Inheritance Tax and trusts
IHT is a cumulative lifetime transfer tax. The tax on death is charged on the death estate plus failed PETs in the seven years before death, with lifetime chargeable transfers cumulated first in the seven-year period. The nil rate band is £325,000 (frozen), the residence nil rate band is £175,000 and tapers by £1 for every £2 of estate value above £2m. Both are transferable between spouses, expressed as a percentage of the unused band of the first to die.
Work through the death computation methodically: value the estate, deduct liabilities and reliefs (business and agricultural relief at 100% or 50%, subject to the two-year ownership rule and the excepted assets test), apply the available NRB and RNRB (with the downsizing addition), then charge at 40% with taper relief for failed PETs at 20%, 40%, 60% and 80% where cumulative totals exceed £325,000 in the relevant three-year slices. Lifetime exemptions - £3,000 annual, £250 small gifts, marriage gifts, normal expenditure out of income - reduce the death charge before taper.
Trusts matter in two ways: relevant property trusts pay 20% on lifetime entry above the available NRB, then periodic charges of up to 6% every ten years and proportionate exit charges; bare trusts and disabled trusts are treated differently. Deeds of variation within two years allow post-death redirection, and GROBs, discounted gift schemes and death benefits from pensions are standard exam scenarios.
Traps: the RNRB taper is brutal - a £2.4m estate loses half the band; and the transferable nil rate band depends on claims and records, not automatic application.