Inheritance Tax

Taxable transfer	Rate %
Up to £275,000	nil
Over £275,000	40
50% of these rates apply for lifetime gifts in or out of certain discretionary trusts. THERE IS A REDUCED TAX CHARGE ON GIFTS MADE WITHIN SEVEN YEARS OF DEATH AS FOLLOWS
Years before death	Percentage of death rates
0 - 3 3 - 4 4 - 5 5 - 6 6 - 7	100 80 60 40 20

Inheritance Tax Exemptions

Spouse exemption (s18 Inheritance Tax Act 1984)
Transfers during lifetime, or at death, between husband and wife are completely exempt from tax, unless the recipient spouse is domiciled outside the UK. In this case, exemption is limited to transfers up to £55,000.The exemption applies, even if the spouse benefits under a life or other limited interest under a settlement. The exemption is not excluded merely because the gift is dependent upon the recipient surviving the other spouse for a specified period, provided that this period is not longer than six months.

Annual exemption (s19 Inheritance Tax Act 1984)
The first £3,000 of transfers in any one tax year by any one donor is exempt. Any part of this exemption not used can be carried forward to the following year only. However, the later year's exemption must be used completely before using the part which has been carried forward. This exemption is available for both spouses separately.

Small gifts exemption (s20 Inheritance Tax Act 1984)
Lifetime gifts are exempt up to a total of £250 to any one person in a tax year. This exemption cannot be carried forward to later years.

Normal expenditure out of income (s21 Inheritance Tax Act 1984)
Lifetime gifts are exempt if they are made out of the donor's income. The gifts should be made as part of normal expenditure and the donor should be left with sufficient income to maintain his or her standard of living, without resorting to capital. The capital element of an annuity bought after 12 November 1974 and withdrawals from single premium bonds are regarded as capital for this purpose.

Wedding gifts (s22 Inheritance Tax Act 1984)
Wedding gifts are exempt: up to £5,000 by a parent of the bride or groom; £2,500 between the bride and groom, or by their grandparents or remote ancestors; and £1,000 by anyone else.

Gifts for maintenance of the family (s11 Inheritance Tax Act 1984)
Lifetime gifts for the maintenance of a spouse, child or dependent relative are exempt from tax. For a child, the gift must be for their maintenance, education or training up to the age of 18, or until full-time education ends if that is later. For the dependent relative, the gift is exempt if it provides them with reasonable care and maintenance.

Business property (s103-114 Inheritance Tax Act 1984)

Business property relief is given by reducing the taxable value of qualifying business assets.

Where the relief applies, the value attributable to 'relevant business property' is reduced by:

To determine control of a company, the shareholdings of both husband and wife are added together.

Generally, to qualify for the relief, the property must have been owned by the transferor for two years before the transfer and the relief will apply only to assets used wholly or mainly for the purposes of the business.

Companies or businesses dealing in securities, stocks and shares, land or buildings or making or holding investments are not eligible for relief. Companies quoted on the Alternative Investment Market are treated as unquoted companies.

Agricultural property (s115-124 Inheritance Tax Act 1984)

Relief is available for agricultural property, where the transferor has either occupied the property for two years or owned the property for the previous seven years. Where the relief applies, the value transferred is reduced by:

From 26 November 1996, land managed according to certain Habitat schemes is treated as farm land; buildings used for the management of the land are treated as farm buildings and are eligible for relief.

Where agricultural relief is not available, business relief may apply if the conditions for that relief are satisfied.

If tax becomes payable because the donor dies within seven years of making the gift, these reliefs will be available only if the recipient still owns the property and it is still used for business or agricultural purposes. Relief will still be available if the original property was replaced, within 12 months, with similar property.

Similar rules apply to the reliefs if additional tax becomes due because the donor dies within seven years of making a chargeable lifetime transfer.

Generally, inheritance tax is payable six months after the end of the month in which the transfer is made or death occurs. For chargeable lifetime transfers made after 5 April and before 1 October, tax is payable at the end of April in the following year.

Inheritance tax may be payable in 10 equal instalments for transfers of a business or interest in a business, a controlling shareholding, certain unquoted shareholdings, land or timber. This applies to all transfers, but only if the trustees pay the tax on a chargeable lifetime transfer.

Interest is added to each instalment. However, for business assets, land eligible for agricultural property relief and timber, interest will only be payable if an instalment is not paid when due.