Tax and Wealth Preservation
Inheritance Tax - FAQs
What is inheritance tax?
Inheritance tax in its current form was introduced in 1986. Prior to that and from 1975 we had capital transfer tax, which followed estate duty. Inheritance tax is payable on a transfer of value which, in its very basic form, is a gift.
What rate is it payable at?
A nil rate band allowance is available and the value of the assets liable to inheritance tax and which exceed this allowance are taxed at 40%. There is a reduced rate of 20% for gifts to trusts made during lifetime. The nil rate band allowance changes each tax year and for the tax year to 5 April 2011 it is £325,000.
When does it arise?
Inheritance tax is levied:
- on the value of the net estate of a deceased person (based on the net value of the estate immediately prior to death);
- on gifts made in seven years prior to death;
- on gifts over which a benefit was reserved which continues to exist at death or within the previous seven years;
- on gifts made in lifetime to certain types of trust; and
- on the underlying value of the asset in a trust over which a deceased person had a qualifying interest in possession.
What type of assets is it payable on?
All types of assets, although there are a number of assets which benefit from a relief or exemption (see below).
Who has to pay it?
The personal representatives (executors or administrators) are responsible for payment of inheritance tax on an estate on death. The tax is paid out of the estate. Trustees are responsible for inheritance tax due on trust assets.
The recipient of a gift (the transferee) is responsible for payment if there is inheritance tax to pay on a gift made by the transferor within seven years of his death. The liability to inheritance tax is reported to HM Revenue & Customs by completing an inheritance tax account.
When does it have to be paid?
Inheritance tax is payable usually within six months of the event which triggers the tax charge, although this rule changes slightly for trusts. Inheritance tax payable on certain assets (land and property and some investments) can be paid in a maximum of ten annual instalments.
Interest and penalties can arise for late payment of inheritance tax.
Are there any exemptions or reliefs?
There are many exemptions and reliefs available and a well structured estate can significantly minimise the impact of inheritance tax for your beneficiaries. The most well known complete exemption is on transfers between spouses or civil partners (although there is a restriction on transfers from a UK domiciled person to his non-UK domiciled spouse/civil partner).
There are a number of smaller exemptions available for gifts made during lifetime, for example an annual exemption of £3,000 per taxpayer, limited exemptions on gifts made in consideration of marriage, and gifts made out of excess income.
There are two very valuable reliefs for business assets and agricultural property. A gift to charity can qualify for a full exemption.
Other perhaps less well known reliefs include relief available on a gift of woodland, and assets which qualify as heritage property.
The most recent change in inheritance tax saw the introduction of the transferable nil rate band for deaths occurring on or after 9 October 2007. The personal representatives of the second spouse or civil partner to die, can claim to use the percentage of any unused nil rate band allowance from the estate of the first spouse or civil partner to die, thereby reducing the inheritance tax charge on the survivor’s death.
When should I be looking to get advice on inheritance tax planning?
If you are concerned about the amount of inheritance tax that may be payable on your death, there may be a number of estate planning exercises you can carry out during your lifetime. For example you could make lifetime gifts, perhaps using a trust to provide more protection of preservation of the assets, convert assets into those which will qualify for a relief, or restructure your Will. Our team can advise on the best wealth preservation structures for you.
If you are a personal representative and you are likely to be selling property and investments which form part of the deceased person’s estate, you should get advice on the ability to make a claim for repayment of inheritance tax. This is a point made even more important in the current economic climate. Time limits for sales on which a repayment claim can be made are strict and so advice should be sought early on.
For advice on Inheritance Tax please contact our Tax and Wealth Preservation team.
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