ATX Revision Notes

The Scope Of IHT and

Valuation

 Inheritance Tax
A gift made during a person’s lifetime may be either:

1. Potentially exempt transfer (PET)

2. Chargeable lifetime transfers (CLT)

1) Potentially exempt transfers - do NOT pay IHT straight away

Any transfer that is made to another individual is a potentially exempt transfer (PET).

If the donor survives for 7 years then NO tax is paid

If the donor dies within 7 years - pay the IHT 40%, the value of a PET is fixed at the time
that the gift is made.

2) Chargeable lifetime transfers - pay IHT straight away

If Donee (Trustee) pays - 20%

If Donor pays - needs grossing up (Calculate the Value of the gift + IHT paid) - pays 25%

For example, parents may not want to make an outright gift of assets to their young
children.

Instead, assets can be put into a trust with the trust being controlled by trustees until the
children are older.

- If the donor dies within 7 years of making the gift - An additional tax liability may arise

- The value of a CLT is fixed at the time that the gift is made, but the additional tax (40%)
liability is calculated using the rates and allowances applicable to the tax year in which
the donor dies.

Payment of inheritance tax and the due date

During Life - CLT:

The due date is the later of:

• 30 April following the end of the tax year in which the gift is made.

• 6 months from the end of the month in which the gift is made.

PET and CLT additional IHT:

The donee is responsible for any additional IHT that becomes payable as a result of the
death of the donor within 7 years.

The due date is 6 months after the end of the month in which the donor died.

On death:
The personal representatives of the deceased’s estate are responsible for any IHT that is
payable.

The due date is 6 months after the end of the month in which death occurred.

IHT paid in Instalments (10 yearly instalments)

- Land & Buildings,

- Unquoted shares ( Holding must be valued @ > £20,000 and you must own more than
10%)

- Controlled Company Shares ( You must own > 50% share capital)

- Sole trader or partnership

The information below is provided in the exam:

 7year accumulation principle

Every individual receives a nil rate band (NRB), if their total chargeable transfers exceed this
NRB, only then is inheritance tax payable.

The NRB must be applied in chronological order - it is given to the gift made earliest.

For example: if an individual dies in January 2017 having made a CLT in June 2006 of
£255,000, this CLT will not be taxable on the death as he survived for more than 7 years.

If he had also made a PET in August 2013 of £200,000 this will be taxable.

In computing the NRB available to go against the PET, however, the £325,000 will be
reduced by the amount of the June 2006 CLT.

Therefore, the NRB available to the PET would be (£325,000 - £255,000) = £70,000

IHT payable on the PET


Value of PET £200,000

Less NRB (£70,000)

£130,000 *40%  = £52,000

Residence Nil Rate Band

In addition to the nil rate band already given, there is another residence NRB of
£125,000.

Conditions to get residence NRB:

1. The death estate must consist of a main residence

2. It must be given to direct descendants (children/grandchildren)

3. It is only available if an individual dies on/after 06/04/2017

4. Unused residence NRB can be passed between spouses as normal, even if the first
death was before 06/04/2017

 Taper Relief
- reduces the amount of tax payable where a donor lives for more than 3 years, but less
than 7 years, after making a gift.

The information below is provided in the exam:

Diminution in value principle (Unquoted shares)

Use Diminution in value principle when you gift:

• Ordinary shares in unquoted company

• Land

Calculation:

Value before (not the independent expert) MINUS Value after

Then deduct A/E 3,000 or Taper relief if available

Gift of Shares - Wife + husband own them together

e.g. If a husband owns 75% and his wife 25% of a company and you are gifting the shares
to someone, the Gifting % will be based on both husband’s and wife’s holdings, so take the
share price reflecting 100% ownership when you give some shares to someone.

 Valuation rule for shares

If shares are disposed of by way of a gift, no proceeds will actually be received, therefore
you will calculate the disposal proceeds to calculate the capital gain in this way:

Unquoted shares:

Market value will be given in exam.

Quoted shares:

1/2 method: Lower recorded bargain + (1/2)(Highest recorded bargain - lowest recorded
bargain)

1/2 up method (Quoted shares)

- you have to pay CGT and IHT on the sale/gift of Quoted shares

Step by step approach:

• Step 1 - Value the shares using:

- 1/2 up method


Method 1: 1/2 up method

This method is used when a range of quoted prices is provided.

For example £3.00-£3.09.

• The value of one share will be:

• Lower range value + 1/2 (higher range value - lower range value)

• = £3.00 + 1/2 (£3.09-£3.00) = £3.05

• Step 2 CGT - Calculated Disposal proceeds 


= Number of shares given * value per share (step 1)

• Step 2 IHT - Calculated Value of the Gift


= Number of shares given * value per share (step 1)

• Step 3 CGT - Calculated CGT @ 10%/20%

Deduct the A/E £11,700

• Step 3 IHT - Calculated IHT @ 40%

Deduct the A/E £3,000 and NRB £325,000 + Use the NRB of your spouse if it’s available

Also check for the Taper relief available

Exemptions

Disposals of gilt edged securities and qualifying corporate bonds are exempt from capital
gains tax.

 IHT liability on the death estate (when you die)

A person’s estate includes the value of everything that they own at the date of death such
as property, shares, motor vehicles, cash and other investments.

A person’s estate also includes the proceeds from life assurance policies even though the
proceeds will not be received until after the date of death.

The actual market value of a life assurance policy at the date of death is irrelevant.

The following deductions are permitted:

• Funeral expenses

• Debts due if they can be legally enforced

• Gambling debts cannot be deducted, nor can debts that are unenforceable
because there is no written evidence

• Mortgages on property

• Endowment mortgages cannot be deducted, because these are repaid upon death
by the life assurance element of the mortgage

• Repayment mortgages and interest-only mortgages are deductible

Transfer of unused NRB between spouses

Any unused nil rate band on a person’s death can be transferred to their surviving spouse
(or registered civil partner).

Illustration:

Nun died on 29 March 2016.

None of her husband’s nil rate band was used when he died on 5 May 2005.

When calculating the IHT on Nun’s estate a nil rate band of £650,000 (325,000 + 325,000)
can be used because a claim can be made to transfer 100% of her husband’s nil rate band.

 Exemptions
Transfers to spouses

Gifts to spouses (and registered civil partners) are exempt from IHT. This exemption applies
both to lifetime gifts and on death.

Small gifts exemption

Gifts up to £250 per person in any one tax year are exempt.

Annual exemption (Use only during the life NEVER on Death!)

Each tax year a person has an annual exemption of £3,000.

If the whole of the annual exemption is not used in any tax year, then the balance is carried
forward to the following tax year.

Therefore, the maximum amount of annual exemptions available in any tax year is £6,000
(£3,000 x 2).

Normal expenditure out of income

Regular annual gifts of £2,500 made by a person with an annual income of £100,000 would
probably be exempt.

A one-off gift of £70,000 made by the same person would probably not be, and would
instead be a PET or a CLT.

Gifts in consideration of marriage

The amount of exemption depends on the relationship of the donor to the donee (who must
be one of the two persons getting married):

• £5,000 if the gift if made by a parent.

• £2,500 if the gift is made by a grandparent or by one of the couple getting married
to the other.

• £1,000 if the gift is made by anyone else.

 Domicile - IHT
An individual who is UK domiciled or (Deemed Domicile) is charged to UK IHT on his
worldwide assets.

An individual who is not UK domiciled is charged to UK IHT only on assets situated in the
UK.

Types of domicile for IHT:

Domicile of choice – an individual can change their domicile from one country to another if
they don’t retain a property or move burial arrangements or change nationality/citizenship
from one country to the other. 



For example, if you were UK domiciled since birth but you emigrated to France (you sold
all property in London and you changed your nationality), then you will be French domiciled.
However, you will still retain UK domiciled for 3 years after you change your domicile. 

Deemed domicile –  for an individual to be deemed domicile in the UK for  IHT purposes at
the relevant time (ie at the time of a transfer of value) they must satisfy any one of the
following two conditions:

1. Long term resident


– this applies to an individual who was never UK domiciled but has been resident in the UK
for at least 15 years out of the previous 20 tax years immediately preceding the relevant tax
year, and for at least 1 of the 4 tax years ending with the relevant tax year.

For example, if you have been UK resident since 1998, but never UK domiciled, and you
made a gift of a home in France in 2018, this gift will be chargeable to UK IHT, because you
are deemed domicile, as you have been     resident in the UK for the last 20 tax years.

2. Formerly UK domiciled individual. 


This is an individual who:

 - was born in the UK; and

 - has a UK domicile of origin; and

 - is UK resident in the relevant tax year; and

 - was UK resident in at least 1 of the 2 tax years immediately before the relevant tax year.

For example, Tom was born in the UK in 1975 and his father was UK domiciled. In 2001 he
moved to Australia. He returned to the UK in August 2018. He will be deemed UK domicile in
2018/19.

If you are UK domiciled and have a foreign asset, you will pay UK IHT and overseas
IHT, in your UK IHT computation:

Take the Foreign asset value and deduct 5% of the house or the legal fees (take the
lower value)

Then deduct the Double tax Relief = Lower of the UK or Foreign IHT

If you are not UK Domiciled:

e.g. You have an asset in the UK - selling it and give the proceed to your sister

If the sale proceeds will go to the bank account located in the UK - you pay the UK IHT

If the sale proceeds will go to the bank account located OUTSIDE the UK - you DON’T pay
the UK IHT

Gifts with reservation

If you give somebody an asset (a house) and keep using it.

If you are not paying rent at the market value rate, then:

You should calculate the gift as a PET and a Death gift and HMRC will choose the higher
value.

PET - A/E - Taper relief

On Death - No A/E and No Taper relief

So HMRC will always choose the value as a Death gift

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