Inheritance Tax

There are special rules concerning the liability to IHT of a transfer made during one’s lifetime. For example, most gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.

These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within three years of making the gift, then the IHT position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

IHT may be chargeable if the person making the gift retains some 'enjoyment' of the gift made. For example, where an elderly person gifts their home to their children (who usually live elsewhere) and continues to live in the house rent-free. In this case the taxman will not accept that a true gift has been made and the 'gift' would remain subject to inheritance tax even if the taxpayer dies more than 7 years after the transfer.

If you are currently considering making a significant gift to your loved ones, it may be prudent to contemplate doing so sooner rather than later as there is always the possibility of changes to the tax regime especially with a new government in place.

As a general rule, an individual who inherits property, money or shares is not liable to pay tax on the inheritance. This is because any Inheritance Tax (IHT) due should be paid out of the deceased’s estate before any cash or assets are distributed to the heirs. However, the recipient is liable to income tax on any profit earned after the inheritance, such as dividends from shares and to capital gains tax on the increase in value on assets after the date of inheritance.

The main exception is if you received a gift during a person's lifetime. These lifetime transfers are known as Potentially Exempt Transfers (PETs). These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the IHT position is as if the gift was made on death.

A tapered relief is available if death occurs between three and seven years after the gift is made. There are insurance products such as a seven-year term assurance policy that can be used to reduce the amount of IHT due should the taxpayer pass away within seven years of making a gift.

The situation is more complicated if the person giving the gift does not fully give up control over the assets concerned. A common example is a person giving their house away but continuing to live in it rent-free. Such gifts are known as 'gifts with a reservation of benefit'. These gifts can remain subject to IHT even if the taxpayer dies more than 7 years later. There can also be a liability to IHT if an inheritance you receive is placed into a trust and the trust cannot or does not pay any tax due.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also be made even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. The RNRB maximum rate and the taper threshold are currently frozen until at least April 2028.

There are special rules concerning the liability to IHT of a transfer made during a lifetime. For example, most gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. 

These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within three years of making the gift, then the IHT position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

IHT can also be chargeable if the person making the gift retains some 'enjoyment' of the gift made. For example, where an elderly person gifts their home to their children (who usually live elsewhere) and continues to live in the house rent-free. In this case the taxman will not accept that a true gift has been made and the 'gift' would remain subject to inheritance tax even if the taxpayer dies more than 7 years after the transfer.

In addition, transfers into most types of discretionary trusts, transfers involving companies, and transfers into most types of interest in possession trusts are immediately chargeable transfers.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million, free of any Inheritance Tax liability, to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate value exceeds the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. The RNRB maximum rate and the taper threshold are currently frozen until at least April 2028.

Most gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the inheritance tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The effective rates of tax on the excess over the nil rate band are:

• 0 to 3 years before death            40%
• 3 to 4 years before death            32%
• 4 to 5 years before death            24%
• 5 to 6 years before death            16%
• 6 to 7 years before death            8%
• 7 or more years before death       0%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made out of surplus income.

We wanted to remind you of the Inheritance Tax (IHT) implications of making cash gifts during the current 2023-24 tax year that will end on 5 April 2024.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you did not make any cash gifts in 2022-23, you could gift up to £6,000 this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, and £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you have not used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

The majority of gifts made during a person's life, including gifting a home, are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax (IHT) if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

HMRC’s guidance suggests that if the person gifting the home wants to continue living in the property after giving it away, they need to:

• pay rent to the new owner at the going rate (for similar local rental properties);
• pay their share of the bills; and
• live there for at least 7 years.

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This could apply if a person gave their home to their children but continued to live in the home rent-free. Under these circumstances, the taxman would contend that the gift falls under the heading of a gift with reservation of benefit and the 'gift' would remain subject to IHT even if the taxpayer dies more than 7 years after the transfer.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent, such as children or grandchildren, after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is in addition to the existing £325,000 Inheritance Tax nil-rate band.

Taken together with the current Inheritance Tax limit of £325,000, this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2028.

A trust is an obligation that binds a trustee, an individual or a company, to deal with assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

HMRC’s manuals states the following when describing what is a trust:

The law of trusts is based upon the concept of English law that property rights can be split into:

• the legal ownership, and
• the beneficial interest.

A person who is the absolute owner of property has both the legal and beneficial interest in it. This means that the owner will show up as legal owner, for example, on a land register or on a company register, and will also enjoy any benefit produced by the property.

The absolute owner may split the legal interest from the beneficial enjoyment. This can be done by giving the legal ownership to trustees and the beneficial interest to a named beneficiary (or beneficiaries). Alternatively the owner can keep the legal title and make themselves a trustee.

The rules are complex and there are different types of trusts that need to be considered, such as a joint property or bare trust.