Annual Exemption

Each individual in the UK is entitled to an annual exemption, allowing them to give away up to £3,000 per year without any inheritance tax implications. Any unused portion of this exemption can be carried forward to the next year but must be used in that year.

Business Relief 

Business Relief offers up to 100% relief on Inheritance Tax (IHT) for shares held in a qualifying business for at least two years before death. Eligible shares include those in unlisted companies and certain companies traded on the Alternative Investment Market (AIM). The business must be actively trading, not primarily involved in investment, to qualify. 

Capital Gains Tax Hold-Over Relief

This relief allows for the deferral of Capital Gains Tax (CGT) when shares are gifted. The CGT that would have been payable on the gain is 'held over' until the recipient disposes of the asset. It is particularly useful in estate planning to transfer shares to the next generation without an immediate CGT charge.

Chargeable Lifetime Transfer (CLT)

Chargeable Lifetime Transfers involve gifts made during an individual’s lifetime that are immediately taxable under IHT, most commonly transfers into Discretionary Trusts. These transfers may attract a 20% IHT on amounts exceeding the donor’s Nil Rate Band.

Clawback 

Clawback refers to the process by which the tax authorities reclaim Inheritance Tax (IHT) benefits previously granted on gifts or transfers if certain conditions are not met. For example, if a potentially exempt transfer (PET) is made, but the donor does not survive for the required seven years, IHT benefits initially anticipated for that gift can be "clawed back" and become subject to taxation. This mechanism ensures that the tax advantages of certain estate planning strategies are only realised if all statutory conditions are fully satisfied over the specified time frames.

Discretionary Trust

A Discretionary Trust is a legal arrangement where trustees have full discretion on how and when to distribute assets to beneficiaries. This type of Trust is useful for managing assets on behalf of beneficiaries who may not be ready or able to handle their financial affairs.

Domicile and Deemed Domicile for IHT

Domicile is a concept that affects how an individual is taxed in the UK, particularly for IHT purposes. An individual's domicile typically is the country they consider their permanent home. Deemed domicile can affect non-UK domiciliaries who have been UK residents for 15 out of the last 20 years, bringing their worldwide assets into scope for UK IHT.

Gifts

A gift is the transfer of any asset such as money, property, or shares, where the donor receives nothing of equivalent value in return. Gifts can lead to a reduction in IHT liability if the donor survives for seven years after making the gift. An individual can utilise an annual exemption of £3,000, which allows them to give away this amount each year without any IHT implications. 

Gift with Reservation of Benefit (GROB)

A Gift with Reservation of Benefit occurs when an individual gives away an asset but continues to benefit from it, such as living in a house they have given to their children. These gifts do not qualify as PETs and remain part of the estate for IHT purposes.

Holding period

The holding period refers to the minimum time an asset must be retained to qualify for certain tax reliefs. Shares in Business Relief-qualifying companies, must be held for at least two years by the deceased before their death to be exempt from IHT.

Nil Rate Band (NRB)

The Nil Rate Band is the threshold up to which no IHT is charged on an individual's estate, set at £325,000 for 2024/25. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.

Potentially Exempt Transfer (PET)

A Potentially Exempt Transfer allows for unlimited value gifts that become exempt from IHT if the donor survives for seven years after the gift. If the donor does not survive this period, the gift reduces the donor's available NRB.

Quick Succession Relief (QSR)

Quick Succession Relief is a measure under section 141 of the Inheritance Tax Act 1984 designed to prevent double taxation of the same assets within five years due to inheritance. It offers a reduction in inheritance tax on a deceased's estate by considering the tax paid on a previous transfer, the benefit received by the deceased from that transfer, and the time elapsed between the transfer and death. Relief ranges from 100% if death occurs within one year of the first, to 20% within five years.

Replacement Relief

This relief concerns the replacement of business properties. If a replacement property is not acquired before the individual's death, any potential business property relief is forfeited. The relief for any replacements made within five years cannot exceed the amount that would have been available had no replacement occurred.

Residence Nil Rate Band (RNRB)

Available since 6 April 2017, the RNRB adds an additional threshold when a primary residence or its sale proceeds are left to direct descendants. It complements the standard NRB but reduces for estates exceeding £2 million and may involve complex calculations for downsized homes or changes in residence. The RNRB as at 2024/25 is £175,000 per person.

Spousal Exemption

Spousal Exemption from Inheritance Tax (IHT) covers all transfers between spouses or civil partners, whether during lifetime or upon death, provided they are UK-domiciled or deemed domiciled. This exemption ensures no IHT is payable on these transfers.

Successive Transfers

Successive Transfers refer to the consecutive passing of assets through multiple estates, typically when assets are inherited by beneficiaries who themselves die shortly thereafter. This situation can potentially lead to multiple incidences of Inheritance Tax (IHT) within a short period. Planning for Successive Transfers can involve strategies like setting up trusts or taking advantage of reliefs such as Quick Succession Relief to mitigate the IHT burden across sequential inheritances.

Taper Relief

Taper Relief applies to gifts exceeding the nil-rate band made at least three years prior to the donor's death. The relief reduces the IHT payable on these gifts in a staggered manner, dependent on the period between the gift and death. No relief is available if the gift is within the nil-rate band or on immediately chargeable transfers unless followed by death.

Trusts

A Trust is a legal arrangement where assets are managed by one party for the benefit of another. Trusts can be used to reduce potential IHT liabilities as well as controlling and protect family assets.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

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