Inheritance Tax rates for chargeable transfers during the year commencing 6 April 2007
	First £300,000 (%)	Excess over £300,000 (%)
Lifetime transfers (other than PETs)	0	20
On death	0	40

 

For individuals, unlimited exemption applies to gifts to –

• a UK domiciled spouse

• UK registered charities

• qualifying political parties and to regular lifetime gifts out of income.

There are also exemptions for –

• lifetime gifts of £3,000 per fiscal year in total

• small gifts of up to £250 per fiscal year per donee

• gifts in consideration of marriage of up to:

– £5,000 by each parent of either party

– £2,500 by a grandparent or other direct linear ancestor of either party

– £2,500 from one party to the other

– £1,000 from any other donee.

The paragraphs below apply to transactions after 22 March 2006 only. For previous periods, refer to previous editions of At A Glance.

Lifetime gifts to individuals constitute potentially exempt transfers (PETs). PETs are not subject to inheritance tax at the date of gift, but if the donor dies within seven years thereafter are taxable at death rates. The rate progressively reduces by 20% upon the donor surviving to the third and each subsequent anniversary of the gift,  and thus after seven years the liability is extinguished. Successive lifetime chargeable transfers within seven years are cumulated, as are PETs which have become chargeable transfers on death.

Lifetime gifts not ranking as PETs (such as gifts to most trusts) are initially taxable at the lifetime rates pertaining at the date of the gift. This liability is revised to death rates if the donor dies within seven years, subject to taper relief as above.

For trusts, except for certain trusts for minors and where there was an existing life tenant at 21 March 2006, a charge to tax potentially arises:

• where assets cease to be held on trust

• every ten years from the date on which the trust was set up, with a maximum charge at the ten year anniversary date of 6%.

The rules and calculations are complex and specialist advice should be sought in this area.

The effect of these rules is ameliorated for certain trusts for minors and disabled beneficiaries but further discussion is beyond the scope of this note.

Caveat: Professional advice should invariably be sought on all matters relating to IHT as this is only a simplified summary. By way of example only, other forms of relief apply to certain transfers of business and agricultural property and of shares in specific types of company.