Inheritance tax is charged on the transfer of property passing on death (chargeable transfers) subject to various exemptions and reliefs, notably for certain business and agricultural property. It is also levied on certain gifts made within the seven years before an individual's death (potentially exempt transfers) and gifts made outside the seven year period where the deceased has retained some benefit in the gifted property. In addition, certain transfers (to companies and most trusts) are taxed at the time of transfer (life-time transfers).
Inheritance tax is calculated on a cumulative basis. When a chargeable transfer is made, tax is calculated at the rate in force at that date taking into account the cumulative total of chargeable transfers made by the individual in the preceding seven years. Inheritance tax is charged at the rate of 20 percent in respect of lifetime transfers and 40 percent where it arises as a result of death (including tax on potentially exempt transfers). There is a nil rate band, which is the first £325,000 of cumulative chargeable transfers on which no inheritance tax is charged. The nil rate band is expected to be frozen at the current level of £325,000 until 5 April 2018.
There is an exemption for most transfers between spouses and civil partners. The unused proportion of the nil rate band on the first death can be transferred to their surviving spouse or civil partner, increasing their nil rate band by that percentage.
The government will review inheritance tax avoidance through “deeds of variation” as part of a move to save £3.1bn by clawing back money lost through tax avoidance. A deed of variation alters a will after someone’s death to enable the beneficiaries or an estate to change the distribution of the assets. The review will report its findings by autumn 2015.