There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who has died. One of these reliefs is known as Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met.

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  – shares controlling more than 50% of the voting rights in a listed company
  – land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled
  – land, buildings or machinery used in the business and held in a trust that it has the right to benefit from

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

Claiming the relief can be a complicated process. We can of course help review the facts and advise.

A trust is an obligation that binds a trustee, an individual or a company, to deal with the assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

Some assets are classed as ‘excluded property’ and IHT is not due. However, the value of the assets may be included when calculating the rate of tax on certain exit charges and 10-year anniversary charges.

Types of excluded property can include:

• property situated outside the UK – that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
• government securities – known as FOTRA (free of tax to residents abroad)

This can be a complex area and specialist advice is usually required to ensure that a trust operates as effectively as intended.

Most gifts made during a person’s lifetime are not subject to Inheritance Tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than 7-years after making the gift. If the taxpayer dies within 3-years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between 3 and 7 years after the gift is made.

The rules surrounding PETs have resulted in many people wanting to make gifts long before they die. The problem in practice is that they do not want to give up control over the assets concerned.

The effective rates of tax on the excess over the nil rate band are:

• 0 to 3 years before death            40%
• 3 to 4 years before death            32%
• 4 to 5 years before death            24%
• 5 to 6 years before death            16%
• 6 to 7 years before death              8%
• 7 or more years before death        0%

These tapered rates cannot reduce the tax due on a lifetime chargeable transfer below the amount chargeable when the transfer was made and so are of no benefit to a transfer within the nil rate band.

We would strongly recommend that you keep a list of any PETs that you make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made from surplus income.

There are special rules concerning the liability to IHT on a transfer made during a person's lifetime. Most gifts made during this period are not subject to tax at the time of the gift.

These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  The gifts or transfers achieve their potential exempt status if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within three years of making the gift, then the IHT position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

However, if a transfer does not qualify as a PET, then IHT will become immediately chargeable on the transfer. HMRC’s internal manual lists the following scenarios where transfers may be immediately chargeable:

• transfer into a relevant property trust, because the gift is not to an individual or a specified trust, and
• transfer to a company.

There may also be an alternative charge on the property transferred under the gift with reservation rules.

There are four other transfers of value that are specifically prevented from being PETs. These are a

• transfer by a close company
• the deemed disposition on the alteration in the capital or share rights of close companies
• the release of a life interest between 18 March 1986 and 16 March 1987, and
• the transfer of woodlands subject to an outstanding Estate Duty charge, which only qualifies for partial PET treatment.

The Financial Secretary to the Treasury has written to the Office of Tax Simplification (OTS) to confirm that HM Treasury strongly supports some key recommendations on changes to Inheritance Tax.

The government announced on 23 March 2021 that it will:

• change reporting regulations so that from 1 January 2022 over 90 per cent of non-taxpaying estates each year will no longer have to complete Inheritance Tax forms for deaths when probate or confirmation is required; and 
• make permanent the ability for those dealing with a trust or estate to provide an Inheritance Tax return without requiring physical signatures from all others involved, easing the administration burden in cases where an Inheritance Tax return is still required. 

These new rules will result in dramatic changes in reporting regulations from 1 January 2022 for more than 200,000 estates every year.

It was also announced that the government will continue to work on the remaining recommendations made by the OTS: for digitisation, improving processes for lifetime and trust charges, guidance, and working with court services. Some of these are longer term in nature and will be taken forward as part of the wider Tax Administration strategy.