Section 1: Overview of IHT
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
This Section is for background information as the application of the statutory provisions relating to Inheritance Tax are the responsibility of HMRC.
The main provisions are consolidated in the Inheritance Tax Act (IHTA) 1984. IHT was a replacement for Capital Transfer Tax which itself replaced Estate Duty.
Inheritance Tax (IHT) applies to “transfers of value”, i.e. transfers which reduce the value of the transferor’s estate. Liability arises under s.1 IHTA 1984 and is chargeable on the value transferred by a chargeable transfer.
In a majority of cases tax is levied at death. The deceased is treated as having made a chargeable transfer equal to the net value of their assets at the date of death.
When calculating the tax due at death, transfers made from someone’s estate within seven years of their death are added to the value of a person’s estate.
There are circumstances where gifts by individuals to discretionary trusts or to companies are immediately chargeable to tax.
An ‘estate’ comprises all the assets owned by the deceased at the date of death. If an individual dies domiciled in the UK, their worldwide estate is chargeable to IHT. The location of the asset is irrelevant.
If an individual dies and is not domiciled in the UK, IHT is only charged on assets situated within the UK.
Non-UK assets owned by a non-domiciliary are “excluded property” and are not brought into the scope of IHT computation.
Exemptions from IHT may be available.
Certain gifts are exempt from tax irrespective of their size, and irrespective of whether they are made during one’s life or made under the terms of one’s will. These are:
- gifts made to one’s spouse or civil partner.
- gifts made to charities.
- gifts made to political parties.
- dispositions for the national interest (for example the National Trust or public museums)
There are some gifts which are exempt subject to value limits or conditions. The most important of these are:
- gifts made as normal expenditure - on a regular basis, such as under a covenant - which come out of one’s income.
- gifts made during the one tax year of a total not exceeding £3,000.
- any number of individual gifts made during the year to different persons, not exceeding £250 per person (this relief is in addition to the annual allowance of £3,000).
- gifts, up to a specified maximum, given to the intending spouses or civil partners, in consideration of a marriage or civil partnership.
For further detail see Section 6.
Reliefs with which the VOA may be concerned are dealt with in separate sections of this Manual.
| Agricultural | Section 9 |
| Woodland | Section 10 |
| Business | Section 11 |
| Heritage Property | Section 20 |
Outright gifts between individuals (and gifts by an individual into trusts for disabled persons) become exempt from tax provided the transferor survives seven years from the date of the gift. During that seven-year period they are called potentially exempt transfers (PETs). (s.3A IHTA 1984)
If the individual dies during this seven-year period, the gift becomes a chargeable transfer, and its recipient becomes liable to tax, depending on the value of the donor’s estate at death, and whether both gift and estate come to less than the tax-free threshold.
When the value of someone’s estate is assessed for tax purposes, gifts made in the last seven years of life are included. Consequently, even though an estate may fall below the tax-free threshold, it may still be liable for IHT, since the inclusion of PETs made in the previous seven years may use up part or all of the threshold. The tax payable on the estate depends on the rates of IHT in force at the date of death; it is the recipient of the PET who is liable to pay the tax.
See Section 4 for a more detailed consideration.
Special rules apply where property is given subject to a reservation, i.e. where the transferee does not enjoy it to the entire exclusion of the donor.
See Section 4 for a more detailed consideration.
The tax is normally charged at 40%, except that no tax is payable until the total of chargeable transfers exceeds the tax-free threshold (s.7 and Sch1 IHTA 1984).
An estate may be liable to a lower 36% tax rate, if 10% of the ‘net value’ of the estate is left to a charity. The ‘net value’ of an estate is the total value of all the assets after deducting debts and liabilities; reliefs; exemptions (for example anything left to a husband, wife or civil partner); and, anything below the tax-free threshold (Sch 1A IHTA 1984).
Personal representatives – the person or persons charged with administering the deceased’s estate -must submit an IHT return to HMRC and pay IHT before an application for probate can be made.
Generally, inheritance tax is due six months after the end of the month in which death occurs. There is an option to pay tax in ten annual instalments on certain types of asset: specifically, land and buildings, business property and certain shares and securities.
In the case of tax due on the death estate interest will run from the due date (6 months date). If revised valuations for assets are submitted, or agreed with HMRC/VOA, additional tax may be due, together with interest on this additional tax backdated to the 6-month date.
The Nil Rate Band has been fixed at £325,000 since 2009/10.
The amount will automatically increase each year by reference to the Consumer Prices Index (CPI), unless the
Treasury specifies an alternative value (s.8 IHTA 84). The Spring 2021 Budget confirmed the current amount will remain frozen until April 2026.
For deaths occurring on or after 9 October 2007, spouses and civil partners can transfer their nil-rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual’s surviving spouse or civil partner for use on their death.
Where a valid claim to transfer an unused nil-rate band is made, the nil-rate band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the nil-rate band unused on the first death.
Examples:
If none of the nil rate band was used in the first death (as all was left to the spouse – an exempt transfer) then that unused amount can be added to the nil rate band on the second death. So, the amount available is two lots of £325,000 or £650,000.
If on the first death the chargeable estate is £125,000 and the nil-rate band at that time was £250,000, 50% of the nil-rate band would be unused. If the nil-rate band when the survivor dies is £325,000 then that would be increased by 50% to £487,500.
An additional nil-rate band, known as the ‘residence nil-rate band’ is available on deaths on or after 6 April 2017. Broadly, RNRB will be available if a person’s estate includes their home and this is left to their children or other direct descendants. The amount of RNRB available is limited to the value of the home that is left to the direct descendants.
Unlike transferable nil rate band (TNRB) the additional nil-rate band provided by RNRB is only applied against the estate on death. RNRB is not considered when working out the tax due on the value of chargeable lifetime transfers or failed potentially exempt transfers
The legislation makes provision for any unused RNRB to be transferred from a person’s estate to the estate of their spouse or civil partner. There are also provisions to ensure that an individual who might lose some entitlement to RNRB because they move to a less valuable home, or into a nursing or care home, are still able to qualify for RNRB if they leave other property to their direct descendants.
The residence nil-rate band was phased in over four tax years, starting on 6 April 2017. The maximum amounts available to an individual are
£100,000 for the tax year 2017/2018
£125,000 for the tax year 2018/2019
£150,000 for the tax year 2019/2020, and
£175,000 for the tax year 2020/2021.
After the tax year 2020/2021 the amount will automatically increase each year by reference to the Consumer Prices Index (CPI), unless the Treasury specifies an alternative value. The Spring 2021 Budget confirmed the current amount (£175,000) will remain frozen until April 2026.
If the RNRB has not been fully utilized on the estate of the first to die of a married couple or civil partnership the unused part can be transferred to the second estate. Where the full entitlement to transferred RNRB exists, an estate can qualify for a total RNRB of
£200,000 for the tax year 2017/2018
£250,000 for the tax year 2018/2019
£300,000 for the tax year 2019/2020, and
£350,000 for the tax year 2020/2021.
If an estate is able to make use of NRB and RNB, and the transferable amounts of both from an earlier death, potentially the total tax-free amount in 2020/21 is £1,000,000 (i.e. £325,000 NRB + £175,000 RNRB x 2) .
The amount of RNRB that is due on any particular estate starts to be withdrawn where the value of the estate exceeds the taper threshold. When this threshold is exceeded the RNRB is reduced by £1 for every £2 of value by which an estate exceeds the taper threshold.
The taper threshold is £2 million until 5 April 2021. After the tax year 2020/2021 the taper threshold will automatically increase each year by reference to the Consumer Prices Index (CPI), unless the Treasury specifies an alternative value. The Spring 2021 Budget confirmed this will remain frozen until April 2026. So, for example an estate valued at £2,350,000 in the tax-year 2020/21 and only entitled to the individual RNRB of £175,000, would see that RNRB tapered to nil.
Transfers of value to discretionary trusts and transfers involving companies are liable to an immediate charge at half the rate of tax. When calculating if the tax-free amounts have been exceeded, account will be taken of any other chargeable lifetime transfers made by the donor in the previous 7 years.
Additional tax is payable if the transferor dies within 7 years.
See section 4 for more detail.
On death, there is a deemed transfer of the deceased’s estate and this, together with any lifetime transfers made within 7 years (including PETs - see para 1.6) is liable to tax or additional tax.
See section 4 for more detail.
Inheritance tax may become payable:
- on the termination of an interest in settled property (ss.43-48 IHTA 1984).
- on the distribution or deemed distribution of capital out of a discretionary trust (ss.43-48 IHTA 1984).
- on the occasion of a ten-yearly periodic charge or a proportionate charge (ss.64 and 65 IHTA 1984).
The definition of a settlement is set out in s.43(2) IHTA 1984.
See Section 8 for a more detailed consideration of settled property.
This paragraph provides an introductory overview only. See Section 7 for the valuation assumptions to be made and for a detailed appraisal of Part VI IHTA 1984.
Valuations are made as at the time of transfer. The general basis of valuation for IHT is set out in s.160 IHTA 1984 and is “the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time”.
This wording is similar to the definition of value used for Estate Duty (ED), Capital Transfer Tax (CTT) and Capital Gains Tax (CGT) and it is considered that the principles of open market value established by the Courts for ED, CTT and CGT should apply to IHT.
For deaths the relevant time for valuation is immediately before the death (s.4(1) IHTA 1984) and it is provided by s.171 IHTA 1984 that account shall be taken of certain increases or decreases in the value of any property comprised in the deceased’s estate which have occurred by reason of the death. (See Section 4 para 4.65).
A special valuation rule is applied by s.161 IHTA 1984 in respect of “related property” (see Section 15). Briefly property is related to a person’s estate if: -
- it is in the estate of the transferor’s spouse or civil partner; or
- it comprises or has comprised within the preceding 5 years property donated by either spouse after 15 April 1976 to a charity or to one of the political, national or public bodies to which exempt transfers may be made.
The services of the VOA are available to HMRC, to provide valuations of land, buildings, lordships of the manor, growing crops, live and dead farming stock, plant, machinery and fixtures which are required for assessment of IHT.
IHT is based on the value transferred by a chargeable transfer after adjustment by HMRC for any exemptions, reliefs and the addition for “grossing up” (see Section 4 para 4.13) when the transferor pays the tax. Strictly therefore the value reported by the VOA is the value transferred before reliefs and deductions and as if grossing up did not apply.
Incidental expenses incurred by a transferor in making a lifetime transfer (but not the liability for IHT) are left out of account, even though when borne by the transferor they are a loss to the estate. However, if such expenses are borne by a person benefiting from the transfer they are deducted by HMRC from the value transferred (s.164 IHTA 1984).
Any charge or mortgage upon a property is deducted by HMRC from the value of that property (s.162(4) IHTA 1984).
The payment by the transferor of any CGT arising out of a lifetime transfer is not taken into account in arriving at the loss to the estate but should the transferee pay the CGT it is deducted by HMRC from the value transferred (s.165 IHTA 1984).