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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Assessing: examples of calculations: calculation on death where lifetime transfers are more than the nil-rate band

The facts

Ranjit died in June 2012 with free estate (Entry A) of £450,000, made up of:

  • £200,000 personal assets
  • £250,000 freehold property.

The personal representatives have asked to pay the tax due on the freehold property by instalments.

Ranjit also had a life interest in a Will Trust (Entry B), which passes on her death. The trust is valued at £150,000 at the date of Ranjit’s death.

In her lifetime, Ranjit made chargeable lifetime gifts of:

  • £200,000 (after exemptions) in October 2007, and
  • £300,000 (after exemptions) in June 2010

The total is £500,000.

There is no unused nil-rate band from the previous death of a spouse or civil partner to carry over to Ranjit ‘s estate.

Calculate the available nil-rate band

The Inheritance Tax nil-rate band at the date Ranjit died is £325,000. There is no unused nil-rate band to add to this so the available nil-rate band is £325,000.

Apply the available nil-rate band to any lifetime transfers first

The available nil rate band of £325,000 is used against the lifetime transfers of £500,000 first. The nil rate band is less than the value of the gifts so there is none left to apply against the death estate. Tax will be due, on the value of the lifetime transfers (£200,000), less the nil-rate band of £325,000 = £175,000 at 40% = £70,000. We will raise a separate calculation for this.

Find the chargeable value of the estate at the date of death

The chargeable value of the death estate, after deducting liabilities, exemptions and reliefs is £450,000 free estate plus £150,000 = £600,000. There is no nil rate band to apportion as it has already been used up.

Calculate the tax on Entries A and B:

Entry A

£450,000 × 40% = £180,000

This is then apportioned between:

  • The personal property (not paid by instalments) (£200,000 × £180,000 tax) ÷ £450,000 = £80,000
  • The freehold property (paid by instalments) (£250,000 × £180,000 tax) ÷ £450,000 = £100,000

Entry B

£150,000 × 40% = £60,000.

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Here we will raise death estate calculations for:

  • £80,000 at Entry A (NIOP)
  • 10 annual instalments of £10,000 (totalling £100,000) at Entry A (IOP)
  • £60,000 at Entry B (NIOP)
  • £70,000 for the tax due on the lifetime transfers