

%or Inheritance Tax, the following persons are chargeable!

" Individuals" Trusts

!!asions of !harge

Inheritance Tax can be charged in the following occasions!

" On the net assets of the donor upon his death &$eath 'state(." On non exempt lifetime gifts by the donor 7 years before his death.

Types of transfers"

$uring the lifetime or on the death of an individual, the following categories of

transfers may arise!

" )hargeable Transfers" 'xempt transfers


2/6

#$ Chargeable transfersThese are transfers which can attract inheritance tax!

a. Potentially Exempt Transfers &PETs%These are lifetime transfers made by an individual to another individual.

They are chargeable if death occurs with 7 years of transfer, and are

exempt otherwise.

b. Chargeable &ifetime Transfers &C&Ts(These become chargeable immediately after transfer.

*. E'e(pt TransfersThese are exempt and fall in two categories!i( 'xeptions to both death and lifetime transfers.

Transfers between spouses+civil partners.ii( 'xempt lifetime transfers

These include

)(all gifts"-ifts to individuals &not trusts( of upto */0 per donee per tax

year. If more, the whole is chargeable, not only the excess.

Annual E'e(ption%irst 1000 after all other exemptions is exempt. Thisexemption is applied to earlier transfers first and is usually

applied to )#T2s first before 3'T2s to avoid wasting.

Nor(al e'penditure out of in!o(e4ince I5T is on capital items, a transfer of value will be exempt

if!

6ade as part of normal expenditure 6ade out of income #eaves donor with sufficient income to maintain his

standard of living.

*ift in !onsideration of (arriage or !ivil partnershipThe exempt limits are, the first!

/,000 worth of transfers from a parent of a party to themarriage+civil partnership.

*,/00 worth of transfers from a remote ancestor or froma party to the marriage+partnership.

,000 from any other person.


3/6

This exemption applies to the donor, per marriage+civil

partnership, and is not applicable if the actual marriage+

partnership does not come to being.

Charge of Inheritan!e Ta'

Inheritance tax can be charged on!

" #ifetime transfers" The death estate of the deceased

&ifeti(e Transfers

Inheritance tax on lifetime transfers is charged on transfers made. Two types ofI5T apply!

" #ifetime Tax" $eath Tax&ifeti(e Ta'

This tax is paid on lifetime transfers of C&Ts. If the tax is paid by the donee,

the tax is charged at +, upto the nil band li(it -./01+++ for the year

/+##2#/% and at /+, on the e'!ess$

The band limit is reduced by any chargeable lifetime transfers in the previous 3

years.

If the tax is paid by the donor, then the gross amount of the transfer must be

calculated &the loss to the donor( which effectively translates to a higher rate of

/0,of the transfer as the tax due from the donor. &)in!e it is the pri(ary

liability of the donor to pay IHT1 if the e'a(iner does not state 4ho

pays the ta'1 its safer to assu(e that the donor pays the ta'$%

5eath Ta' on C&Ts

This is the liability of the donee$ It applies where the donor dies 7 years after

the transfer. Tax is charged at +, upto the nil band li(it -./01+++ for the

year /+##2#/% and at 6+, on the e'!ess$ The band limit is reduced by any

chargeable lifetime transfers in the previous 3 years. $eath Tax )harged on

)#T2s is reduced by a Taper relief which only applies if the donor dies more

than 1 years after the transfer, and less than 7 years after the transfer.


4/6

Taper 8elief 8ates

If the donor survives"

-units in years%

Redu!tion in ta' liability

7. 89 6 /+,

76 89 0 6+,

70 89 : :+,

7: 89 3 3+,

Taper relief can only reduce the tax to nil but not more.

To get the death ta' due on the transfer1 any lifeti(e ta' paid is

dedu!ted$

5eath Ta' on PET

" ;sually paid by the donee$" Co(puted in the sa(e 4ay as in C&T" There is no lifeti(e ta' if this ta' is paid$

5eath Estate

The death estate of the deceased is!

" 9ll property owned by the deceased immediately before his death added to" 9ny receipts on death &eg life assurance( , less" 9ny liabilities and any funeral expenses.

#iabilities owed by the decease ualifying for deduction from a death estate include!

" $ebts incurred in good faith, and for full consideration &do not includebetting(

" $ebts falling due periods after the death &discounted(" 9ccrued expenses by the deceased before his death" Taxes due on death" 4pecific )harges &applied to specific assets of the estate(

%uneral expenses include

" 8easonable funeral expenses &depending on the standard of living(


5/6

" 8easonable mourning expenses" )ost of a tombstone

The death estate then suffers I5T at 0: upto the nil band limit, and ;0: on the

excess.

Transfers of unused nile a lifeti(e transfer?


6/6

" If a PET is (ade but the donor survives for 3 or (ore year1 ade!rease of his estate suffers no IHT

" If a C&T is (ade and the donor survives 3 years after1 only life ti(eta' is payable

" Taper relief redu!es death ta' due on C&Ts and PETs in !ase deatho!!urs after . years but before 3 years$

" @or assets that appre!iate over ti(e1 the earlier they are transferred1the lesser the IHT if any$

Caveat"

If the overall ta' liability -in!luding !apital gains ta'% is higher upon a

transfer1 than it 4ould be in future1 a !onsideration (ight be (ade not to(a>e the transfer$

>uestion -allery

" $ecember *0 >/ &c(" ?une *0 >/

lecture 13 (inheritance tax)

Documents