UK Law and Practice Contributed by: Roger Gherson, Alfred Gherson, Lisa Uttley and David Tipping, Gherson Solicitors
Inheritance Tax (“IHT”) IHT is, contrary to its name, not just a tax on inherit - ances but can be a tax on other gratuitous transfers more generally. Broadly, IHT taxes any dispositions that result in a loss to the donor’s estate. However, any gifts from one individual to another are exempt if the donor sur - vives for at least seven years after the date of the gift. During the seven-year period before the donor dies, these transfers are presumed to be exempt and no tax is due. Any such transfers are known as potentially exempt transfers or “PETs”. If the donor dies within seven years of making a PET, the value becomes chargeable to tax on death. Further, on death, the donor is taxed as if they disposed of their entire estate (ie, all the property to which the donor was beneficially entitled) immediately before death. Subject to the nil- rate band (see 1.2 Exemptions ), IHT is charged at 40% in respect of any tax which is due on death. Some transactions are not PETs and give rise to an immediate charge to tax. The most common immedi - ately chargeable transfer is a transfer to most types of trust. Lifetime transfers are taxed at half the normal rate (ie, 20%). Where an individual is not a long-term UK resident (see 7.1 Requirements for Domicile, Residency and Citizenship ), any assets that are situated outside of the UK are excluded property and do not form part of the individual’s estate for IHT. In effect, this means that transfers of these assets are not subject to IHT. Most trusts are subject to the “relevant property regime”. Under these rules, the trust pays regular charges every ten years of up to 6% of the value of the property held in the trust. If distributions are made between a tenth anniversary charge and the next, there is an IHT exit charge, subject to certain excep - tions. Assets held in trust will be excluded property if they are situated outside the UK and: • if the settlor is alive, the settlor is not a long-term UK resident; • if the settlor died before 6 April 2025, the settlor was not domiciled in the UK at the time of their death;
• if the settlor died after 6 April 2025, they were not a long-term UK resident at the time of their death; and • if the trust is an interest in possession trust, the beneficiary must also not be a long-term UK resi - dent. Stamp Duty Land Tax (“SDLT”) SDLT is a tax on land transactions. It is charged as a percentage of the consideration paid for land. The ordinary SDLT rates go up to 12%, although higher rates apply where the purchaser owns more than one property and there is an additional 2% surcharge for purchasers who are not resident in the UK. As a result, the highest possible rate is 19%. SDLT is not chargeable in respect of land in Scotland (which imposes Land and Buildings Transaction Tax) or Wales (which imposes Land Transaction Tax). 1.2 Exemptions IHT has many different exemptions and reliefs. As outlined above, PETs are exempt so long as the individual donor survives seven years from the date of the transfer. Although the nil-rate band is not really an “exemption” (as it forms part of the rate structure of IHT), it means that the first GBP325,000 is taxed at 0%. There is a further nil-rate band for residential property when the direct descendants of the deceased inherit it. This is GBP175,000 but is withdrawn if the estate exceeds GBP2 million. Both the nil-rate band and residential nil-rate band can be transferred between spouses or civil partners. Gifts to spouses and civil partners are generally exempt from IHT. The relief is restricted in circum - stances where the donor is a long-term UK resident and the donee spouse is not. Significant reliefs are available for agricultural and business property, known as Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”), respectively. Prior to 6 April 2025, APR and BPR were unlimited. Since that date, only the first GBP2.5 million is eligible for 100% relief. Any agricultural property or
647 CHAMBERS.COM
Powered by FlippingBook