Summary
Summary Inheritance Tax Exam Notes
- Module
- LPC - Legal Practice Course
- Institution
- LPC - Legal Practice Course
Inheritance Tax Exam Notes
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Step 1 Identify transfer value = date and type of transfer of value: PET/LCT/death (timeline)Step 2 Find value transferred = amount of the reduction in transferor’s estate & identify value of estate
Step 3 Apply relevant exemptions and reliefs
Step 4 Calculate tax at appropriate rate – calculate each transfer – lifetime first then on death
Step 1 Identify transfer value = date of transfer and type of transfer: PET/LCT/death (timeline)
transfer of value = a disposition which reduces the value of the transferor’s estate
There are three main Chargeable transfers/gifts which are subject to IHT - IHTA 1984, ss 1, 2:
(a) on death (40%) deemed transfer of value;
(b) potentially exempt transfer (PET) (40% or tapered) - lifetime transfer to individuals - 7 years of death
(c) lifetime chargeable transfer (LCT) - to company/trust (unless for a disabled person)
IHT is immediately chargeable at the time when it is made (20% or 40% if recalculated at death)
Step 2 Find value transferred = amount of reduction in transferor’s estate & identify value of estate
Death estate = valued at open market value minus debts/liabilities and reasonable funeral expenses.
Lifetime transfers = the amount by which the transferor’s estate has been reduced.
Step 3 Apply relevant exemptions and reliefs
Exemptions that apply both to lifetime and transfers = to spouse or civil partner or charities.
Exemptions for PETs & LCTs = annual exemption, marriage gifts and gifts made as normal
expenditure out of income. Small gifts exemption only for PETs.
Business and agricultural property relief - lifetime and death = unquoted shares etc see below
Step 4 Calculate tax at appropriate rate – calculate each transfer – lifetime first then on death
Rates of tax - @ 40%
* From 2021 – both nil bands will increase in line with consumer price index (CPI)
Overall nil rate band (currently £325,000) – available for all transfers of value;
‘cumulation’ - calculate what NRB is left after each chargeable transfer within 7 years and each transfer
has its own 7-year period
PETs – chargeable if did not survive 7 years from date of transfer
nil rate band @ 0% and 40% thereafter – allow for cumulation – tapering relief applicable if IHT payable
LCTs = when transfer is made - nil rate band @ 0% and 20% thereafter (allow for any cumulation).
If transferor dies within 7 years – re-calculate - nil rate band @ 0% and 40% thereafter (allow for any
cumulation). Tapering relief may be available if any tax is payable and credit given for any tax paid when
transfer made.
Death estate = residence nil rate band – home and lienal descendants (currently £175,000 subject to
adjustments for estates over £2 million) nil rate band @ 0% thereafter 40%* (allow for any cumulation).
* Large charitable donations (at least 10% of a person’s estate) - 40% is replaced by a rate of 36%.
Formula for identifying share of tax - Inherited amount x total tax liability = specific tax liability
total taxable estate
, Calculating Lifetime PET on death
IHT only liable if the transferor survives 7 years after the transfer.
Step 1 Identify transfer value
‘transfer of value’ = any lifetime disposition which reduces the value of the estate (IHTA 1984, s 3(1).
Some dispositions are excluded for IHT = transfer for maintenance/ education/ training of his child
under 18, or over 18 in full-time education/training, or maintenance of a dependent relative (IHTA s 11).
Step 2 Find the value transferred
market value of the property transferred. EXAMPLE: Vanessa owns a pair of matching bronze statuettes.
The market value of the pair together is £80,000, but individually each one is worth £25,000. If Vanessa
were to give away one statuette to her son, the loss to her estate would be calculated 55,000.
Related property
EXAMPLE: Vanessa gives one statuette to her husband Boris (an exempt transfer to spouse). Without
the related property rules Vanessa and Boris would each own one statuette worth £25,000. However,
two statuettes owned by Vanessa and Boris are related property. Under the related property valuation
rule, each statuette is the appropriate portion of the value of the pair, ie half of £80,000 which is
£40,000. If Vanessa was then to give away her statuette, the value transferred would be £40,000.
Step 3 Apply any relevant exemptions and reliefs – in the following order:
Spouse or civil partner and charity exemptions - even if the transferor dies within seven years.
Business and agricultural property relief - but if dies within seven years then relief will be available only
if the transferee still owns the property or qualifying replacement when the transferor dies.
The reduction is 100% for:
(a) a business, or an interest in a business (such as a share in a partnership); and
(b) unquoted shares.
The reduction is 50% for:
(a) quoted shares which gave the transferor control of the company; and
(b) certain land, buildings and machinery owned by him but used in his company or partnership.
Lifetime only exemptions - The annual exemption (IHTA 1984, s 19) The annual exemption applies to
the first £3,000 transferred by lifetime transfers in each tax year. Any unused annual exemption may be
carried forward for one year only, so maximum exemption of £6,000 a year. The current year’s
exemption must be used before the previous year’s exemption can be carried forward.
Small gifts (IHTA 1984, s 20) Lifetime gifts in any one tax year of £250 or less to any one person are
exempt. This exemption cannot be set against a gift which exceeds £250.
Normal expenditure out of income (IHTA 1984, s 21) lifetime transfer is exempt if:
(a) it was made as part of the transferor’s normal expenditure; and
(b) it was made out of the transferor’s income; and
(c) after all such payments, the transferor had sufficient income to maintain his usual standard of living.
Gifts in consideration of marriage (IHTA 1984, s 22) Lifetime gifts on marriage are exempt up to:
(a) £5,000 by a parent of a party to the marriage;
(b) £2,500 by a remoter ancestor of a party to the marriage (eg, a grandparent); and
(c) £1,000 in any other case.
Life policies – there could be a PET of the value of the policy at date of the assignment if within 7 years
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