A Charge to IHT will arise on transfers of assets made in the following circumstances:
IHT is levied on:
All chargeable transfers of assets, UK and foreign, made by persons domiciled in the UK;
All chargeable transfers of UK assets made by persons not domiciled in the UK
Just as residence is important for determining who is chargeable to income tax, domicile is important in determining who is chargeable to IHT.
There is an extended definition of domicile that only applies to IHT called ‘deemed domicile’
Certain individuals are considered to be domiciled in the UK for IHT purposes only, even though at the time of making a chargeable transfer they were not, for other purposes, domiciled in the UK;
A person domiciled in the UK will be treated as domiciled here for IHT purposes for 3 years after he has ceased to be domiciled in the UK for other purposes. It is also important to ensure that any transfers are not caught by the rule below.
A person, who has been resident in the UK for at least 17 years out of the previous 20 years, ending with the fiscal year in which any chargeable transfer is made, is deemed to be domiciled in the UK for IHT purposes.
A chargeable lifetime transfer is a transfer of value made by an individual, and which is not (potentially or otherwise) an exempt transfer, e.g. transfers into a discretionary trust. If the donor agrees to bear the IHT liability, the tax further reduces the value of the estate. The transfer is therefore 'grossed up' on a tax-inclusive basis to arrive at the chargeable transfer.
In order for a chargeable transfer to occur, the following conditions must apply:
There must be a transfer of value;
The transfer must be made by an individual;
The transfer must not be an exempt transfer; and
The transfer must not be a potentially exempt transfer (PET)
Subject to the 7 year rule IHT is levied cumulatively and chronologically on all chargeable gifts made during a persons lifetime and on the chargeable value of that persons estate at death
Any lifetime transfers, which still attract IHT from the start, are charged half the appropriate ‘death’ rates
Lifetime transfers, which take place within the seven years before death, attract further tax at full - scale rates.
Current rates of IHT are:
|From 6th April 2009||Nil band up to £325,000|
In October 2007, new legislation was introduced to enable married couples and registered civil partners to effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2009-10.
Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
These are gifts made during a lifetime, exceeding the annual gift allowance of £3,000 but within the nil rate band. Provided the donor survives for a further 7 years, no tax will be payable and the gift becomes a PET.
If death occurs within seven years then tax may become payable at the death rate but reduced by the following scale (this is known as tapering relief).
|Years between gift and death||% of tax payable|
|Up to 3 years||100%|
|In the 4th year||80%|
|In the 5th year||60%>|
|In the 6th year||50%|
|In the 7th year||20%|
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