F6 - INHERITANCE TAX

INHERITANCE TAX is a tax levied on gift. The gift is called transfer of value. Any transfer of value in this context is any gratuitous disposition (e.g. a gift) made by a person which results in his being worse off. That is, he suffers a diminution (i.e. reduction) in the value of his estate. An estate represents all the net assets owned by that individual. Summarily, the transfer of value is the diminution in the value of the estate of the donor which means the actual amount lost by the donor as a result of the gift and not necessarily the value of the gift to the donee. It must be something e.g. cash, house, shares etc. that is willingly or deliberately given by the donor as a gift and not something sold in an arm‟s length transaction (that is on a commercial basis). If the asset is sold at a price lower than its current market value because of non-availability of sufficient information that could make the donor (seller) sell the item at the normal price, but the sale is made on a commercial basis, there is no transfer of value. The points listed above tend to emphasize that Inheritance tax is levied on gift also called transfer of value or on the actual amount lost by the donor (diminution in the value of his estate) due to the gift. If this can not be established by you in the question, do not solve the question!
Types of Transfer of value
There are some transfers made during the lifetime of the donor and other gifts transferred after death to the beneficiary. This means that INHERITANCE TAX is levied on
a. Life time gifts or lifetime transfer of value and
b. Death estate.
Transfer of value (or gift) made during the lifetime of the donor can be grouped into:
a. Chargeable lifetime transfer(C.L.T).
b. Potentially exempt transfer (P.E.T).

How will you know the type of transfer of value?
When the donor presents the gift(s) to the trust, this is CHARGEABLE LIFE TIME TRANSFER, but if the gift is presented directly to the beneficiary i.e. to son, uncle, mother, father etc. this is POTENTIALLY EXEMPT TRANSFERs. Gift made directly to spouse or civil partner usually have some exemptions. We shall deal with that later.
When the transfer is a chargeable lifetime transfer, INHERITANCE TAX is due immediately.
Types of INHERITANCE TAX –
1. Lifetime Tax: this is a tax applicable on CHARGEABLE LIFE TIME TRANSFER. It is applicable or chargeable immediately on CHARGEABLE LIFE TIME TRANSFERs.
NOTE 1 : Life time tax does not have anything to do with whether the donor survives for more than 7 years or died within 7 years of the gifts. It is chargeable immediately.

Lifetime tax: - 0% on the Nil rate band
- 20% on the excess.
NOTE 2: It is the primary responsibility of the donor to pay the life time tax. if the donor pays this tax, then the lifetime tax payable is computed as follows
- 0% on the Nil Rate band
- 20/80 on the excess.
2. Death Tax:
this is applicable to both CHARGEABLE LIFE TIME TRANSFERs and POTENTIALLY EXEMPT TRANSFERs, if the donor dies within 7 years of the gift. This tax is to be reduced by Taper relief and life time tax already paid on CHARGEABLE LIFE TIME TRANSFERs. This means that, death tax payable on CHARGEABLE LIFE TIME TRANSFER should be reduced by Taper relief and lifetime tax already paid.
Death Tax is
0% on the Nil rate band and
40% on the excess.
you are to deduct the following from your answer:
A. Taper relief
B. Lifetime tax paid on CHARGEABLE LIFE TIME TRANSFER.
Why is taper relief required? Taper relief is required if the donor survived for more than 3 years after the gifts. If the donor lived for more than 3 years after the gift but died before the 7th year of the gift then death tax is due on both gifts(POTENTIALLY EXEMPT TRANSFER & CHARGEABLE LIFE TIME
Do you want a detailed note on this?
send a request to accanotesforall@gmail.com