CHAPTER 18- INHERITANCE

TAX
F6- Taxation
 Chapter 18- Inheritance tax

Chargeable persons
IHT is a tax on gifts made by individuals to other individuals or trustees.
IHT is a tax on gifts or transfers of value made by chargeable persons. This generally involves a
transaction as result of which wealth is transferred by one individual to another, either directly or
via a trust.
Individuals are chargeable persons for inheritance tax.
Spouses and civil partners are taxed separately under inheritance tax although there is an
exemption for transfers between couple.
The general principle is that all transfers of value of assets made by individuals, whether during
lifetime or death are within the charge of IHT.

Transfers of value
IHT applies to lifetime transfers of value and transfers of value made on death.
There are 2 main chargeable occasions for IHT: -
1. Transfers of value made in the lifetime of the donor (lifetime transfers)
2. Transfers of value made on death, for example when a property is left in a will (death
estate)
Transfer of value means gift by individual to another individual or gift by individual to trustees.
A trust is a legal structure where one person(settlor) gives property to one or more people (the
trustees) to be held for the benefit of one or more people (the beneficiaries).
A transfer of value is any gratuitous disposition made by a person which results in his being
worse off, that is, he suffers a diminution in the value of his estate. An individual’s estate is
basically all the assets which he owns.
Transfers where there is no gratuitous intent are not chargeable to IHT.

Diminution of value
Reduction in the donor’s estate or increase in the donee’s estate. Typically, this is the situation
where the unquoted shares are gifted. The measure of the transfer for IHT purposes is always the
loss to the donor, not the amount gained by the donee.
Question 1- A holds 5,100 shares in an unquoted company which had an issued share capital of
10,000 shares. Currently A’s majority holding is valued at £15 per share. A wishes to give 200 shares to
her son B. however the shares are worth only £2.50 each to B, since B will have only a minority holding
in the company. After the gift A will own 4,900 shares which will be worth £10 each. The value
reduction is because A would lose control of the company upon the transfer. What is the diminution?

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Lifetime transfers - Chargeable transfers and potentially exempt transfers

IHT is chargeable on a chargeable transfer.
A potentially exempt transfer is a lifetime transfer made by an individual to another individual. It
would be exempt from IHT if the donor survives at least 7 years from making the gift. If the donor
dies within the 7 years of making the PET, the transfer will become chargeable for IHT.
Any other lifetime transfers by an individual which is not an exempt transfer is a Chargeable
lifetime transfer.
On death, an individual is treated as if he had made a transfer of value of the property comprised in
his estate immediately before death.

Exemptions
Exemptions may apply to make transfers or parts of the transfer non chargeable. Some exemptions
may apply on lifetime transfers (annual, normal expenditure out of income, marriage/civil
partnership), but the spouse /civil partner exemption applies on both life and death transfers.

Introduction
There are various exemptions available to eliminate or reduce the chargeable amount of a lifetime
transfer or property passing on an individual’s death. The lifetime exemption applies to PETs as
well as CLTs. Only the balance of such gifts after the lifetime exemptions have been taken into
account is then potentially exempt.

Exemptions applying to lifetime transfers only

Small gifts exemption
Outright gifts to individuals totaling £250 or less per donee in any one tax year are exempt. If gifts
total more than £250, the whole amount is chargeable. A donor can give up to £250 each year to as
many donees as he wishes. The small gifts exemption cannot apply to gifts into trusts.

The annual exemption

The first £3,000 of the value transferred in a tax year is exempt from IHT. The annual exemption is
used only after all other exemptions. If several gifts are made in a year, the £3,000 exemption is
applied to earlier gifts than later gifts. The annual exemption is used up by PETs as well as CLTs,
even though the PETs might never become chargeable.
Where CLTs and PETs are made in the same tax year, the CLTs should be made first to use any
available annual exemptions. If used up against the PETs the exemption will be wasted if the PETs
never become chargeable.
Any unused portion of the annual exemption is carried forward for one year only.
Question 2- Frank has no unused annual allowance brought forward at 6th April 2022. On 1st August
2022, he makes a transfer of £600 to his son Peter. On 1st September 2022, he makes a transfer of
£2000 to his nephew Q. On 1st July 2023, he makes a transfer of £3300 to a trust for his grandchildren,

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On 1st June 2024 he makes a transfer of £5000 to his friend Rowan. Calculate the application of annual
exemption.

Normal expenditure out of income

Inheritance tax is a tax on transfers of capital, not income. A transfer of value is exempt if: -
a) It is made as part of the normal expenditure of the donor
b) Taking one year with another, it was made out of income
c) It leaves the donor with sufficient income to maintain his usual standard of living
As well as covering such things as regular presents this exemption can cover regular payments out
of income such as grandchild’s school fees or the payment of assurance premiums on a policy for
someone else.

Gifts in consideration of marriage/civil partnership

Gifts in consideration of marriage/civil partnership are exempt up to: -
a) £5000 if from a parent of a party to the marriage/civil partnership
b) £2500 if from a lineal ancestor or from one of the parties to the marriage/civil partnership
c) £1000 if from any other person
The limits apply to gifts from any one donor for any one marriage/civil partnership. The exemption
is available only if the marriage/civil partnership actually takes place.

Exemption applying to both lifetime transfers and transfers on death

Transfers between spouses/civil partners
Any transfers of value between spouses/civil partners are exempt. The exemption covers lifetime
gifts between them and property passing under a will or on intestacy.
Question 3- Dale made a gift of £153,000 to her son on 17th October 2019 on the son’s marriage. Dale
gave £100,000 to her spouse on 1st January 2023. Dale gave £70,000 to her daughter on 11th May 2023.
The only other gifts Dale made were birthday and Christmas presents of £100 each to her
grandchildren. Show what exemptions are available in respect of these transfers.

Calculation of tax on lifetime transfers

The tax on a chargeable transfer is calculated with reference to chargeable transfers in the previous
7 years.
There are 2 aspects of the calculation of tax on lifetime transfers: -
1. Lifetime tax on CLT
2. Additional death tax on CLTs and death tax on PETs, in both cases where the donor dies
within 7 years of making the transfer

Lifetime tax
IHT is charged on what a donor loses. If the donor pays the IHT on a lifetime gift he loses both the
asset given away and the money with which he paid the tax due on it. Grossing up is required.
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Donee pays tax

Lifetime inheritance tax on lifetime transfers is chargeable at 2 rates of tax; a 0% rate and 20%. The
nil rate is chargeable where accumulated transfers don’t exceed the nil rate band limit which is
£325,000. The excess is chargeable at 20%.
When a CLT is made and the donee pays the lifetime tax the follow steps need to be worked out: -

1. Look back 7 years from date of transfer to identify if any CLTs (PETs are not applicable since
the donor could survive up to 7 years). If so, the nil rate band would reduce by that amount.
2. Calculate the value of the transfer
3. Deduct any exemptions
4. The value of transfer less any exemption would be taxed at zero until the Nil rate band and
any excess taxed at 20%

Question 4- Eric makes a gift of £336,000 to a trust on 10th July 2023. The trustees agree to pay the
tax due. Calculate the lifetime tax payable by the trustees if Eric has made: -
a) A lifetime chargeable transfer of value of £100,000 in August 2015
b) A lifetime chargeable transfer of value of £100,000 in August 2016
c) A lifetime chargeable transfer of value of £350,000 in August 2016

Donor pays tax

Where IHT is payable on a CLT, the primary liability to pay tax is on the donor, although the donor
may agree with the donee that the donee is to pay the tax instead.
If the donor pays the lifetime IHT due to CLT, the total reduction in value of his estate is the transfer
of value plus the IHT due on it. The transfer is therefore a net transfer and must be grossed up in
order to find the gross value of the transfer.

IHT tax payable (by donor) = Chargeable amount * 20/80

When a CLT is made and the donor pays the lifetime tax, follow these steps to work out the lifetime
IHT on it: -
1. Look back 7 years from date of transfer to identify if any CLTs (PETs are not
applicable since the donor could survive up to 7 years). If so, the nil rate band would
reduce by that amount.
2. Calculate the value of the transfer
3. Deduct any exemptions
4. The value of transfer less any exemption would be taxed at zero until the Nil rate
band and any excess taxed at 20/80
5. Calculate
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Question 5- James makes a gift of £336,000 to a trust on 10th July 2023. James will pay the tax due.
Calculate the lifetime tax payable by James if James has made: -
a) A lifetime chargeable transfer of value of £100,000 in August 2015
b) A lifetime chargeable transfer of value of £100,000 in August 2016
c) A lifetime chargeable transfer of value of £350,000 in August 2016
Question 6- T made a cash gift to a trust of £300,000 on 9th December 2009. This was his first transfer
of value. The nil rate band in 2009/2010 was £300,000. He then made a gift to the trust of shares
worth £206,000 on 15th November 2016. The nil rate band in 2016/2017 was £325,000. T paid the
lifetime tax due on December 2009 transfer but the trustees paid the lifetime tax due on November
2016 transfer.
Calculate:
1) The lifetime tax payable by T on the lifetime transfer in December 2009
2) The lifetime tax payable by the trustees on the lifetime transfer in November 2016

Death tax on chargeable lifetime transfers

Death tax is chargeable on chargeable lifetime transfers if the donor dies within seven years of
making the transfer. Taper relief reduces the death tax if the donor survives between 3 and 7 years.
Death inheritance tax on lifetime transfers is chargeable if the donor dies within 7 years of making
the lifetime transfer. It is chargeable at 2 rates: 0% and 40%. The nil rate is chargeable where the
accumulated transfers do not exceed the nil rate band limit at the date of death which is
£325,000 in 2023/2024. The excess is chargeable at 40%.
The longer the donor survives after making a gift, the lower the death tax. This because the taper
relief applies to lower the amount of death tax payable as follows:

Years before death % reduction

Over 3 but less than 4 years 20
Over 4 but less than 5 years 40
Over 5 but less than 6 years 60
Over 6 but less than 7 years 80

Death tax on a lifetime transfer is always payable by the donee, so grossing up is not relevant.
Follow these steps to work out the death tax on CLT

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Question 7- Based on the information on question 6- T’s lifetime chargeable transfer were £294,000
(lifetime taxed paid 0) on the 9th December 2009 and £200,000 (lifetime taxed paid 33,800) on 15th
November 2016. T died in July 2022. Compute the death tax payable on the lifetime transfer in
November 2016.

Death tax on potentially exempt transfers

Death tax is chargeable on potentially exempt transfers if the donor dies within 7 years of making
the transfer. Taper relief reduces the death tax if the donor survives between 3 and 7 years.
Grossing up is never required on PET because the death tax is payable by the donee.
If the donor dies within 7 years of making a PET it will become chargeable to death tax in the same
way as CLT. There will be no lifetime tax paid, so step 5 above will not apply.
Question 8- L gave £346,000 to her son on 1st Feb 2020. This was the first transfer that L had made.
On 10th October 2023 she gave £376,000 to a trust. The trustees paid the lifetime IHT due. On 11th
January 2024 she died. Calculate
a) The lifetime tax payable by the trustees on the lifetime transfer made in 2023
b) The death tax payable on lifetime transfer made in 2020
c) The death tax payable on the lifetime transfer made in 2023

Advantages of making lifetime transfers

1. If the donor makes a PET and survives 7 years, they have reduced their estate for
IHT, and the transfer is exempt
2. If the donor makes a CLT and survives 7 years, they have reduced their estate for
IHT, and the tax is payable on the lifetime transfer at lifetime rates
3. Taper relief reduces the death tax if the donor survives between three and seven
years
4. Good tax planning to give away assets which are likely to increase in value such as
land and shares

Calculation of tax on death estate

When someone dies we must bring together all the assets to find the value of their death estate and
then charge inheritance tax on it taking account of transfers made in the 7 years before death.

Death estate
An individual’s death estate consists of all the property he owned immediately before death less
debts and funeral expenses.
The death estate also includes anything received as a result of death, for example the proceeds of a
life assurance policy which pays out on the individual’s death. The value of the policy immediately
before the death is not relevant.

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Debts and funeral expenses

The rules on debts are as follows:
a) Debts incurred by the decease can be deducted if they can be legally enforced as they are
either imposed by law or they are a debt for which the deceased received consideration.
Specific examples include
a. Taxes
b. Electricity and gas bills
c. Gambling debts
d. Promise to pay an amount to a relative- not deductible
b) Debts incurred by the deceased but payable after the death may be deductible under the
above rules
c) Rent and similar amounts which accrue every day should be accrued up to the date of death
d) If a debt is charged on specific property it is deductible primarily from that property.
Reasonable funeral expenses may also be deducted:
a) What is reasonable depends on deceased’s condition in life
b) Reasonable costs of mourning for the family are allowed
c) Cost of a tombstone is deductible

Question 9- Z died on 19th June 2023. His assets at the date of his death consisted of the following: -

• 10,000 shares in A plc valued at £8,525

• Cash in bank- £9,280
• Property valued at £150,000 subject to a repayment mortgage of £45,000
• Z’s debts due at the date of his death were as follows: -
o Electricity- £150
o Council tax- £300
• Z had also told his daughter on 10th June 2023 that he would pay £1000 towards the cost of her
summer holiday and that he would pay her this amount on 1st July 2023.
• Z’s executors paid reasonable funeral expenses of £2000 on 1st September 2023.
Calculate Z’s death estate for IHT purposes.

Computing death tax on death estate

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Nil rate band

The available nil rate band for the death estate is :-

• The maximum nil rate band which is

o £325,000 plus
o Any transferred nil rate band from a spouse or civil partner less
• Life time transfers in seven years before death(CLTs and PETs which have become
chargeable)

Residence nil rate band

There is an additional nil rate band on death called the residence nil rate band. This is used in
computing IHT on death estate(not on death tax for lifetime transfers)
The residence nil rate band is used where:-

• The deceased person died on or after 6th April 2017; and

• Deceased person owned a home in which they lived(main residence) which is part of their
death estate
• The main residence passes to one or more direct descendants of the deceased person(E.g.
children, grand children)
The available residence nil rate band is the lower of:-
1. The maximum residence nil rate band which is
a. £175,000 for 2022/23 plus
b. Any transferred residence nil rate band from a spouse or civil partner and

2. The value of the main residence passing to direct descendants after deducting any
repayment mortgage or interest only mortgage on the property
If the value of the main residence passing to the direct descendants is equal to or exceeds the
maximum residence nil rate band, all the maximum residence nil rate band is used up. However, if
the value of the main residence passing to the direct descendants is less than the maximum
residence nil rate band, the unused nil rate band may be transferred to the estate of a surviving
spouse or civil partner.
Question 10- L dies on 1st August 2023, leaving a death estate valued at £530,000. In her will, L left
cash of £80,000 to her husband and remainder of the estate to her son which included her main
residence valued at £200,000. L made a gift of £171,000 to her sister on 11th September 2022.
Calculate the tax payable on L’s death estate.

Transfer of unused nil rate band

If one spouse or civil partner doesn’t use up the entire nil rate band on death, the excess may be
transferred to the surviving spouse/civil partner.

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How the transfer of unused nil rate band works?

If

• An individual (A) dies and

• A had a spouse or civil partner (B) who died before A and
• A and B were married or in a civil partnership immediately before B’s death; and
• B had unused nil rate band (wholly or in part) on death
Then a claim may be made to increase the nil rate band maximum at the date of A’s death by B’s
unused nil rate band in order to calculate the IHT on A’s death. The revised nil rate band will apply
to the calculation of additional death tax on CLTs made by A, PETs made by A and death tax on A’s
death estate.

Changes in nil rate band between death of spouses/civil partners

If the nil rate band increases between the death of B and the death of A, the amount of B’s unused
nil rate band must be scaled up so that it represents the same proportion of the nil rate band at A’s
death as it did at B’s death.
Question 11- J and R were civil partners until the death of J on 19th August 2010. J made no lifetime
transfers. Her death estate was £240,000 and she left it to her mother. The nil rate band at J’s death
was £300,000. R died on 24th February 2023. Her death estate was £550,000 and she left her entire
estate to her brother. She had made no lifetime transfers.
Calculate the IHT payable on death of R, assuming that any beneficial claims are made.

Transfer of residence unused nil rate band

The unused nil rate band can be transferred to a spouse or civil partner in a similar way to the nil
rate band, if A dies on or after 6th April 2017. The principles of increasing the nil rate band, when
there is a change in residence nil rate between the death of B and A as discussed above, apply here
as well. However the increase cannot exceed the residence nil rate band maximum at the date of A’s
death.
Question 12- D&L were married for many years. L died on 2nd Aug. 2020. L made no lifetime transfers.
In her will L, left her main residence to her son, which used 85% of her residence nil rate band, cash
which used up 20% of her nil rate band and the remainder of her estate to D. D died on 19th January
2021. His death estate consisted of his main residence valued at £195,000, on which there was a
secured interest only mortgage of £40,000 and other assets valued at £720,000. In his will, D left his
entire estate to his daughter. D had made no life time transfers. Calculate inheritance tax payable on
the death of D assuming that any beneficial claims are made

Claim to transfer unused nil rate band

The claim to transfer the unused nil rate band is usually made by the personal representatives of A.
the time limit for the claim is two years from the end of the month of A’s death (or the period of 3
months after the personal representatives start to act, if later) or such longer period as an officer of
HMRC may allow in a particular case.

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If the personal representatives do not make a claim, a claim can be made by any other person liable
to tax chargeable on A’s death within such later period as an officer of HMRC may allow in a
particular case.

Basic inheritance tax planning

Basic planning may reduce or eliminate inheritance tax payable. Where appropriate, donor should
use exemptions, making gifts early in life, make use of the nil rate band in relation to gifts to trusts
and consider making gifts to grandchildren, rather than children.
1. Use exemptions
2. Make gifts early in life
3. Make use of the nil rate band
4. Skip a generation

Payment of inheritance tax

Liability of IHT
The liability of paying IHT depends on the type of transfer and whether it was made in lifetime or
on death.
The donor is primarily liable for the tax due on CLT. However, the donee may agree to pay the tax
out of the trust assets. On death, liability for payment is as follows: -
a) Tax on death estate is paid by deceased’s personal representatives out of estate assets
b) Tax on a PET that has become chargeable is paid by donee
c) Additional liabilities on a CLT is paid by the donee

Due dates
a) For chargeable lifetime transfers the due date is later of:
a. 30th April after the end of the tax year of the transfer
b. Six months after the end of the month of the transfer
b) Tax arising on the death estate; the due date is six months from the end of the month of
death. However, if the personal representatives submit an account of the death estate
within 6-month period, they must pay the IHT due on the death estate on the submission of
the account
c) Tax arising on death in respect of PETs and CLTs; the due date for additional tax is 6 months
from the end of the month of death
Question 13- L gave some shares to a trust on 10th July 2022. She gave a house to her daughter on 12th
December 2022. L died on 17th May 2023 leaving her death estate to her son. For each of these
transfers of value, state who is liable to pay any inheritance tax due and the due date of payment.

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