Calculating inheritance tax (IHT) and exit charges for IHT

CALCULATING INHERITANCE TAX

Step 1: Calculate the cumulative total and find the remaining NRB.

Has the testator given any lifetime gifts? (e.g. a car worth £5,000 to his daughter in May 2009)
Are there any exemptions which apply to those gifts? (Annual exemption of £3,000 per year (can back-date unused exemptions by one year using a max of £6,000), spousal exemption, gifts in consideration of marriage, business property relief etc...) If so, reduce the gifts by the exemption rate, then add the cumulative total together. Take the cumulative total away from the nil-rate-band of £325,000 (NRB) and this figure is the new NRB figure to be deducted at Step 6.

Step 2: Work out what property falls inside or outside of the taxable estate.

Property falling outside the estate will be foreign property, life interest trusts in which the deceased was a remainderman but the life tenant is still alive, discretionary pension schemes, and insurance schemes written in trust.

Step 3: Calculate the taxable estate by adding together all property which does not fall outside the scope.

Step 4: Deduct debts (this may include funeral expenses, credit cards, etc)

Step 5: Deduct exemptions and reliefs (NB: these must only be those which apply on death e.g. spousal, charity, business property, agricultural property)

Step 6: Take away the remaining NRB from Step 1 and then tax at 40% to find the total IHT sum due.



CALCULATING EXIT CHARGES FOR IHT

Exit charges may be due where a distribution is made from a discretionary trust or a life interest trust.

Step 1: Ascertain the Hypothetical Chargeable Transfer (HCT) i.e. the amount of money in the trust

Step 2: Calculate the tax on the HCT by removing the NRB of £325,000 and then taxing at 20%

Step 3: Work out the Average Rate using the following calculation: Step 2/Step 1 x 100

Work out the Settlement Rate using the following calculation: Average Rate x 30%

Step 4: Ascertain how many 'quarters' (i.e. 3 months - there are 4 quarters in a year) have passed since creation of the trust; divide this number by 40. Then multiply the answer by the sum of money which is leaving the trust (e.g. if £100,000 is being given to the testator's son then £100,000 is the value leaving the trust) and multiply by the Settlement Rate percentage.

i.e. X/40 x 'amount leaving the trust' x SR%

The answer is the value of the exit charge.