Inheritance Tax (IHT), previously known as death duties, has two rates of tax chargeable to a person’s estate when they die – 0% and 40%. The 0% rate of tax, also known as the Nil Rate Band (NRB), is charged on a person’s estate if the value is up to and including £325,000. If the estate is worth more than £325,000 when they die, the second rate of tax, 40%, will be applied. There are a number of exemptions and allowances which can be used to reduce the value of the estate and thereby the tax liability. Any property, money and possessions owned by the deceased are assessed to give the total value of the estate, and any liabilities, exemptions and allowances are deducted to determine if the estate’s value is less than the NRB. There is normally no tax to pay if either the value of the estate is below the NRB of £325,000 or the deceased leaves everything to a spouse or civil partner, a charity or other relevant organisations. If this is not the case and the estate has a value in excess of the NRB, then the second rate of tax is applied to the excess and the tax due is calculated. IHT is paid by an ‘executor’ (with a valid will) or ‘administrator’ (no valid will) of an estate
Most of us know that anything you leave your spouse or civil partner is free from Inheritance Tax, but if your spouse or civil partner is a foreign national, then Non-domiciled individuals are treated differently based on their individual circumstances. As we also know, the tax system is constantly changing and so are the thresholds and limits, so it’s important to make sure that you regularly review your will. Every year HMRC receives ever-increasing amounts of money which, with better planning, could have gone to loved ones.
Even though we consider ourselves pretty well informed, when we meet with our lawyers or Financial Advisers, we discover there is an awful lot we don’t know! For example, not everybody realises that Inheritance Tax is payable within six months of the person dying, whether you’ve received money from the estate at that point or not. This could be a sizeable amount of money that a deceased’s family might need to find, and this is where the right protection can prevent a lot of problems. A simple life insurance policy written in trust can ensure that the funds are available as soon as a person dies, alleviating a lot of stress and pressure at what is bound to be a difficult time for the family left behind.
These Key Statistics have been taken from HMRC’s own publication “Inheritance Tax Statistics 2015 – 2016”. Released 27th July 2018 and re-issued 3rd August 2018.
What is Inheritance Tax?
It is a tax that may be become payable on:
Who has to pay Inheritance Tax?
A person who is domiciled, or deemed domiciled, in the UK is subject to inheritance tax on their worldwide assets. A non-UK domiciled person is only liable to IHT on assets that are situated in the UK, if the value of your estate is in excess of the Nil Rate Band. It may also be payable on gifts made within the previous 7 years of the date of death.
How do I know if I am domiciled, or deemed domiciled, in the UK?
Under UK law, individuals will generally, but not necessarily, be domiciled in the country where they have their permanent home. Domicile is separate from nationality or residence, and it is only possible to have one domicile at any given time. However, this is a complicated subject and therefore, if you are unsure, it would be better to discuss the matter with your solicitor or Independent Financial Adviser.
What is the Nil Rate Band?
The standard Nil Rate Band (NRB) for the current tax year is £325,000, although this amountmay differ according to your personal circumstances. The tax rate is 0% and if your estate on death is greater than the NRB then the excess is typically taxed at a rate of 40%.
If I leave all of my estate to my spouse or civil partner, do I lose my NRB?
No, your executors/administrators can claim any unused part of your nil rate band. If your spouse is left everything when you die, they could have up to £650,000 to set against their estate. But money left to others, such as children or grandchildren, can reduce the amount which can be transferred.
How do I calculate the value of my estate?
If you consider your home to be the UK, then your estate, for tax purposes, will be the value of all the assets you own anywhere in the world. This includes your family home, any buy to let/holiday properties, cars, savings, investments and personal possessions. Your estate on death could also include lifetime gifts you made in the 7 years before your death.
Is there any way to reduce the value of the estate?
Yes, for instance, by citing monies owed, gifts made to a spouse or civil partner, gifts to a registered charity, certain business assets, which have been owned by you for at least 2 years and agricultural property which has been used for farming. In addition, there are some Exempt gifts that can be used to reduce the value of the estate and include an Annual Exemption of £3,000. A gift in consideration of a wedding or civil partnership of up to £5,000 per child, £2,500 for a grandchild or great grandchild or £1,000 per person. Making a gift directly or via a Trust and surviving 7 years after the gift has been made (in certain circumstances, some gifts can reduce the estate’s value after 2years, see Q12). Finally, pension savings are not normally included in your estate, however, there are certain circumstances where they could be included.
Will a gift made 5 years ago reduce the value of my estate?
This is known as a failed PET – if the value of the gift is less than the current NRB, then the gift will form part of the NRB and no inheritance tax will be due, if however, the value of the gift exceeds the NRB, then that part of the value, up to the NRB will be charged at 0% and the excess over the NRB is charged at 40%, on gifts given in the 3 years before death. For gifts made 3 to 7 years before your death, will be taxed on a sliding scale, known as ‘taper relief’. Please see table below:
|Years between gift and death||Tax paid|
Less than 3
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||6%|
|7 or more||0%|
If there is a Tax Liability when do I pay it?
Once the executor/Administrator has calculated any Inheritance Tax due, it is their responsibility to ensure it is paid to HMRC by the due date, which is 6 months after the date of death.
What is a gift with reservation?
A gift with reservation (GWR) is where the donor of the gift continues to have the use of or the ability to enjoy, any form of benefit from the gift. In these circumstances the gift or asset will be deemed by HMRC to remain as part of the donor’s estate for Inheritance Tax. This legislation applies to gifts made on, or varied after, 18 March 1986.
If two people die at the same time, who dies first?
If it is not possible to tell who died first then, for inheritance tax (IHT) purposes, they are deemed to die at the same instant. This can help to avoid double IHT charges.
How can business property relief (BPR) reduce the value of the estate?
The transfer (gift) of certain (relevant) business assets (property) can offer relief from Inheritance Tax (IHT), if the relevant property has been held for 2 years, at a rate of 50% or 100%.
Please contact LR Connections on 0345 314 8972 for an appointment to discuss how we could help you.