Inheritance tax
The charge
IHT is charged on transfers of value, measured by the fall in the estate. Lifetime gifts are PETs or LCTs (chargeable transfers, for example into most trusts, taxed at 20% on the excess over the nil rate band). On death the estate is charged at 40%, reduced to 36% where at least 10% of the baseline amount goes to charity.
Cumulation and taper
Every transfer is cumulated with transfers in the previous seven years. A PET that becomes chargeable competes for the nil rate band with earlier transfers, so always build a timeline. Taper relief reduces the tax on a failed PET or LCT by 20% for each year survived beyond three (down to 20% at 6–7 years) - it does not reduce the value transferred. The NRB is £325,000; the residence nil rate band adds up to £175,000 where a residence is closely inherited, tapered by £1 for every £2 of estate above £2m, and transferable between spouses.
Exemptions and reliefs
Spouse exemption, charity exemption, the £3,000 annual exemption (with one year's carry forward), £250 small gifts, marriage gifts and normal expenditure out of income. Business property relief and agricultural property relief remove qualifying assets from the charge, but not from the value for cumulation and taper purposes.
Traps
Forgetting that RNRB is available only on death, applying taper relief to the value rather than the tax, and omitting lifetime gifts when computing the death estate.
Worked example
An estate of £2.2m includes a £600,000 home left to children. RNRB is cut by (£2.2m − £2m)/2 = £100,000, so only £75,000 is available; the NRB is unaffected.