The executors of your estate pay inheritance tax and it is only due if the value of your estate exceeds the threshold of £325,000 (2016-17). Tax is payable at 40% on any amount in excess of the threshold or 36% if the estate qualifies for a reduced rate as a result of a charitable donation.The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.
IHT is payable by different people in different circumstances. Usually the executor or personal administrator will pay the tax using money from the estate of the deceased person. On rare occasions beneficiaries may be asked to pay inheritance tax on gifts made during someone’s lifetime. By planning ahead you can clearly establish what your intentions are and who should get what from your estate in the event of your death.
Exemption from Inheritance Tax
In some circumstances, even if the estate exceeds the threshold or a lifetime gift may appear to be subject to IHT, assets can be passed on without having to pay IHT.
There is no IHT payable on anything left to a spouse/civil partner who has a permanent home in the UK, or any gifts that you make to them during your lifetime. If you make any gifts to a UK registered charity in your lifetime, or in your will, these will be exempt from IHT.
- Potentially Exempt Transfers (PETs): If you make a gift to someone and then live for 7 years afterwards, the gift is generally exempt from an IHT irrespective of the value. If you should die between three and seven years of making the gift then any IHT due on the gift is reduced proportionately.
- Annual Exemption: An individual can give away up to £3,000 each tax year either as a single amount or several amounts totalling £3,000. You can also use up the previous year’s unused allowance. You could effectively give up to £6,000 in a tax year (or £12,000 as a couple).
- Small gift exemptions: You can make small gifts of up to £250 to as many individuals as you like without any tax to pay.
- Gifts out of income: Any regular gifts that you make from your after-tax income (not capital) are also exempt, as long as the gifts follow a regular pattern and you have sufficient income to maintain your lifestyle after making these gifts such as regular gifts for Christmas and birthdays.
- Wedding and civil ceremony gifts: Parents can each make gifts (or give cash) of up to £5,000 on these occasions. Grandparents and Great Grandparents can each give cash or gifts of £2,500. Anyone else can give cash or gifts worth £1,000. The gift (or promise) must be made on or just before the date of the ceremony.
- Gifts to charities and political parties also qualify for exemption from inheritance tax
If you are married
When you die, any assets left to your spouse/civil partner are exempt from IHT as long as they are UK domiciled. Any balance of the exemption that you don’t use can be transferred to your spouse/partner. This means a couple can leave as much as £650,000 tax free. When the second spouse or partner dies, the executor or personal representative needs to make a claim for the unused balance. To do this they too will need all of the following documents from the first death:
- A copy of the first will, if there was one;
- A copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out;
- A copy of any deed of variation if one was used to vary (or change) the will.
You will also need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 (Scotland may be different). The form can be found on the HMRC website.
Inheritance tax for UK residents with overseas assets
All assets, whether located in the UK or overseas is brought within the charge of UK inheritance tax.
However, many UK domiciled individuals will incur an equivalent charge to local IHT in the country where the property is situated – in the absence of some form of relief, double tax arises.
Fortunately, double tax relief is in principle available either under one of the double tax conventions on IHT to which the UK is a party. The form of such relief is an offset against any UK charge of the tax paid in the overseas country.
Although ownership of overseas property does not present major IHT problems – foreign currency translation differences may arise and you do need to consider foreign “forced heirship” rules in certain countries.
Inheritance tax for non- domiciled individuals
If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, eg property or bank accounts you have in the UK.
It’s not paid on ‘excluded assets’ like:
- foreign currency accounts with a bank or the Post Office
- overseas pensions
- holdings in authorised unit trusts and open-ended investment companies
If you have lived in the UK for 17 of the last 20 years or had your permanent home in the UK at any time in the last 3 years of your life , then this is not counted as living abroad and HMRC will treat you as being domiciled in the UK. This means your estate is assessed on its worldwide assets.
The New residence nil rate band
The government has announced the introduction of an additional nil- rate band when a residence is passed on death to a direct descendant. This measure will be phased in from April 2017 as follows:
- 100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
Assessing your IHT liability
To find out if any IHT is due you need to value the estate or gift. An estate is not just the house. It includes all of the possessions, money and investments, less any debts, unpaid bills and funeral expenses. It will also include any jointly owned assets and needs to take account of any lifetime gifts that may not be exempt.
The IHT is payable by different people depending on circumstances. Generally the executor or personal representative pays it from the funds in the estate of the deceased person. If the executor can’t make the payment the beneficiaries may have to meet the bill, but only if:
- They have received a gift from someone who dies within 7 years of making the gift;
- They are the joint owner (but not spouse or civil partner) of a property;
- They benefit (or receive income) from assets in a Trust at the time of death.
The seven year rule
Most lifetime gifts will be exempt from IHT as long as the donor survives for 7 years after making the gift. If there is inheritance tax to pay, its charged at 40% on gifts given in the three years before you die. Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ as follows:
Years between gift and death
less than 3
3 to 4
4 to 5
5 to 6
6 to 7
7 or more
Gifts with reservation of benefit
If an asset is given away but the donor maintains an interest in it, for example, if you give away your house but continue to live in it rent-free this will not qualify as a potentially exempt transfer. When passing on your home as a gift, you should consider two potential points. If you give your home to someone, it will be exempt from IHT if you live on for 7 years after making the gift. This is known as a potentially exempt transfer, as described above. Gifts that you continue to derive a benefit from; giving your home away with conditions attached, or continuing to benefit from the home yourself, are known as a ‘gift with reservation of benefit’. Even if you survive for seven years afterwards it will not be exempt from IHT.
When is Inheritance tax paid?
The due date for IHT is six months after the end of the month in which the deceased has died. You should keep a record of any gifts made and the dates on which they were made, as this will help your executor to sort out your affairs when the time comes.
If you do not leave a will, your estate will be shared out among your next of kin in a specific order under the rules of intestacy. This could mean that people you particularly wanted to benefit could end up with nothing. Remember that the laws of intestacy in Scotland are different.