Inheritance Tax: Liabilities on Chargeable Lifetime Transfers and on Death

What this chapter covers

Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death: topics in the order to study them

1. 1IHT Scope, Transfers of Value and DomicileYou need to know what is taxed and whose assets are in the charge before you can calculate anything.
2. 2Lifetime Exemptions and ReliefsExemptions are deducted from a gift before you classify it, so they come before CLTs and PETs.
3. 3Chargeable Lifetime Transfers and PETsThis sets out the 20% lifetime charge, the seven-year cumulation and when a PET becomes chargeable.
4. 4Death Estate and Residence Nil Rate BandOnce you can handle gifts, you can build the death estate and see how the residence nil rate band is used.
5. 5Additional Tax on Death and Taper ReliefThis combines the gifts and the estate: lifetime gifts use the nil rate band first, and taper relief then reduces the tax.
6. 6Business and Agricultural Property ReliefsThese reliefs reduce the value of assets before tax, so you apply them once the basic computation is secure.
7. 7Valuation Rules, Related Property and Quick Succession ReliefValuation and quick succession relief refine the figures you already know how to compute.
8. 8IHT Payment, Interest, Liability and Tax PlanningThis closes the chapter: who pays, when, and how to advise on reducing the tax.

How to prepare Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

1. Learn the tax table figures first, and know what each one does: the nil rate band, the residence nil rate band, the 20% and 40% rates and the taper percentages.
2. Practise a single gift: exemptions first, then the nil rate band after the previous seven years of CLTs, then tax at 20%. Add the grossing-up step when the donor pays the tax.
3. Move to death with earlier gifts. Work in date order, show the seven-year look-back for each gift and apply taper relief to the tax, not to the value.
4. Add the estate: assets, liabilities, reliefs, exemptions such as spouse and charity, then the residence nil rate band with any restriction for a large estate.
5. Practise the reliefs and valuation with short cases: business property relief, agricultural property relief, related property and quick succession relief.
6. Finish with timed mixed questions that combine IHT with CGT or trusts. Write a short planning conclusion in each, because advice earns professional skills marks.
7. Revisit your errors a week later and redo only the questions you got wrong.

Common mistakes in Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

• Using the nil rate band against the death estate before the earlier gifts that fall in the seven-year window.

  Fix: Order everything by date. Gifts within seven years before death use the nil rate band first, and the estate gets what is left.

• Applying taper relief to the value of the gift instead of the tax.

  Fix: Compute the tax at 40% first, then reduce that tax by the table percentage. Only gifts above the available nil rate band produce tax to taper.

• Forgetting to gross up a CLT when the donor pays the lifetime tax.

  Fix: Check who pays the tax. If the donor does, grossing up is needed for the part above the nil rate band, so the tax is 20/80 of the excess.

• Treating every gift as a PET.

  Fix: Look at the recipient. Gifts to trusts are usually CLTs, charged at once at 20% above the nil rate band.

• Ignoring the conditions of the residence nil rate band.

  Fix: Check that a home passes to direct descendants, then consider the restriction for a large estate. Carry-over of an unused band from a spouse may also be relevant.

• Stopping at the calculation and giving no advice.

  Fix: Add short, specific comments on planning, payment dates or risks. Tie them to the client's facts to earn professional skills marks.

Last-day revision: Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death

• ✓Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%.
• ✓A transfer of value is a lifetime or death fall in the value of the donor's estate, not the value received.
• ✓UK-domiciled individuals are taxed on worldwide assets; others are taxed only on UK assets. Check the domicile rules in the question.
• ✓A PET is a gift to an individual and is exempt unless the donor dies within seven years.
• ✓A CLT, such as a gift to a trust, is taxed at 20% above the nil rate band at the time of the gift.
• ✓If the donor pays the lifetime tax, gross up the gift: the tax is 20/80 of the excess over the available nil rate band.
• ✓Look back seven years from each gift to see how much of the nil rate band is already used.
• ✓Taper relief reduces the tax, not the gift's value, and only applies where the gift exceeds the available nil rate band.
• ✓Taper relief percentages: 20% (3-4 years), 40% (4-5), 60% (5-6), 80% (6-7).
• ✓Death tax on a CLT is 40% less lifetime tax paid; no refund if lifetime tax was higher.
• ✓Business property relief and agricultural property relief reduce the value transferred, subject to their conditions.
• ✓Quick succession relief applies where the estate received a chargeable transfer within the previous five years.

Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death practice questions

• Priya owned all the shares in Rentco Ltd, a company whose main activity is letting residential properties to tenants. She gave the shares to…
• Dev died with a death estate of £900,000 including his main residence of £400,000 left to his daughter. His nil rate band of £325,000 is ful…
• Alan made a chargeable lifetime transfer to a discretionary trust and the trustees pay the lifetime IHT. Alan then dies within seven years o…
• Hamid owns a rare painting worth £200,000 on its own. It forms a pair with another painting worth £200,000, and together the pair is worth £…
• Mehmet made a gift of £500,000 to a discretionary trust and paid the lifetime inheritance tax himself. He died 4 years and 6 months later. W…
• Carl died and his executors paid IHT late on a lifetime transfer that became chargeable to additional tax due to his death. The tax was paid…
• Which statement about taper relief on a lifetime transfer is correct?
• Olivia made a chargeable lifetime transfer of £405,000 to a discretionary trust on 1 May 2020, having made no previous transfers. The trust …

Inheritance tax: the liabilities arising on chargeable lifetime transfers and on death in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• ACCA Applied SkillsThe liabilities arising on chargeable lifetime transfers and on the death of an individual