In the United Kingdom, inheritance tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing capital transfer tax. The UK has the fourth highest inheritance tax rate in the world, according to conservative think tank,[1] the Tax Foundation,[2] though only a very small proportion of the population pays it. 3.7% of deaths recorded in the UK in the 2020-21 tax year resulted in inheritance tax liabilities.[3] Other countries such as China, Russia and India have no inheritance tax, whilst Australia, New Zealand, Canada, Norway and Israel have all chosen to abolish succession taxes.
Prior to the introduction of estate duty by the Finance Act 1894, there was a complex system of different taxes relating to the inheritance of property, that applied to either realty (land) or personalty (other personal property):
An Act for granting to Her Majesty Duties on Succession to Property, and for altering certain Provisions of the Acts charging Duties on Legacies and Shares of Personal Estates.
From 1694, probate duty, introduced as a stamp duty on wills entered in probate in 1694, applying to personalty.
From 1780, legacy duty, an inheritance duty paid by the receiver of personalty, graduated according to consanguinity
From 1853, succession duty, a duty introduced by the Succession Duty Act 1853 (16 & 17 Vict. c. 51) applying to realty settlements, taking effect on the death of the settlor
From 1881, account duty applied as an anti-avoidance duty on lifetime gifts made to avoid paying Legacy Duty
From 1885, corporation duty applied to the annual value of certain property vested in corporate and unincorporated bodies that would otherwise have avoided any of the above duties[4]
From 1889 (scheduled for expiry in 1896), estate duty, being an additional stamp duty on estates and successions greater than £10,000 in value[5]
In 1894, estate duty replaced probate duty, account duty, certain additional succession duties, and temporary estate duty.[6]
Legacy duty and succession duty were later abolished by the Finance Act 1949, followed by the abolition of corporation duty by the Finance Act 1959. The three-year period for gifts made prior to death was extended to five years by the Finance Act 1946, and then to seven years by the Finance Act 1969.
Estate duty became more progressive in scale, eventually peaking in 1969 with the highest marginal rate fixed at 85% of amounts in excess of £750,000, provided that total duty did not exceed 80% of the value of the total estate.[7]
Estate duty was abolished with the passage of the Finance Act 1975, which created the capital transfer tax, with the following characteristics:
It captured all transfers of value, not made at an arm's length basis, by which the transferor's estate was less in value after the disposition than it was before.[8]
Value was generally defined as "the price which the property might reasonably be expected to fetch in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time."[9]
Transfers (in excess of specified limits, or not otherwise excluded) made during a person's lifetime were accumulated with tax assessed on a sliding scale on the total amount.[10]
All transfers made at death or within three years before were taxable at a separate, higher sliding scale.[11]
Where the transferor was domiciled in the United Kingdom, tax was chargeable on all subject property; otherwise, it was chargeable only on property situated in the UK.[12]
CTT was reduced in scope during the Thatcher years, with most lifetime gifts removed by the Finance Act 1986. The tax was renamed as inheritance tax.
Framework of IHT
Inheritance tax thresholds and party responsible for each increase. Note the correlation with average house price (grey).
The aggregate of all the property, other than excluded property and specified interests in possession, to which he is beneficially entitled;
Beneficial entitlement includes the general power to dispose or charge money on any property;
Except where otherwise provided, the person's liabilities must be taken into account, but it does not include liability with respect to any other tax that may arise on the transfer, and a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth.
Property situated outside the United Kingdom, where the person beneficially entitled to it is an individual domiciled outside the United Kingdom;
Decorations and awards granted for valour or gallant conduct, and which have never been the subject of a disposition for a consideration in money or money's worth; and
Certain specified securities.
Relief is also granted,[15] where the value of the estate is reduced with respect to specified business property, agricultural property, woodlands, certain transfers made within three years of death made at a diminished value, and certain other cases.
Chargeable transfers prior to death
Deductions will be made from an estate's nil rate band with respect to transfers of value made in excess of specified limits,[16] other than "potentially exempt transfers" made more than seven years before the transferor's death. Transfers of value made within specified limits are known as "exempt transfers".[17]
Transfers of value will also include gifts arising from the amount by which an asset is sold for less than it could have been sold on the open market, as for a sale from a parent to a child.[18] Gifts can also arise where:[19]
a lease is granted at less than full market rent, shares in a private company are rearranged, rights in such shares are altered, or there has been agreement to act as a guarantor for someone else's debts
transfers of value, at a loss to the donor, have been made to certain trusts
premiums have been paid on a life insurance policy for the benefit of someone else
the deceased ceased to have a right to a benefit from a trust or settlement
Where the value of such transfers exhausts the amount available to the nil rate band, IHT is assessed on the excess amount, to which the recipients of such transfers bear the liability to pay.[16]
Types of estates exempt from IHT
For deaths occurring on or after 1 September 2006, the following estates are effectively excepted from liability for IHT:
Types of excepted estates for Inheritance Tax purposes[20]
Type
Qualifying conditions
Low value estates
the deceased died domiciled in the United Kingdom (UK)
the gross value of the estate does not exceed the Inheritance Tax nil rate band
if the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000
if the estate includes foreign assets, their gross value does not exceed £100,000
if there are any specified transfers, their chargeable value does not exceed £150,000
the deceased had not made a gift with reservation of benefit
gifts out of income totalling more than £3,000 in any year must be shown in full
no charge arises on the individual's death under any of the provisions relating to alternatively secured pensions
For claims to transfer the unused nil rate band from the estate of a predeceased spouse or civil partner, the following additional conditions apply:
the full nil rate band must be available to transfer from the earlier death so that the deceased's nil rate band is increased by 100%
there is only one predeceased spouse or civil partner
a suitable claim is made to transfer the unused nil rate band
Exempt estates
Where the gross value of the estate does not exceed £1 million and there is no tax to pay because either or both conditions relating to transfers to a spouse or civil partner, or absolute gifts to one or more charities, applies, and no other exemption or relief can be taken into account.
The conditions for these estates are that:
the deceased and the deceased's spouse or civil partner have always been domiciled in the UK
the gross value of the estate does not exceed £1 million and the net chargeable value of the estate after deduction of liabilities and Spouse or Civil Partner Exemption and/or Charity Exemption only does not exceed the Inheritance Tax threshold
if the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000 (unless the settled property passes to a spouse or civil partner, or to a charity, in which case the limit is waived)
if the estate includes foreign assets, their gross value does not exceed £100,000
if there are any specified transfers, their chargeable value does not exceed £150,000, and the deceased had not made a gift with reservation of benefit
gifts out of income of more than £3,000 in any year must be shown in full
no charge arises on the individual's death under any of the provisions relating to alternatively secured pensions
In Scotland, spousal and charity exemptions must be calculated on the basis that any entitlement to legitim against the estate will be claimed in full.
Foreign domiciliaries
Where the gross value of the estate in the UK does not exceed £150,000.
The conditions for these estates are that:
the deceased died domiciled outside the UK
the deceased was never domiciled in the UK or treated as domiciled in the UK for Inheritance Tax purposes
the deceased's UK estate consisted only of cash or listed shares and securities passing under a will or intestacy or by survivorship
Blue Light Exemption
When a member or former member of the armed forces dies as a result of injuries or disease sustained while on active service their whole estate is exempt. The Finance Act 2015 extended this to individuals who work in emergency situations. This would include care workers who die as a result of COVID-19 including people who lose their life at any point in the future if a clear link to the coronavirus can be proven.[21]
Rate of tax
Tax is assessed at 40% of the net value of the estate, after application of the nil rate band.[22] The applicable nil rate band will depend on the date of death: if the date falls at any time from 6 August to 5 April in a given tax year, the current year's band will apply; but, where the date is after 5 April but before 6 August, and application for a grant is filed before 6 August, the prior year's band will apply.[23]
For deaths occurring after 5 April 2012, the tax is assessed at 36%, where at least 10% of a specified baseline amount of the estate has been bequeathed as charitable gifts.[24] For purposes of calculation, the property of the estate is separated into three components, each of which is tested to see if the charitable gifts are sufficient to qualify for the lesser rate:[25]
the survivorship component, comprising joint or common property that passes on death by survivorship or special destination;
the settled property component, made up of all settled property in which the deceased had an interest in possession to which he was beneficially entitled immediately before death; and
the general component, consisting of all other property in the estate, with the exception of that arising from gifts with reservation.
If applicable gifts meet the 10% threshold for a given component, in certain circumstances, upon election, the 36% rate applies to the whole estate.[26] There are several options available for estates to be able to achieve that threshold, such as having the will specifying relevant gifts in terms of percentages of assets, or successors executing a deed of variation to attain the desired result.[27]
Nil-rate band
The Chancellor of the Exchequer's Autumn Statement on 9 October 2007[28] announced that with immediate effect inheritance tax allowances (often referred to as the nil-rate band) were to be transferable between married couples and between civil partners. Thus, for the 2007/8 tax year, a married couple will in effect have an allowance of £600,000 against inheritance tax, whilst a single person's allowance remains at £300,000. The mechanism for this enhanced allowance is that on the death of the second spouse to die, the nil rate band for the second spouse is increased by the percentage of the nil-rate band which was not used on the death of the first spouse to die.
For example, if in 2007/08 the first married spouse (or civil partner) to die were to leave £120,000 to their children and the rest of their estate to their spouse, there would be no inheritance tax due at that time and £180,000 or 60% of the nil-rate band would be unused. Later, upon the second death the nil-rate band would be 160% of the allowance for a single person, so that if the surviving spouse also died in 2007/08 the first £480,000 (160% of £300,000) of the surviving spouse's estate would be exempt from inheritance tax. If the surviving spouse died in a later year when the nil-rate band had reached £350,000, the first £560,000 (160% of £350,000) of the estate would be tax exempt.
This measure was also extended to existing widows, widowers and bereaved civil partners on 9 October 2007. If their late spouse or partner had not used all of their inheritance tax allowance at the time of the spouse's death, then the unused percentage of that allowance can now be added to the single person's allowance when the surviving spouse or partner dies. This applies irrespective of the date on which the first spouse died, but special rules apply if the surviving spouse remarries.
In a judgement following an unsuccessful appeal to a 2006 decision by the European Court of Human Rights,[29] it was held that the above does not apply to siblings living together. The crucial factor in such cases was determined to be the existence of a public undertaking, carrying with it a body of rights and obligations of a contractual nature, rather than the length or supportive nature of the relationship.[30]
Prior to this legislative change, the most common means of ensuring that both nil-rate bands were used was called a nil band discretionary trust (now more properly known as NRB Relevant Property Trust*). This is an arrangement in both wills which says that whoever is the first to die leaves their nil band to a discretionary trust for the family, and not to the survivor. The survivor can still benefit from those assets if needed, but they are not part of that survivor's estate.
It is worth noting that as the Government seeks not to profit from the death of those who (a) gave their lives in military service, or (b) died from the results of a wound, injury, or disease associated with that military service, that the estates of such servicemen and women are exempt, totally, from any Inheritance Tax regardless of the value of the estate even if it amounts to millions of pounds as long as (a) or (b) apply....and that that exemption is then transferable to the serviceman's or servicewoman's widow or widower. That they do qualify as at (a) or (b) may be certified by application to the British MOD "Joint Casualty and Compassionate Centre" (JCCC). The JCCC then inform the HMRC of that decision. The exemption does not apply to ex-servicemen or servicewomen who die from other causes unrelated to their military service.
Additional nil rate band on main residence
In the summer budget of 2015 a new measure was outlined to reduce the burden of IHT for some estates by providing additional tax-free allowances in cases where the family home passed to direct descendants.[31] This measure, called the Residence Nil-Rate Band (RNRB) came into effect upon the passage of the Finance (No. 2) Act 2015, and provided for the following scheduled amounts:[32]
£100,000 for the 2017-18 tax year
£125,000 for the 2018-19 tax year
£150,000 for the 2019-20 tax year
£175,000 for the 2020-21 tax year and until 5 April 2028.[33]
The Finance Act 2016 provided further relief in cases where all or part of the additional band could be lost, where a person had downsized to a less valuable residence or had ceased to own a residence after 8 July 2015 (and before the person has died). This is conditional upon the deceased having left that smaller residence, or assets of equivalent value, to direct descendants.[34] These are defined as lineal descendants, spouses or civil partners of such lineal descendants, or former spouses or civil partners who have not become anyone else's spouse or civil partner.[35]
The introduction of the RNRB means that a married couple leaving a residence to direct descendants can currently leave up to £900,000 tax-free between them (2018/19 tax year), with this tax-free amount rising to £1 million by April 2020.[36] This tax-free allowance is diminished for estates worth more than £2 million.[36]
The person liable for POAT may, while he is still alive, elect on a timely basis to have such transactions treated as gifts with reservations (thus subject to IHT) with respect to such transactions made in a given tax year.[39][40]
Controversy
In 2002, Queen Elizabeth The Queen Mother left her estate (estimated at £50 million) to her daughter Elizabeth II, including works of art, jewels, antiques and her thoroughbred racehorses. A deal made back in 1993 ensures that The Queen is spared inheritance tax of an estimated £20 million on her mother's estate.[41]
In 2016 published letters and a prominent article in The Guardian by a leading accountant supported by Jeremy Corbyn criticised the tax-exempt arrangements of many largest landowners and the most capital-endowed. They advocated reform of tax on such wealth and for transparency of trusts, namely:
Publication of the annual accounts of all trusts (as currently applicable to charitable UK trusts)
A compulsory register of trusts.
An extension of the taxed lifetime chargeable trusts regime to cover such entities as overseas-based fixed and discretionary trusts and companies with UK assets.
Consideration of taxation of the largest valuable interests appointed or advanced (paid or part-paid) by trust or other entity away to new beneficiaries (presumably exempting usual reliefs such as spousal, bona fide business, charity or agricultural).
This critique followed the death of Gerald Grosvenor, 6th Duke of Westminster, whose significant at-death loose "interests", the benefit of which his children by trustees' discretion perhaps receive demonstrate suspected tax savings. The unpublished size of the late Duke's death estate compares with the valuation of the family-related landholdings of c. £9,000,000,000. Critics claim inheritance tax impacts more on the living standards of the middle class and less on plutocrats and the super rich.[42][43] If the family assets were taxed as if one taxable estate the taxation would equate to the inheritance taxes paid nationally for 2014–2015.[44]
Since c. 2006 tax of 20% must be paid on assets in excess of the Nil-Rate Band entering most UK non-death trusts combined with periodic charges of between 0% and 6% are due on the total value of the trust every 10 years.[44] This is designed to replicate the 40 per cent death charge once a generation (assuming a normal life span to be around seven decades).[45]
George Hodgson, interim chief executive of the Society of Trust and Estate Practitioners, counter-argued for trusts to remain private on three grounds: many beneficiaries are children or vulnerable adults; the inheritance tax exemptions and counter-tax-planning structures help to protect jobs; "An awful lot of trusts are used to hold family businesses".[42]
In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 billion.
In common law jurisdictions, probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased, or whereby the estate is settled according to the laws of intestacy in the state of residence of the deceased at time of death in the absence of a legal will.
Estate planning is the process of anticipating and arranging for the management and disposal of a person's estate during the person's life in preparation for a person's future incapacity or death. The planning includes the bequest of assets to heirs, loved ones, and/or charity, and may include minimizing gift, estate, and generation-skipping transfer taxes. Estate planning includes planning for incapacity, reducing or eliminating uncertainties over the administration of a probate, and maximizing the value of the estate by reducing taxes and other expenses. The ultimate goal of estate planning can only be determined by the specific goals of the estate owner, and may be as simple or complex as the owner's wishes and needs directs. Guardians are often designated for minor children and beneficiaries with incapacity.
A Finance Act is the headline fiscal (budgetary) legislation enacted by the UK Parliament, containing multiple provisions as to taxes, duties, exemptions and reliefs at least once per year, and in particular setting out the principal tax rates for each fiscal year.
Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.
A gift, in the law of property, is the voluntary and immediate transfer of property from one person to another without consideration. There are several type of gifts in property law, most notably inter vivos gifts which are made in the donor's lifetime and causa mortis (deathbed) gifts which are made in expectation of the donor's imminent death. Both types of gifts share three elements which must be met in order for the gift to be legally effective: donative intent, the delivery of the gift to the donee, and the acceptance of the gift. In addition to those elements, causa mortis gifts require that the donor must die of the impending peril that he or she had contemplated when making the gift.
In trust law, an express trust is a trust created "in express terms, and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties." Property is transferred by a person to a transferee, who holds the property for the benefit of one or more persons, called beneficiaries. The trustee may distribute the property, or the income from that property, to the beneficiaries. Express trusts are frequently used in common law jurisdictions as methods of wealth preservation or enhancement.
The taxation of trusts in the United Kingdom is governed by a different set of principles to those tax laws which apply to individuals or companies.
International tax law distinguishes between an estate tax and an inheritance tax. An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate of a person who has died. However, this distinction is not always observed; for example, the UK's "inheritance tax" is a tax on the assets of the deceased, and strictly speaking is therefore an estate tax.
A Discounted Gift Trust (DGT) is a type of UK trust arrangement usually set up in connection with an investment in either an onshore or offshore investment bond. It allows the gifting of a lump sum into a trust whilst retaining a lifelong 'income' from that money, with the overarching aim of reducing the eventual IHT bill on death.
In economics, a gift tax is the tax on money or property that one living person or corporate entity gives to another. A gift tax is a type of transfer tax that is imposed when someone gives something of value to someone else. The transfer must be gratuitous or the receiving party must pay a lesser amount than the item's full value to be considered a gift. Items received upon the death of another are considered separately under the inheritance tax. Many gifts are not subject to taxation because of exemptions given in tax laws. The gift tax amount varies by jurisdiction, and international comparison of rates is complex and fluid.
The nil rate band (NRB) is a term defined and used within the tax legislation of the United Kingdom which establishes the threshold below which some or all of the value of a gift, a death estate, or assets held within a trust, is subject to a zero rate of Inheritance Tax in the United Kingdom on an occasion of charge to Inheritance Tax. An occasion of charge to Inheritance Tax may not only be the death of an individual, but may also the date of a gift or of another act causing a transfer of value to occur from one person to another person, trust or entity.
In the United States, the estate tax is a federal tax on the transfer of the estate of a person who dies. The tax applies to property that is transferred by will or, if the person has no will, according to state laws of intestacy. Other transfers that are subject to the tax can include those made through a trust and the payment of certain life insurance benefits or financial accounts. The estate tax is part of the federal unified gift and estate tax in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.
Acceptance in lieu (AiL) is a provision in British tax law under which inheritance tax debts can be written off in exchange for the acquisition of objects of national importance. It was originally established by Chancellor of the Exchequer David Lloyd George as a means for the wealthy to pay the increased estate taxes imposed by his People's Budget of 1909 but had its roots in similar schemes dating to the late 19th century. It has developed from the early years, when it was used mainly as a means for the aristocracy to dispose of country estates to the National Trust, to the modern day, when it is more associated with the transfer of works of art, antiquities and archive material to museums. The scheme is administered by Arts Council England, a non-departmental public body of the Department for Culture, Media and Sport. The scheme has brought many houses, works of art and other collections into publicly accessible institutions when they would otherwise have gone to auction. In April 2013 the Cultural Gifts Scheme was started which allows taxpayers to make a donation of art in return for a credit on income tax, capital gains tax or corporation tax. The Cultural Gifts Scheme is also administered by Arts Council England and is reported jointly with the Acceptance in Lieu scheme.
Taxes in Germany are levied by the federal government, the states (Länder) as well as the municipalities (Städte/Gemeinden). Many direct and indirect taxes exist in Germany; income tax and VAT are the most significant.
Taxation may involve payments to a minimum of two different levels of government: central government through SARS or to local government. Prior to 2001 the South African tax system was "source-based", where in income is taxed in the country where it originates. Since January 2001, the tax system was changed to "residence-based" wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Non residents are only subject to domestic taxes.
Taxation in Gibraltar is determined by the law of Gibraltar which is based on English law, but is separate from the UK legal system. Companies and non residents do not pay income tax unless the source of this income is or is deemed to be Gibraltar. Individuals pay tax on a worldwide basis on income from employment or self employment if they are ordinarily resident in Gibraltar. There is no tax on capital income.
The history of inheritance taxes in the United Kingdom has undergone significant change and mutation since their original introduction in 1694.
Inheritance and gift taxes in Canada have a complex history dating back to Canadian Confederation. They are beginning to see a return to prominence in the provincial sphere.
Capital gains tax in the United Kingdom is a tax levied on capital gains, the profit realised on the sale of a non-inventory asset by an individual or trust in the United Kingdom. The most common capital gains are realised from the sale of shares, bonds, precious metals, real estate, and property, so the tax principally targets business owners, investors and employee share scheme participants.
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