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British Inheritance Tax

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IHT - Introduction

An Introduction

Inheritance Tax (IHT) is probably the tax that people get the most annoyed about and seek to avoid paying if at all possible.  It is potentially payable on all transfers of value, not only on death.

However, it is important to try to understand the tax how and why it works like it does as well as considering some of the planning opportunities that is available to us.  It is important to understand that in a document of this type, it is only really possible to take a cursory look at this complicated tax.  Prior to undertaking any planning specialist advice should be obtained.

In this document, we will also consider Trusts and their uses.  This is because trusts are inextricably linked to the mitigation of IHT.

IHT is complicated as it seeks to levy a tax charge when any asset is transferred from the ownership of one person (which can include a trust etc) to another.Trusts have been a part of English Law for many centuries and can certainly be traced back to medieval times and as such, much of the “law” surrounding trusts, and as a result IHT, is complicated by this. There have been a number of Acts of Parliament setting out the Law in relation to trusts, but this aspect is not covered by this legislation, then English Common Law still applies along with Case Law (where Courts have made a ruling interpreting the Common Law).  Whilst the historic background is similar, Scotland and Northern Ireland have different legislation concerning Trusts, although generally the legislation is broadly similar. However the IHT legislation applies in the same way throughout the UK.

How We Got To Where We Are

In 1894 transfers of capital on death became subject to a tax charge for the first time with the introduction of Estate Duty.  The Finance Act 1975 extended the regime of tax on transfers of capital to lifetime gifts with the introduction of Capital Transfer Tax with effect from 26 March 1974.

Inheritance Tax (IHT) was introduced by the Finance Act 1986 to replace Capital Transfer Tax and applies to all transfers made on or after 18 March 1986.  The legislation is now mainly found in the Inheritance Tax Act (IHTA) 1984.   Section 156 and Schedule 20 Finance Act 2006 introduced new IHT rules for assets held in trust.  

Inheritance tax applies to “transfers of value” (therefore it does not apply if an asset is sold, so long as it is at the full market value) whether made during lifetime or on death.  These are transfers that reduce the value of the transferor’s (the person making the transfer) estate. Tax is charged, usually on the transferor, by measuring the loss to the transferor’s estate, rather than by reference to the benefit received by the transferee.

IHT is a cumulative tax.  A chargeable transfer remains in the transferor’s accumulation for seven years.  After seven years the transfer is no longer taxable, but may continue to be relevant in certain circumstances.

Hopefully, these will give you a firm grounding on this issue, whether you require urgent help, or simply wish to know more about this particular form of taxation.

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