Inheritance tax is charged on transfers of capital by individuals. It may be payable on certain lifetime gifts, on wealth at death, on certain transfers into and out
of trusts and on certain transfers made by close companies. The law is contained in the Inheritance Tax Act 1984. The tax was introduced in 1975 to replace estate duty,
and was called capital transfer tax until 1986.
UK domiciled individuals are chargeable to inheritance tax in respect of property anywhere in the world, and non-UK domiciled individuals are chargeable in respect of
property in the UK. Spouses and civil partners are chargeable separately, so that any available exemptions apply to each of them and each can make transfers free of
tax up to the nil rate threshold.
Where a surviving spouse or civil partner dies after 8 October 2007 a claim may be made for any part of the nil rate band unused on the death of the first spouse or
civil partner to die to be added to the survivor's own nil rate band on his or her death.
Domicile is a legal term that is not easy to define but essentially it means the country an individual regards as 'home'. The term has an extended meaning for inheritance
tax, so that broadly speaking, even if an individual does not have a UK domicile under general law, he will be treated as UK domiciled if:
he was UK domiciled within the three years immediately preceding the transfer; or
he was resident (as determined for income tax) in the UK in at least 17 of the 20 tax years ending with the year of transfer.
Double taxation relief is given where the transfer of assets attracts foreign tax as well as UK tax.
The following reliefs are available:
Business property relief is available on the value of transfers of business property (in the UK or elsewhere), providing certain conditions as to the length of ownership
and type of business are satisfied.
Agricultural property relief is available on the transfer of agricultural property situated in the UK, Channel Islands, Isle of Man or (from 22 April 2009) in any country
that is a member of the European Economic Area, so long as various conditions are met. The extension to EEA countries also applies to any earlier chargeable occasion
where inheritance tax in respect of that occasion was due or paid on or after 23 April 2003.
Growing timber. Where an estate on death includes growing timber, an election may be made to leave the timber (but not the land on which it stands) out of account in
valuing the estate at death.
Quick succession relief. Where a donee dies after receiving a chargeable transfer, the transfer will have increased his estate at death and therefore attracts tax
in his estate as well as tax possibly having arisen on the earlier transfer. Relief is given where the death occurs within five years after the earlier transfer.
There is no requirement to retain the actual asset obtained by that transfer.