In the United Kingdom, the inheritance tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing capital transfer tax. The UK has the fourth highest inheritance tax rate in the world, according to conservative think tank, the Tax Foundation, though only a very small proportion of the population pays it; 3.7% of deaths recorded in the UK in the 2020–21 tax year resulted in inheritance tax liabilities.

History

Before the introduction of estate duty by the Finance Act 1894, there was a complex system of different taxes relating to the inheritance of property, that applied to either realty (land) or personalty (other personal property):

From 1694, probate duty, introduced as a stamp duty on wills entered in probate, applied to personalty. From 1780, legacy duty was an inheritance duty paid by the receiver of personalty, graduated according to consanguinity. From 1853, succession duty, a duty introduced by the Succession Duty Act 1853 (16 & 17 Vict. c. 51), applied to realty settlements, taking effect on the death of the settlor. From 1881, account duty applied as an anti-avoidance duty on lifetime gifts made to avoid paying legacy duty. From 1885, corporation duty applied to the annual value of certain property vested in corporate and unincorporated bodies that would otherwise have avoided any of the above duties.Customs and Inland Revenue Act 1885 (48 & 49 Vict. c. 51), Part II From 1889 (scheduled for expiry in 1896), estate duty was levied as an additional stamp duty on estates and successions greater than £10,000 in value.Customs and Inland Revenue Act 1885 (48 & 49 Vict. c. 51), Part II

In 1894, estate duty replaced probate duty, account duty, certain additional succession duties, and temporary estate duty.Finance Act 1894 (57 & 58 Vict. c. 30), s.1 and First ScheduleSeely, Antony (1 November 1995). "Inheritance Tax" (PDF). House of Commons Library. Research Paper 95-107.

Legacy duty and succession duty were later abolished by the Finance Act 1949, followed by the abolition of corporation duty by the Finance Act 1959. The three-year period for gifts made prior to death was extended to five years by the Finance Act 1946, and then to seven years by the Finance Act 1969.

Estate duty became more progressive in scale, eventually peaking in 1969 with the highest marginal rate fixed at 85% of amounts in excess of £750,000, provided that total duty did not exceed 80% of the value of the total estate.Finance Act 1969, Schedule 17, Part I

Estate duty was abolished with the passage of the Finance Act 1975, which created the capital transfer tax, with the following characteristics:Seely, Antony (1 November 1995). "Inheritance Tax" (PDF). House of Commons Library. Research Paper 95-107. It captured all transfers of value, not made at an arm's length basis, by which the transferor's estate was less in value after the disposition than it was before.Finance Act 1975, s. 20(2) Value was generally defined as "the price which the property might reasonably be expected to fetch in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time."Finance Act 1975, s. 38 Transfers (in excess of specified limits, or not otherwise excluded) made during a person's lifetime were accumulated with tax assessed on a sliding scale on the total amount.Finance Act 1975, s. 37, Second Table All transfers made at death or within three years before were taxable at a separate, higher sliding scale.Finance Act 1975, s. 37, First Table Where the transferor was domiciled in the United Kingdom, tax was chargeable on all subject property; otherwise, it was chargeable only on property situated in the UK.Finance Act 1975, s. 24(2)

Capital transfer tax was reduced in scope during the Thatcher years, with most lifetime gifts removed by the Finance Act 1986. The tax was renamed as inheritance tax.

Framework of IHT

Estate on death For IHT purposes, a person's estate includes:IHTA 1984, s. 5

The aggregate of all the property, other than excluded property and specified interests in possession, to which he is beneficially entitled; Beneficial entitlement includes the general power to dispose or charge money on any property; Except where otherwise provided, the person's liabilities must be taken into account, but it does not include liability with respect to any other tax that may arise on the transfer, and a liability incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money's worth.

Excluded property comprises:IHTA 1984, s. 6

Property situated outside the United Kingdom, where the person beneficially entitled to it is an individual domiciled outside the United Kingdom; Decorations and awards granted for valour or gallant conduct, and which have never been the subject of a disposition for a consideration in money or money's worth; and Certain specified securities.

Relief is also granted,IHTA 1984, Part V where the value of the estate is reduced with respect to specified business property, agricultural property, woodlands, certain transfers made within three years of death made at a diminished value, and certain other cases.

Chargeable transfers before death Deductions will be made from an estate's nil rate band with respect to transfers of value made in excess of specified limits, other than "potentially exempt transfers" made more than seven years before the transferor's death. Transfers of value made within specified limits are known as "exempt transfers".IHTA 1984, ss. 2-4

Transfers of value will also include gifts arising from the amount by which an asset is sold for less than it could have been sold on the open market, as for a sale from a parent to a child. Gifts can also arise where:

a lease is granted at less than full market rent, shares in a private company are rearranged, rights in such shares are altered, or there has been agreement to act as a guarantor for someone else's debts transfers of value, at a loss to the donor, have been made to certain trusts premiums have been paid on a life insurance policy for the benefit of someone else the deceased ceased to have a right to a benefit from a trust or settlement

Where the value of such transfers exhausts the amount available to the nil rate band, IHT is assessed on the excess amount, to which the recipients of such transfers bear the liability to pay.

Types of estates exempt from IHT For deaths occurring on or after 1 September 2006, the following estates are effectively excepted from liability for IHT:

+Types of excepted estates for Inheritance Tax purposesType Qualifying conditionsLow value estates the deceased died domiciled in the United Kingdom (UK) the gross value of the estate does not exceed the Inheritance Tax nil rate band if the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000 if the estate includes foreign assets, their gross value does not exceed £100,000 if there are any specified transfers, their chargeable value does not exceed £150,000 the deceased had not made a gift with reservation of benefit gifts out of income totalling more than £3,000 in any year must be shown in full no charge arises on the individual's death under any of the provisions relating to alternatively secured pensions

For claims to transfer the unused nil rate band from the estate of a predeceased spouse or civil partner, the following additional conditions apply:

the full nil rate band must be available to transfer from the earlier death so that the deceased's nil rate band is increased by 100% there is only one predeceased spouse or civil partner a suitable claim is made to transfer the unused nil rate bandExempt estatesWhere the gross value of the estate does not exceed £1 million and there is no tax to pay because either or both conditions relating to transfers to a spouse or civil partner, or absolute gifts to one or more charities, applies, and no other exemption or relief can be taken into account.

The conditions for these estates are that:

the deceased and the deceased's spouse or civil partner have always been domiciled in the UK the gross value of the estate does not exceed £1 million and the net chargeable value of the estate after deduction of liabilities and Spouse or Civil Partner Exemption and/or Charity Exemption only does not exceed the Inheritance Tax threshold if the estate includes any assets in trust, they are held in a single trust and the gross value does not exceed £150,000 (unless the settled property passes to a spouse or civil partner, or to a charity, in which case the limit is waived) if the estate includes foreign assets, their gross value does not exceed £100,000 if there are any specified transfers, their chargeable value does not exceed £150,000, and the deceased had not made a gift with reservation of benefit gifts out of income of more than £3,000 in any year must be shown in full no charge arises on the individual's death under any of the provisions relating to alternatively secured pensions

In Scotland, spousal and charity exemptions must be calculated on the basis that any entitlement to legitim against the estate will be claimed in full.Foreign domiciliariesWhere the gross value of the estate in the UK does not exceed £150,000.

The conditions for these estates are that:

the deceased died domiciled outside the UK the deceased was never domiciled in the UK or treated as domiciled in the UK for Inheritance Tax purposes the deceased's UK estate consisted only of cash or listed shares and securities passing under a will or intestacy or by survivorshipBlue Light ExemptionWhen a member or former member of the armed forces dies as a result of injuries or disease sustained while on active service their whole estate is exempt. The Finance Act 2015 extended this to individuals who work in emergency situations. This would include care workers who die as a result of COVID-19 including people who lose their life at any point in the future if a clear link to the coronavirus can be proven.

Rate of tax Tax is assessed at 40% of the net value of the estate, after application of the nil rate band.IHTA 1984, Schedule 1 The applicable nil rate band will depend on the date of death: if the date falls at any time from 6 August to 5 April in a given tax year, the current year's band will apply; but, where the date is after 5 April but before 6 August, and application for a grant is filed before 6 August, the prior year's band will apply.

For deaths occurring after 5 April 2012, the tax is assessed at 36%, where at least 10% of a specified baseline amount of the estate has been bequeathed as charitable gifts.IHTA 1984, Sch. 1, as inserted by FA 2012, Sch. 33 For purposes of calculation, the property of the estate is separated into three components, each of which is tested to see if the charitable gifts are sufficient to qualify for the lesser rate:IHTA 1984, Sch. 1, par. 3

the survivorship component, comprising joint or common property that passes on death by survivorship or special destination; the settled property component, made up of all settled property in which the deceased had an interest in possession to which he was beneficially entitled immediately before death; and the general component, consisting of all other property in the estate, with the exception of that arising from gifts with reservation.