Inheritance Tax

Inheritance Tax
Inheritance Tax
Full Overview Of Inheritance Tax

Inheritance tax (IHT) is an important consideration in estate planning and estate administration for a deceased person.

At DLS Solicitors, we recognise that dealing with inheritance tax can be complex and overwhelming at times. This detailed guide aims to offer a comprehensive understanding of inheritance tax, covering its principles, implications, and strategies for managing liabilities.

Understanding Inheritance Tax

Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. The tax is levied on the value of the estate above a certain threshold, known as the nil-rate band.

Nil-Rate Band

As of the 2023–24 tax year, the standard nil-rate band is £325,000. This means that no IHT is due on the first £325,000 of the estate’s value. Any value above this threshold is typically taxed at 40%.

Residence Nil-Rate Band

An additional allowance, the Residence Nil-Rate Band (RNRB), may apply if the deceased owned a home and left it to their direct descendants (children or grandchildren). As of the 2023–24 tax year, the RNRB is £175,000. This can potentially increase the total threshold to £500,000 for individuals and £1 million for married couples or civil partners.

Rate of Tax

The standard rate of IHT is 40%, applied to the estate’s value above the nil-rate band and any applicable RNRB. However, a reduced rate of 36% may apply if at least 10% of the net estate is left to charity.

Calculating Inheritance Tax

Calculating the IHT liability involves several steps, including valuing the estate, identifying any applicable reliefs and exemptions, and considering gifts made during the deceased’s lifetime.

Valuing the Estate

Valuing the estate accurately is the foundation of calculating IHT. This involves listing all assets and liabilities.

  • Assets: Property, bank accounts, investments, personal belongings, pensions, and business interests.
  • Liabilities: Mortgages, loans, credit card debts, and funeral expenses.

Professional valuations may be necessary for significant assets such as property, valuable personal items, and business interests.

Gifts and Potentially Exempt Transfers

Gifts made during the deceased’s lifetime can impact the IHT calculation:

  • Potentially Exempt Transfers (PETs): Gifts to individuals are considered PETs and become exempt from IHT if the donor survives for seven years after making the gift. If the donor dies within seven years, the gift may be subject to IHT, with a taper relief reducing the tax payable if the gift was made more than three years before death.

Exemptions and Reliefs

Several exemptions and reliefs can reduce the IHT liability:

  • Spouse or Civil Partner Exemption: Transfers between spouses or civil partners are generally exempt from IHT.
  • Charitable Donations: Gifts to qualifying charities are exempt from IHT.
  • Business Relief: Certain business assets may qualify for up to 100% relief from IHT.
  • Agricultural Relief: Agricultural property may be eligible for up to 100% relief from IHT.

Inheritance Tax Planning

Effective IHT planning can significantly reduce the amount of tax payable on an estate. At DLS Solicitors, we offer strategic advice to help clients manage their IHT liabilities through various planning techniques.

Lifetime Gifts

Making gifts during one’s lifetime can be an effective way to reduce the value of the estate for IHT purposes. Gifts to individuals can be exempt if the donor survives for seven years, while certain smaller gifts can be immediately exempt, such as:

  • Annual Exemption: Each individual can give away up to £3,000 per year, exempt from IHT.
  • Small Gifts Exemption: Gifts of up to £250 per person per tax year are exempt, provided the recipient has not benefited from the annual exemption.
  • Gifts on Marriage or civil partnership: Gifts to someone getting married or entering a civil partnership are exempt up to certain limits (£5,000 from parents, £2,500 from grandparents, and £1,000 from anyone else).

Trusts

Setting up trusts can be an effective way to manage IHT liabilities. Trusts allow individuals to transfer assets out of their estate while still retaining some control over how the assets are managed and distributed. Several types of trusts may be used for IHT planning, including:

  • Discretionary Trusts: These offer flexibility in distributing income and capital to beneficiaries, potentially reducing the estate’s value for IHT purposes.
  • bare trusts: Assets in a bare trust are held for a specific beneficiary and are treated as part of the beneficiary’s estate for IHT purposes, potentially using the beneficiary’s nil-rate band.
  • Interest in Possession Trusts: The beneficiary has a right to the income from the trust assets, which may reduce the value of the estate.

Insurance Policies

Taking out life insurance to cover the potential IHT liability can provide peace of mind and financial security for beneficiaries. Policies can be written in trust to ensure the payout is not included in the deceased’s estate.

Inheritance Tax on Jointly Owned Assets

Jointly owned assets can complicate the IHT calculation. The treatment of these assets depends on the type of ownership.

  • Joint Tenancy: When one joint tenant dies, their share automatically passes to the surviving joint tenant(s), and the value of the deceased’s share is included in their estate for IHT purposes.
  • Tenancy in Common: Each owner has a distinct share of the property, which can be bequeathed in their will. The deceased’s share is included in their estate for IHT purposes.

Special Considerations for Business and Agricultural Property

Business and agricultural properties often represent significant portions of an estate’s value. Special reliefs may apply to reduce the IHT liability:

  • Business Relief: Up to 100% relief is available on qualifying business assets, such as shares in a private trading company or an unincorporated business.
  • Agricultural Relief: Up to 100% relief is available on qualifying agricultural property, such as farmland and buildings used for agricultural purposes.

Inheritance Tax on Overseas Assets

If the deceased was domiciled in the UK, IHT applies to their worldwide assets. However, if the deceased was not UK-domiciled, only their UK assets are subject to IHT. Double-taxation treaties may mitigate the tax liability on overseas assets.

Reporting and Paying Inheritance Tax

The executor or administrator is responsible for reporting and paying IHT. The process involves several steps:

Completing IHT Forms

The relevant IHT forms must be completed and submitted to HMRC. For smaller estates below the nil-rate band, the IHT205 form is used. For larger estates, the IHT400 form and its supplementary schedules are required.

Paying IHT

IHT is due within six months of the end of the month in which the deceased died. If payment is not made on time, interest will be charged on the outstanding amount. In some cases, it is possible to pay IHT in installments, particularly if the estate includes property or certain other assets.

Conclusion

Inheritance Tax is a complex aspect of estate planning and administration. At DLS Solicitors, we are committed to providing expert guidance and support to help you navigate these complexities effectively. Our experienced solicitors offer comprehensive advice on all aspects of IHT, from calculating liabilities to implementing effective planning strategies.

By understanding the principles of IHT, accurately valuing the estate, and utilising available reliefs and exemptions, you can manage and potentially reduce the IHT liability on your estate. Whether planning your estate or administering a deceased person’s estate, our professional and personalised service ensures that you are well informed and supported throughout the process.

DLS Solicitors: Your Trusted Partner in Inheritance Tax Matters

Comprehensive Advice

We provide thorough and up-to-date advice on all aspects of IHT, ensuring you understand your obligations and options. Our team stays abreast of the latest legal and tax developments to provide accurate and relevant guidance.

Tailored Solutions

Every estate is unique, and our approach is tailored to your specific circumstances. We work closely with you to develop strategies that align with your goals and minimise your IHT liability.

Transparent Communication

Clear and transparent communication is at the heart of our service. We keep you informed at every stage, explaining complex legal and tax concepts in plain language and ensuring you understand your options.

Efficient Administration

We strive to manage the administration process efficiently, reducing delays and ensuring that IHT liabilities are settled promptly. Our goal is to streamline the process and alleviate the burden on you and your family.

Dispute Resolution

In the event of disputes, our experienced team provides robust representation and mediation services. We work to resolve conflicts amicably and protect your interests and those of the estate.

Contact DLS Solicitors

If you are facing Inheritance Tax matters and need expert advice and support, please do not hesitate to contact DLS Solicitors. Our team is here to assist you with all aspects of IHT, providing the reassurance and professional service you need during this challenging time.

Whether you are planning your estate, dealing with the administration of a deceased’s estate, or facing potential disputes, DLS Solicitors is your trusted partner in navigating the complexities of Inheritance Tax. Contact us today to schedule a consultation and learn how we can help you manage your IHT obligations effectively.

Inheritance Tax FAQ'S

Inheritance Tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has died. The tax is applied at a rate of 40% on the value of the estate above a certain threshold, known as the nil-rate band.

As of 2023, the nil-rate band for Inheritance Tax is £325,000. This means that the first £325,000 of the estate’s value is tax-free. Amounts above this threshold are subject to IHT at the standard rate of 40%.

Yes, several exemptions and reliefs can reduce the IHT liability, including:

  • Spouse or civil partner exemption: Transfers to a spouse or civil partner are generally exempt from IHT.
  • Charity exemption: Gifts to registered charities are exempt from IHT.
  • Annual exemption: You can give away up to £3,000 per year tax-free.
  • Small gifts exemption: Gifts up to £250 per person per year are exempt.
  • Business and agricultural reliefs: Certain business and agricultural property may qualify for relief from IHT.

The residence nil-rate band (RNRB) is an additional allowance for those who leave their main residence to direct descendants (children or grandchildren). As of 2023, the RNRB is £175,000, potentially increasing the total tax-free threshold to £500,000 per individual (£1 million for a married couple or civil partners).

IHT is calculated based on the value of the deceased’s estate minus any debts, liabilities, and exemptions. The remaining value above the nil-rate band and any applicable reliefs is taxed at 40%. For example, if an estate is worth £500,000 and the nil-rate band is £325,000, IHT would be due on £175,000 at 40%.

IHT is usually due within six months of the end of the month in which the person died. If the tax is not paid within this period, interest will be charged on the overdue amount. Executors can pay the tax in instalments for certain types of assets, such as property.

The executor or personal representative of the estate is responsible for paying IHT. They must calculate the amount due, file the necessary paperwork with HM Revenue and Customs (HMRC), and ensure that the tax is paid from the estate’s assets.

Yes, gifts made within seven years before death may be subject to IHT. These are known as potentially exempt transfers. If the donor survives for seven years after making the gift, it is generally exempt. Gifts made within three to seven years before death may qualify for taper relief, reducing the tax due.

Taper relief reduces the amount of IHT payable on gifts made between three and seven years before death. The longer the period between the gift and the death, the lower the tax rate applied to the gift. The relief scales down the tax rate from 40% to 8% depending on the time elapsed.

While it is difficult to completely avoid IHT, careful planning can reduce its impact. Strategies include making use of exemptions and reliefs, gifting assets during your lifetime, setting up trusts, and taking out life insurance policies to cover potential IHT liabilities. It is advisable to seek professional advice to create an effective estate plan.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 11th July 2024.

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Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.

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