Inheritance tax is, in essence, a tax on giving, in the widest sense of the word. The tax is calculated by reference to the value of the gift at the time it is made and applies to gifts made during the taxpayer’s lifetime, to gifts made by the taxpayer’s will at the moment of death and to gifts which the laws of intestacy deem that he would have made then had indolence, incompetence, forgetfulness, procrastination or indeed sheer cussedness not caused him to die without a valid will. The State is determined to have its tax even though it might be tardy in taking it and often the taxpayer’s death is the first occasion upon which he pays tax at the highest rate. Therefore careful tax planning is essential to minimize it.

The law of inheritance tax is based upon The Inheritance Tax Act 1984 as subsequently amended (the Act). In broad terms the tax becomes payable whenever a person’s wealth is reduced, that is to say there is as a transfer of value, by the making of a gift or a failure to act, unless the transfer or the failure is within one of the exceptions specified by the Act (when it is known as an “exempt disposition”). A transfer is also exempt if the property transferred is “excluded property” which is defined in the Act, or if it is a gift which is exempted from the tax by the Act. The tax payable is less if the inheritance tax “reliefs” specified in the Act notionally reduce either the value of the property or the tax itself.

If a taxpayer has his domicile in the United Kingdom or is deemed to have it here, inheritance tax is charged whenever there is any gratuitous transfer of value (other than an exempt disposition or exempt gift) in respect of any of the taxpayer’s assets in whatever country they may be, unless it is a transfer of “excluded property” and whether the transfer takes place during the taxpayer’s lifetime or on death.

If the taxpayer’s domicile or deemed domicile is outside the United Kingdom i.e. the taxpayer is what is commonly referred to as a ‘non-dom’, the tax only applies to those assets (other than excluded property) that are situated in the United Kingdom.

By Gordon Bowley, author of How to Make Your Own Will, visit www.how-to-make-your-own-will.co.uk and Probate, visit www.probate-the-executors-guide.co.uk