Guidance on Inheritance Tax

The Inheritance tax may apply:

  1. On the death of a person
  2. On lifetime gifts which are made to individuals within seven years prior to death
  3. On lifetime gifts to companies or into a trust except where the trust is for a disabled person.

Tax on Death

Inheritance tax is charged on the value of deceased’s estate. All assets of the deceased are summed up and all liabilities are deducted from this sum. The remainder will be subject to Inheritance tax which is charged at 40%

Life Time Gifts

Lifetime gifts are potentially chargeable gifts, which means that the person to whom the gift is made may have to pay inheritance tax in cases where the donor has died within  7 years of making a lifetime gift.

It is important that the donor must not retain any control over the gift and must transfer possession and enjoyment of the property which is given away as a lifetime gift. Where a donor does not give away the possession and enjoyment of the property, the donor is treated as being beneficially entitled to the property. Such property will be subject to Inheritance Tax on the death

Example

 Jan 2009                         Dec 2012                                                       Jan 2017

  1. Suppose Ali made a lifetime gift of £ 200,000 to Meera on January 2009, at the time when the gift was made no inheritance tax was due or paid.
  2. Ali also made a lifetime gift to Mike for £200,000 in December 20012 and no inheritance tax was paid or was due in December 2012.
  3. Ali died on Jan 2017, the gift which was made to Meera will possibly be exempt from any inheritance tax as it is made seven years before death
  4. However, the gift to Mike now becomes chargeable gift as it is made within 7 years of Ali’s death

Life Time chargeable transfers to Companies and Trusts

A lifetime gift to a company or a trust is immediately chargeable to Inheritance tax at the time when it is made, the only exception to the general rule is where the trust is set up for the benefit of a disabled person. The rate of tax is 20% for lifetime chargeable transfers, instead of 40% which is applied to potentially exempt gifts and on death inheritance.

Rate of Tax

Nill Rate Band (0%)

The nill rate band applies to the first £ 325,000 worth of an estate of a deceased person. It means that there is no inheritance tax to pay. It is the exempt amount. The Nill Rate band  will remain at £325,000 until April 2021

Example

Ali’s net estate after taking all the expenses including funeral expenses, bills, and tax liabilities amount to £300,000. The Executors will not pay any tax as he has a nill rate band till £325,000.

Ali’s net estate after taking all the expenses including funeral expenses, bills, and tax liabilities amount to £350,000. The Executors will only pay any IHT  on £25,000 only ( £350,000 – £ 325,000).

Ali’s net estate after taking all the expenses including funeral expenses, bills, and tax liabilities amount to £550,000. The Executors will only pay any IHT  on £225,000 only ( £550,000 – £ 325,000).

Residential Nill Rate Band (0%)

Where an estate includes the main residence of the deceased person and that main residence is passed to the child(ren) of the deceased.  There will be a further allowance of £100,000, on which there is no inheritance tax is payable.

Table RNRB

Year

Value

2017/18

£ 100,000

2018/19

£ 125,000

2019/20

£ 150,000

2020/21

£ 175,000

Example

Ali’s net estate after taking all the expenses including funeral expenses, bills, and tax liabilities amount to £400,000. His estate includes the main residence which is now passed on to his children  The Executors now have two nill rate allowances,£325,000 £100,000( residential Nill Rate Band).

Inheritance taxe will be

Value of the estate (400,000) – Nill Rate band + Residentail Nill Rate Band ( £425,000) = £0  (to pay Inheritance Tax)

Ali’s net estate after taking all the expenses including funeral expenses, bills, and tax liabilities amount to £550,000. His estate includes the main residence which is now passed on to his children  The Executors now have two nill rate allowances,£325,000 £100,000( residential Nill Rate Band).

Inheritance taxe will be

Value of the estate (550,000) – Nill Rate band + Residentail Nill Rate Band ( £425,000) = £ 125,000 (Inheritance Tax is payable o this amount which is 40% of £125,000= £ 50,000)

40% Rate

Inheritance tax is charged at 40% of the estate after taking the Residential nill rate band ( where it applies) and Nill rate band first from the reasonable market value of the deceased person’s estate.

Important

  • It is important to note that the Residential Nill Rate only Applies to where deceased has left his main residence to his Children only and this includes, illegitimate and adopted children as well. If the main residence is left to a relative or a friend or to brother or sister, then there is no Residential Nill Rate Band available.

Exemptions and Reliefs

Spouse/civil partner

The main exemption is Spouse or Civil Partner Exemption. A person can leave his estate including real and personal to his/her spouse or civil partner absolutely free. No inheritance tax is payable on the estate which is left to a spouse or civil partner irrespective of its value. This exception does not apply on cohabitees.

Example

Ali left his all estate (valued at £900,000) to his civil partner/ spouse. No Inheritance Tax is payable to HMRC.

Charity Exemption

Any property which is left to a charity is also exempt from inheritance tax

Business and Agricultural Property Relief

Where deceased has owned such property for the two years immediately before the transfer

100%  exemption

  1. The transfer is a business or an interest in a business ( such as shares in partnership; and
  2. Unquoted shares

50% Exemption

  1. Quoted shares which have given the transferor control of the company; and
  2. Certain land, buildings and machinery owned by the transferor but used in his company or partnership

Important

Where a person has used spouse or civil partner exemption and has not used his Nill Rate Band and Residential Nill Rate Band. These allowances can be used later on to reduce the inherited tax

Example

Ali and Brenda lived as a civil partner they have son James and Daughter Miriam. Ali died on 1 January 2015 leaving all his personal and real estate, valued at  £600,000, to his wife Brenda.  As this is exempt transfer no inheritance tax is payable and his Nill rate band (£325,000) and Residential Nill rate Band (£100,000) has not been used.

Brenda dies on 1 May ,2017 leaving all her estat, valued at 825,000 to her children equally. Brenda’s entitlemen of  Nill rate band (£325,000)  and Residential Nill rate Band (£100,000) will be used along with Ali’s as well. As Ali’s entitlement was not used due to exemption

Inheritance Tax Payable Calculation

Total Value of Estate = £825,000

Residential Nill rate =  (£ 100,000 Ali’s Entitlement + £100,000 Brenda’s entitlment ) = (£200,000)

Nill Rate Band = (£ 325,000 Ali’s Entitlement + £325,000 Brenda’s entitlment ) = (£650,000) ( Total £ 825,000)

Inhertitance Tax=   £825,000 -8250,000 =  £ 25,000 × 40% = £ 10,000

Life Time Gift Exemptions

These exemptions apply only to lifetime gifts which may potentially become chargeable, where a donor dies within 7 years of making the gift

Annual Exemption

£3,000/ each tax year and can be combined with last year if it was not used in the last year

Example

Ali on 1 March 2017 Ali gives his sister Monica £120,000 as a gift. The value transferred for inheritance tax purposes only ( assuming that Ali will die in next 7 years, and will make this gift taxable). The value which is taxable is

Amount of the gift = £120,000

Annual Exemptions= £3,000

Potentially taxable amount =  £117,000

If Ali has not used his annual exemption in the last year it can be added to this year making it £6,000 and taxable amount to be £114,000.

Lifetime gifts  in consideration of Marriage Exemptions

  1. £5,000 by parents of a party to marriage
  2. £ 2,500 by a remote ancestor of a party to the marriage
  3. £ 1,000 in any other case

Time of Payment

  • The Personal Representative ( Executors and Administrators) and the donee of a lifetime gift will be responsible for payment of any Inheritance Tax.
  • The Inheritance Tax is due for payment within six months after the end of the month of death.
  • Where the tax due is not paid it will incur an interest on the outstanding amount.

Inheritence Tax Forms

IHT205 Return of estate information where no IHT is due. Please senD it to Probate Service

IHT400 Inheritance Tax Account. where IHT is due. Please send it to HMRC

Inheritance Tax, wills and probate is a complex area of law. For professional advice and guidance, please seek advice from legalally’s experienced lawyers.

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Disclaimer

While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legalally does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.