Inheritance tax advice: What is Inheritance Tax?
It is a tax on the estate (all of the assets: property, money and possessions) of a person who has died. Though it can sometimes be payable on Lifetime Giving and indeed on things “given away” many years earlier. IHT Planning is often very simple, and too many people make mistakes because they don’t take professional advice – and we know the advisers to speak too!
Usually, there is no Inheritance Tax to pay if:
- The total value of the individuals’ assets is under £325,000. In some areas of the UK that won’t even buy a 1 bed flat, so Inheritance Tax Advice in planning to reduce the eventual IHT bill is becoming increasingly important for ordinary folk. It is pretty unlikely there will be any further easing of this particular tax: rather the reverse we suspect!
- If everything goes to your UK domiciled spouse or civil partner, a charity or a community amateur sports club.
If you leave your home to your children (after your spouse) in your Will (including adopted, foster or stepchildren) or grandchildren, your threshold will increase with the new Property Nil Rate Band, currently worth up to £175,000 each.
If you are married or in a civil partnership and your own less than the IHT allowance/ threshold, any unused proportion can be added to your legal spouses’ threshold when they die. If the first to die leaves anything to anyone other than the spouse, that proportion of the Nil Rate Band is no longer transferable, it is the proportion of unused Nil Rate Band which is transferred, not the amount. So as the Chancellor increased the allowance, the monetary value of the amount goes up.
Before we continue, consider our recommended IHT Review service – best in lifetime, but very useful for executors too.
Inheritance Tax rates
The Inheritance Tax rate is 40% of the balance over your tax-free allowance.
Example of IHT Calculation
Your estate is worth £600,000 and your tax-free allowance is the basic £325,000. IHT will be at 40% of £275,000 (£600,000 minus £325,000). Clearly, there may be some Property Nil Rate Band too, but we’re just trying to show a simple example.
Charitable Gifts in the Will or by Deed of Variation
If you leave 10% or more of the net value of your estate to charity in your will, then the balance is potentially taxable at the lower rate of 36%.
IHT Reliefs and exemptions
Some lifetime gifts may add to the tax bill after your death, depending on when the gift was given. ‘Taper relief’ may reduce the bill on gifts made more than 3 years before. In most cases, a proper gift will drop out of the tax net after 7 years – BUT:
Important Note: Gifts with reservation of benefit
If you give something away and continue to benefit from it, it is still included in your estate, even though it may also be chargeable to tax in the hands of the person you gave it to. The classic error is giving your house to your children in the wrong way and continuing to live in it without paying a full commercial rent. When it is sold, they will have to pay Capital Gains Tax, even though your estate may have already paid IHT on it.
Other reliefs, such as Business or Agricultural Property Relief allow some assets to be passed on free of Inheritance Tax or with a reduced bill.
Who pays the IHT bill?
Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (the ‘executor’ if there is a Will). Sometimes it may involve a loan, or (where the tax is due on property) 6 monthly installments until the property is sold or for up to 10 years.
Your beneficiaries (the people who inherit your estate) don’t normally pay tax on their inheritance, as it comes out of the estate after IHT has been paid (unless the Will says otherwise, which just means the tax will still be paid from the rest of the estate – no savings, just a transfer of the cost to the shares of other beneficiaries. They may have related taxes to pay, for example if they get rental income from a house left to them in a will. If things go up in value after the date of death, then the executors may need to pay Capital Gains Tax on the gain when the item is sold and before inheritances can be paid out. Executors don’t always realise this, and can end up having to pay it themselves much later after a Revenue investigation.
People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.
More on IHT & Gifts
Inheritance Tax on death how much is payable?
This section has four purposes:
- To introduce the option of reducing inheritance tax on death where it is not too late for advance planning.
- To review the dangers of dealing with an estate where Inheritance Tax may become payable on the first or second death and the penalties for getting it wrong.
- To point you in the direction of Deeds of Variation which may form the cornerstone of IHT Planning for the beneficiaries and their families.
- To offer our recommended Inheritance Tax Review Service.
The best place to start, where possible, is:
Advance Planning to save Inheritance Tax
Inheritance Tax is mostly an avoidable tax usually paid on an estate when somebody dies. We say avoidable as if you have spoken to our recommended Inheritance Tax Planning service they would have often have been able to either reduce the IHT bill substantially or eliminate it. Even after a death it is often possible to dramatically increase the benefit to future generations as long as you are quick enough. So that is an extra reason for talking to us if there is likely to be a significant bill.
IHT also sometimes payable on trusts or gifts made during someone’s lifetime so gifts made in the previous seven (and sometimes fourteen) years have to be taken into account. Which rather shows the need for careful planning.
The biggest boost is inheritance tax on property as property values – especially in London – have gone through the roof. And the Chancellor is rubbing his hands in glee!
When is IHT Payable, and Penalties for incorrect payment of Inheritance Tax
Firstly, you are required to pay within 6 months starting from the first day of the month after death, which can be a pretty tall order in complicated estates, after that interest is payable.
If the Inheritance Tax return is incorrect, there are potential penalties on top of the interest which can double the IHT bill, with the careless executor being personally liable for the penalty.
In order to avoid such problems. it is vital to instruct professionals (if you are going to use them) at the earliest possible moment. We are especially useful for such an estate finding helpful service at fees which most practices would consider very modest. If your tax bill is likely to be very high, then it may be worth considering top-end talent whose fees are rather less modest – but it is about what they can save you.
Inheritance Tax on death can sometimes be legally avoided
– if you contact us in time!
Capital Gains Tax on Death
Another interesting tax issue is that Capital Gains Tax is wiped out on death – otherwise gains could be taxed twice. So selling assets with taxable gains just before you die is a really bad idea – even if you won’t be liable for IHT, a nice tax-free uplift is to be welcomed.
Inheritance Tax Review & Advice
Who could benefit from an IHT Review? This version is specifically aimed at people who are significantly over the Inheritance Tax Threshold or know that they will be soon. If it is for the estate of someone who died significantly less than 2 years ago, it can be the executors who request the review. But lifetime planning is far easier and more effective.
Why should your beneficiaries pay too much towards a legally avoidable tax?
Inheritance Tax is very much a tax payable by the beneficiaries of those who are unwilling to pay for professional advice. So if you wish future generations of your family to benefit, then advice is essential. Most people will take advice from a financial adviser or an accountant, which is great. However, they both come at the problem from a particular viewpoint rather than looking at the situation as a whole. There are also advisers who propose expensive leading-edge solutions, which just could end up bogging your estate down in years of litigation – that is not an area we are keen on, though we accept that many of these schemes will work, we are not risk takers – if you are, let us know and we’ll pass you on to one of our more adventurous contacts.
When our contacts create a full Estate Plan for clients, they take an overview which includes pointing out unused Inheritance Tax breaks, financial services product areas that could be considered (leaving the specific recommendations in this area to your financial adviser). Vitally, they ensure that the dynamics of the family are taken into account, that as much flexibility as possible is built-in and that the Legal Planning is sound (we see the end results of bad planning in enquries on a regular basis as we try to find help to improve the situation.)
Inheritance Tax Review
Some parts of the advice may involve your financial adviser. If you don’t have one, we can introduce you to one.
You will receive an outline verbal and email report and estimate where relevant. In the vast majority of cases, that is more than enough to point the way forward, but you can pay for extra time if you wish. If you want Ingrid to review any paperwork, then that can be done during the phone call, but the standard fee does not allow for any reading in advance, and extra time might have to be charged.
Always bear in mind that the legal, tax and family situation will never remain static and you should have regular reviews, especially if you do not join the Peace of Mind Service.
Inheritance tax advice London. We can arrange Inheritance Tax advice anywhere in the UK, especially Sussex, Kent, Surrey, Hampshire, Essex, Buckinghamshire, Manchester, Berkshire, Yorkshire and Hertfordshire. Not that anyone else should feel excluded!