Allocation of the tax burden

By Tolley
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The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Allocation of the tax burden
  • Who bears the tax?
  • Allocation of the nil rate band
  • Apportioning tax to different components of the estate
  • Exempt (relieved) assets and liabilities
  • Tax free gifts
  • Exempt beneficiaries
  • Distributions

Who bears the tax?

The basic premise of inheritance tax is that it is a tax on a transfer of value calculated with reference to the transferor’s status. Tax on death is calculated as a total charge as if the deceased made a transfer of value of the whole of his estate.

IHTA 1984, s 4

It is therefore a tax on the deceased but it is effectively borne by the beneficiaries of his estate: the value of their inheritance is reduced by the tax on it. In a situation where the estate is distributed among a number of people, the question arises as to how to share the tax between them. This affects what they receive, and, in turn, what they receive may have an effect on the tax liability if they enjoy an exempt status.

There is a distinction to be drawn between incidence of tax and liability. Incidence refers to who, ultimately, bears the burden of tax and the proportions in which it is shared out. Liability refers to who has a responsibility to pay the tax, the rules for which are set out in IHTA 1984, s 200.

This guidance note is concerned with incidence and provides an overview of the issues to be considered in allocating the burden of tax to beneficiaries. It provides links to other guidance notes and examples which examine certain aspects in more detail.

Allocation of the nil rate band

In accordance with the cumulation principle, the nil rate band is applied chronologically. It is applied in strict chronological order to lifetime gifts which have become chargeable on death, whether those gifts were originally chargeable or potentially exempt. Then the remaining nil rate band (and transferable nil rate band if available) is apportioned across all taxable components of the death estate.

The situation

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