Inheritance Tax The Basics

What is Inheritance Tax (IHT)? It is a tax usually levied on an individual’s estate on their death, although on occasion it can become payable during a lifetime. Your estate is made up of all your assets even if they are overseas. It can also include money held in trust and gifts made to individuals in the seven years prior to death.

Inheritance Tax (IHT) is not levied on any assets that you leave to your spouse or civil partner, nor is it levied on any gifts that are “Exempt”. These are set out on the “Gifting Allowances” page. As no Inheritance tax (IHT) is due on any money left to a spouse or civil partner, any tax liability normally falls due on the “second death” for a couple.

On death every individual is allowed to leave a certain amount called the “Nil Rate Band”. This is taxed at zero percent so it is effectively tax free. This amount usually changes each year and for the tax year 2010-2011 it is £325,000. If your estate is larger than this, then Inheritance Tax will become liable and any amount over the threshold will be taxed at 40%. (In the April 2010 Budget the Chancellor announced the limit will be pegged for the next 5 tax years)

Since October 2007 if you are married or in a civil partnership, you can have your allowance (nil rate band) or any unused proportion of it, transferred to your spouse or partner, so that when they ultimately die, they will have a bigger allowance up to double (the only time this may not apply is if the first death occurred prior to 1975 as restrictions may apply), which would currently be £650,000. This can only be done at the time the spouse or civil partner dies (the “second death”) and needs to be applied for by the executors or personal representatives of the estate. The amount of the extra allowance will be the prevailing rate at the time of the second death.

When is it paid? It must generally be paid within 6 months of death and before a Grant of Probate can be made. This can often involve money having to be borrowed in order to pay the tax before the estate can be realised. There are certain times when the tax may be paid by instalments for up to 10 years although interest will be charged at market rates. Commonly this is where estates involve assets that are harder to sell such as property, certain shares and agricultural land.

Who pays the tax? This can vary. In most cases it will be the executors of the estate if they have made a will or the appointed “administrator” if they haven’t made a will. However, it can become payable by trustees of money held in trust, or even beneficiaries if they have received gifts from the deceased in the seven years before death.

If you are a trustee of an existing trust Inheritance Tax (IHT) may become payable on each 10th anniversary of the trust (periodic charge), on monies paid out of the trust (exit charge) and when a beneficiary dies.

As with any tax matters, there are deadlines to meet and penalties payable if rules are broken, so it is important to get help if you are in any doubt at all. At Ashwood Law we have specially trained advisers who can help you every step of the way and as we have connections with so many Solicitor practices help is readily on hand.

Tax Planning is not regulated by the Financial Services Authority.

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