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  2. UK Inheritance Tax (IHT)

UK Inheritance Tax (IHT)

Inheritance Tax (IHT) - A Summary

Advice in relation to UK inheritance tax (UK IHT) is not an area for either "do it yourself research" or even gifted amateurs - professional advice is an absolute requirement. A very brief summary is provided below just to provide some background regarding what is a complex topic - amounts quoted are current as at 2015.

What is Inheritance Tax and who is liable?

  • UK IHT is a tax on both lifetime transfers of value in the seven years before death and on the estate held at the time of death
  • UK domiciles or ‘deemed domiciles’ are liable to UK IHT on their worldwide assets
  • Non-UK domiciles are liable only on their UK ‘situs’ assets (broadly those located in the UK)
  • Non-UK individuals who have been resident in the UK for 17 out of the preceding 20 years will be ‘deemed domiciled’ in the UK for IHT purposes
  • UK individuals permanently leaving the UK will (even if they break their UK-domicile) continue to be ‘deemed domiciled’ for UK IHT purposes for 3 tax years from the date they left
  • UK individuals leaving the UK may not break their UK domicile at all if they continue to hold significant assets in the UK

Rates of Tax

  • Each individual is entitled to a nil rate band of (currently) £325,000 so that the first £325k of transfers are free of tax, after that 40% tax is levied on the estate (subject to exemptions and reliefs)
  • Lifetime transfers can be taxed when made (chargeable lifetime transfers) or exempt unless the transferee dies within 7 years of the transfer (potentially exempt transfers)
  • Lifetime tax rates are ¼ of the rate on death

Exemptions and Reliefs

  • Certain types of assets are exempt or partially-exempt
  • There is an annual allowance for non-taxable lifetime transfers
  • There are exemptions for gifts to particular recipients eg certain marriage gifts, small gifts, gifts to charities or political parties
  • Transfers between husband and wife are normally exempt – however if one spouse is UK domiciled and the other is not UK domiciled the spousal exemption is limited to £55,000
  • Note also that the spousal exemption applies to husband and wife or formal civil partners (not to de facto relationships)
  • Any un-used nil rate band when the first spouse dies may be transferred to the surviving spouse to use on their death
  • There is a tapering relief for assets more than 3 years before death but less than 7 years from death
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