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Wednesday, 03 May 2023 08:40

Introduction to Inheritance Tax

Inheritance Tax (IHT) is a tax on bequests, gifts, and other transfers of property by individuals, either during lifetime or on death. It can also be charged on property held in a trust, or owned by a close company.

The charge to tax is determined by the nature of the transfer, the relationship between the parties, and the circumstances of the individual, trust or company making the transfer.

The most common situations encountered in practice, however, involve lifetime gifts by individuals (when lifetime tax rates of 20% apply) and the computation of an individual’s Estate when the death rate of 40% applies.

Chargeable persons

Individuals who are domiciled in the UK are subject to IHT on any chargeable transfers, regardless of whether or not the property transferred is located in the UK. Non-UK domiciled individuals are only subject to IHT on property which is located in the UK. General law provisions determine where assets are located for such purposes.

Domicile is a concept in general law and is more fundamental and permanent than residence. Domicile is a link to a particular jurisdiction and is not necessarily the same as nationality or place of residence. Every individual must have a domicile but cannot have more than one at the same time.

So, for IHT purposes, a person’s domicile status determines their potential liability to IHT whereas their residence status normally determines their exposure to other taxes such as income tax and capital gains tax although domicile can play a part in determining which income or gains are subject to UK taxes.

There are rules which determine a person’s domicile status and this is normally determined at birth but can be changed by choice in certain circumstances. There are provisions in law that can result in individuals becoming of deemed domicile status depending upon certain circumstances.

Transfers of Value

IHT is charged when a chargeable transfer takes place and such transfers are defined as any transfer of value made by an individual which is not an exempt transfer.

The term disposition is not defined by legislation and so takes on its general meaning of an act of disposing, bestowing or transferring money, goods or rights in property to another person.

A disposition results in the value of a person’s estate immediately after the disposition being less than it was before. The fall in value is deemed to be the value transferred. There are strict rules for determining the value of dispositions for IHT purposes.

Exempt Transfers

These are transfers which would normally constitute a transfer of value but which will never be chargeable to IHT because of specific statutory provisions.

Examples include small gifts, gifts in consideration of marriage, gifts to spouses and gifts to Charities and to Political parties.

Potentially Exempt Transfers (PETs)

One of the most useful ways of minimising a person’s liability to IHT is to make lifetime PETs which could escape liability if the donor survives a full period of 7 years from the date of making such transfers.

Future articles will provide a more detailed commentary on PETs together with other areas of IHT that are incurred commonly relating to clients’ affairs.

 Ian Conway
This article was written by Ian Conway who is a Senior Tax Manager based in our Taunton office. Ian is both FCA and CTA qualified and is also certified in Probate and Estate Administration. Ian will be pleased to respond to any questions you may have regarding Inheritance Tax or Probate issues. Please contact him on 01823 286274 or by email This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 

Last modified on Wednesday, 05 July 2023 08:15

        

 
 

Chard Office

17-18 Leach Road 
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Somerset 
TA20 1FA

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01460 64441

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Kingsway
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