Inheritance tax

The following example brings together most of the points covered in the IHT article. It is much longer than a typical exam question.

Jing died on 21 January 2015. She had made the following lifetime gifts:

3 March 2007A gift of 126,000 to a trust
8 August 2009A gift of £206,000 to her son
12 January 2010A gift of £40,000 to her husband
10 May 2011A gift of £200 to a nephew
23 June 2011A gift of £40,000 to her daughter when she got married
2 September 2011A gift of £300,000 to a trust

Jing paid any IHT arising from the gifts to the trusts.

At the date of her death Jing owned the following assets:

  • A holiday cottage valued at £220,000. This had an outstanding endowment mortgage of £60,000.
  • Units in the Global Trust, a unit trust, valued at £12,000.
  • Cash deposits in new individual savings accounts of £16,800.
  • A motor car valued at £8,000.
  • A life assurance policy on her own life. On 21 January 2015 the policy had an open market value of £45,000, and proceeds of £50,000 were received following Jing’s death.


On 21 January 2015 Jing owed £3,600 in respect of a personal loan from a bank, and had gambling debts of £600. The cost of her funeral amounted to £3,200.

Under the terms of her will Jing left £100,000 to her husband, a specific legacy of £40,000 to her brother, and the residue of the estate to her children.

Nil rate bands are as follows:

 £ 
2006–07285,000 
2009–10325,000 
2011–12325,000 

IHT liabilities are as follows:
 

Lifetime transfers
3 March 2007

  £ 
Value transferred 126,000 
Annual exemptions  
2006–07
2005–06
3,000
3,000		  
  6,000 
Chargeable transfer 120,000 
  • No lifetime IHT is payable as the CLT is less than the nil rate band for 2006–07.


8 August 2009

  £ 
Value transferred 206,000 
Annual exemptions  
2009–10
2008–09
3,000
3,000		  
  6,000 
Potentially exempt transfer 200,000 

12 January 2010
Exempt as a transfer to spouse.

10 May 2011
Exempt as a small gift under £250.

23 June 2011

  £ 
Value transferred 40,000 
Marriage exemption5,000  
Annual exemptions  
2011–12
2010–11
3,000
3,000		  
  (11,000) 
Potentially exempt transfer 29,000 

2 September 2011

 £ 
Net chargeable transfer300,000 
IHT liability
205,000 at nil%
95,000 x 20/80
0
23,750		 
Gross chargeable transfer323,750 
  • The PET made on 23 June 2011 has utilised the annual exemptions for 2011–12 and 2010–11.
  • The CLT made on 3 March 2007 is within seven years of 2 September 2011, so it utilises £120,000 of the nil rate band for 2011–12.
  • The due date for the IHT liability of £23,750 payable by Jing was 30 April 2012.


Additional liabilities arising on death
3 March 2007

 £ 
Chargeable transfer120,000 
  • This CLT was made more than seven years before the date of Jing’s death on 21 January 2015.


8 August 2009

 £ 
Potentially exempt transfer200,000 
  • The seven year cumulative total is £320,000 (120,000 + 200,000), which is less than the nil rate band for 2014–15 of £325,000. No IHT is payable.


23 June 2011

 £ 
Potentially exempt transfer29,000 
IHT liability
5,000 at nil%
24,000 at 40%
0
9,600		 
Taper relief reduction – 20%(1,920) 
 7,680 
  • The seven year cumulative total is £320,000 so £5,000 (325,000 – 320,000) of the nil rate band for 2014-15 of £325,000 is available.
  • The taper relief reduction is 20% as the gift to the daughter was made between three and four years of the date of Jing’s death.
  • The due date for the IHT liability of £7,680 payable by Jing’s daughter is 31 July 2015.


2 September 2011

 £ 
Gross chargeable transfer323,750 
IHT liability
323,750 at 40%

129,500
 
Taper relief reduction – 20%(25,900) 
 103,600 
IHT already paid(23,750) 
Additional liability79,850 
  • The seven year cumulative total is £349,000 (120,000 + 200,000 + 29,000) so the nil rate band for 2014–15 has been fully utilised.
  • The taper relief reduction is 20% as the gift to the trust was made between three and four years of the date of Jing’s death.
  • The due date for the IHT liability of £79,850 payable by the trust is 31 July 2015.


Death estate

  £ 
Property 220,000 
Units in Global Trust 12,000 
New individual savings accounts 16,800 
Motor car 8,000 
Proceeds of life assurance policy 
50,000		 
  306,800 
Bank loan3,600  
Funeral expenses3,200
  
 _____(6,800) 
Value of estate 300,000 
Spouse exemption (100,000) 
Chargeable estate 200,000 
IHT liability 200,000
at 40%		 80,000 
  • The due date for the IHT liability of £80,000 payable by the personal representatives of Jing’s estate is 31 July 2015.
  • Jing’s husband will inherit £100,000, her brother will inherit £40,000, and the children will inherit the residue of £80,000 (300,000 – 100,000 – 40,000 – 80,000). 

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