Inheritance Tax (IHT)

Inheritance Tax (IHT) is a tax introduced in the Budget of 1986, charged on the estate of a deceased individual domiciled in the UK or on UK property owned by a non-domiciled individual. It applies retrospectively on certain lifetime gifts and includes exemptions and potential allowances.

Introduction to Inheritance Tax (IHT)

Inheritance Tax (IHT) is imposed on the estate of a deceased individual. It was introduced in the 1986 Budget and applies to those domiciled in the UK on their worldwide assets, and to non-domiciled individuals on their UK assets. Significant changes and allowances have been introduced over the years, offering strategies for estate planning and tax minimization.

Understanding IHT

Inheritance Tax is primarily based on the value of a deceased person’s estate. In simple terms, it’s a tax on the property, money, and possessions of someone who has passed away. The current threshold for Inheritance Tax in the UK is £325,000 (as of the 2016-2017 tax year), beyond which a flat rate of 40% is applied to the excess amount.

Key Points:

  • Threshold & Rate: £325,000 threshold; 40% tax on excess.
  • Domiciled Individuals: Charged on worldwide property.
  • Non-Domiciled Individuals: Charged on UK property.
  • Spouse/Civil Partner Allowance: Transferable unused threshold; effectively raises to £650,000.
  • Main Residence Allowance: Additional allowance from April 2017 for main family home, intending to raise individual threshold to £500,000 by 2020.
  • Lifetime Gifts: Certain lifetime gifts are retrospectively taxable if the individual dies within 7 years of the gift, known as Potentially Exempt Transfers (PETs).

Examples of Inheritance Tax

  1. Domiciled Individual: An individual domiciled in the UK passes away with an estate valued at £500,000. Given the threshold of £325,000, the taxable estate is £175,000. The Inheritance Tax payable would be 40% of £175,000, which equates to £70,000.

  2. Main Residence Allowance: A domiciled individual passes away owning a house worth £450,000 as their main residence. With the standard threshold and main residence additional allowance, the estate may not pay any Inheritance Tax if under the new proposed limits.

  3. Non-Domiciled Individual: A non-domiciled individual dies owning property in the UK valued at £400,000. The entire value is subject to Inheritance Tax above the threshold limit.

Frequently Asked Questions (FAQ)

What is the current threshold for Inheritance Tax?

The current threshold (or nil-rate band) for Inheritance Tax is £325,000. Any value above this threshold is subject to a 40% tax.

Are there exemptions to Inheritance Tax?

Yes, gifts between spouses or civil partners are exempt, and certain charitable donations may also qualify for exemptions.

What are Potentially Exempt Transfers (PETs)?

Potentially Exempt Transfers are gifts that become exempt from Inheritance Tax if the person making the gift survives for seven years after the gift is made.

Can the threshold be increased?

The unused part of the £325,000 threshold can be transferred to a surviving spouse or civil partner, potentially doubling the threshold to £650,000.

Is there additional relief for main residences?

Yes, from April 2017, an additional residence nil-rate band applies to main family homes, intending to raise the individual threshold to £500,000 by 2020.

Exempt Transfers:

Transfers of assets that are completely free from Inheritance Tax, such as those between spouses or to charities.

Potentially Exempt Transfers (PETs):

Gifts that are exempt from Inheritance Tax if the giver survives for seven years after making the gift.

Chargeable Transfers:

Transfers of assets that are subject to Inheritance Tax either during a person’s lifetime or upon their death.

Online Resources

Suggested Books for Further Studies

  • “Inheritance Tax Simplified” by Lee Hadnum - A comprehensive guide on navigating inheritance tax laws and planning.
  • “Tolley’s Inheritance Tax” by Malcolm Gunn - Detailed and authoritative text on IHT laws and practices.
  • “Estate Planning for Dummies” by N. Brian Caverly, Esq., and Jordan S. Simon - A practical guide to planning estates with a focus on minimizing IHT impact.

Accounting Basics: “Inheritance Tax (IHT)” Fundamentals Quiz

### What is the current threshold for Inheritance Tax? - [ ] £300,000 - [x] £325,000 - [ ] £350,000 - [ ] £375,000 > **Explanation:** As of the 2016-2017 tax year, the threshold for Inheritance Tax is £325,000. ### What rate is Inheritance Tax charged above the threshold? - [x] 40% - [ ] 30% - [ ] 25% - [ ] 20% > **Explanation:** The rate for Inheritance Tax on the excess amount above the threshold is 40%. ### Gifts between spouses or civil partners are _______? - [x] Exempt - [ ] Taxable - [ ] Partially taxable - [ ] Subject to a flat rate > **Explanation:** Gifts between spouses or civil partners are completely exempt from Inheritance Tax. ### How long must a giver survive for a Potentially Exempt Transfer (PET) to be free of Inheritance Tax? - [ ] 5 years - [x] 7 years - [ ] 10 years - [ ] 12 years > **Explanation:** The giver must survive for 7 years after making the gift for it to be exempt from Inheritance Tax. ### What type of assets does Inheritance Tax apply to for a non-domiciled individual? - [ ] Global property - [x] UK property - [ ] EU property - [ ] Only movable assets > **Explanation:** Inheritance Tax applies to all UK property owned by a non-domiciled individual. ### What is the additional allowance for a main family home starting April 2017 aimed to raise the threshold to by 2020? - [ ] £400,000 - [x] £500,000 - [ ] £600,000 - [ ] £700,000 > **Explanation:** The additional allowance for a main family home is intended to raise the individual threshold to £500,000 by 2020. ### What is a Chargeable Transfer? - [x] Transfer that is subject to Inheritance Tax - [ ] Transfer that is exempt from Inheritance Tax - [ ] Transfer limited to a certain amount - [ ] Transfer made within the UK only > **Explanation:** A Chargeable Transfer is a transfer of assets that is subject to Inheritance Tax. ### What is the purpose of the transferable unused threshold for spouses or civil partners? - [x] To effectively double the threshold to £650,000 - [ ] To avoid any tax liability - [ ] To make easier transfer of property - [ ] To encourage more gifts > **Explanation:** The purpose is to effectively double the threshold to £650,000 for surviving spouses or civil partners. ### What do Potentially Exempt Transfers (PETs) depend on? - [ ] Value of the assets - [ ] Relationship with the recipient - [x] Survival period - [ ] Frequency of transfers > **Explanation:** Potentially Exempt Transfers depend on the individual surviving for seven years following the gift. ### How much Inheritance Tax is payable if all chargeable transfers are below the threshold? - [x] No tax - [ ] 10% - [ ] 20% - [ ] 30% > **Explanation:** No Inheritance Tax is payable if the cumulative total of all chargeable transfers is less than the threshold.

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Tuesday, August 6, 2024

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