Inheritance Tax (IHT)
A brief history
The introduction of a tax on estates in England and Wales in 1796 was the precursor of the Inheritance Tax system we have today. The current system of Inheritance Tax was first introduced in 1986; however, whilst Inheritance Tax counts for less than 1% of government income, it is increasing due to house price inflation being higher than the increases in the available nil rate band.
What is Inheritance Tax?
Inheritance Tax is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain transfers to trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts. There is a nil rate band, currently £325,000, below which no Inheritance Tax is payable. There are also a number of reliefs which are covered later in this guide.
It is important to note that, other than in the case of very large gifts (above the nil rate band) no Inheritance Tax is payable on gifts made or received during someone’s lifetime. However, on death the executors are required to report on the value of taxable gifts made by the deceased during the seven-year period immediately prior to their death.
Inheritance Tax and probate forms
It is a legal requirement to complete Inheritance Tax forms as part of the probate process even where no Inheritance Tax is due. The estate must pay some or all of any Inheritance Tax due before a grant of probate can be obtained.
Valuing an estate
In order to ascertain whether or not Inheritance Tax is due, the executor or personal representative of the deceased must value the deceased’s estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts.
Payment of Inheritance Tax
Inheritance Tax is due six months after the end of the month in which the deceased died. In certain cases, it is possible to pay by annual instalments or to make payments later with the addition of interest.
In our next article on Inheritance Tax, we will cover the transferable nil rate band and various reliefs that are available.
How can Essex Abel help?
We would welcome the opportunity to assist you in arranging a review of your affairs to identify the prospective Inheritance Tax payable on your estate at death. We could then discuss with you the steps that you could take to reduce this liability. Some such steps could be quite straightforward. If the sums involved warrant more extensive planning and you wish to consider this, we can help you here too.
Essex Abel’s team have many years’ experience of advising people in relation to their Inheritance Tax position and offer a FREE consultation to discuss your affairs, if you would like to take advantage of this offer, please contact us.
Inheritance Tax Rates
|Nil rate band for individuals*||£325,000||£325,000|
|Thereafter – lifetime gifts**||20%||20%|
|– lower rate on death***||36%||36%|
|– lower rate on death***||40%||40%|
|– lower rate on death***||£100,000||–|
* Unused nil rate band can be used by surviving spouse or civil partner.
** Increased to 40%, subject to tapering relief, on gifts made between 3 and 7 years pre death.
*** If you leave at least 10% of your estate to charity.
Certain lifetime gifts are exempt and there are special rules for business property.
The tax rate on lifetime gifts is reduced depending upon the number of years which have passed since the gifts as follows:
|Years before death||0 – 3||3 – 4||4 – 5||5 – 6||6 – 7|
|% of tax payable||100%||80%||60%||40%||20%|
Main exempt lifetime gifts
|Recurring annual gifts out of surplus income||unlimited|
|Annual gifts out of capital (with one year carry forward if unused)||£3,000|
|Small gifts (per recipient) ||£250|
|Parental gift on marriage||£5,000|
|Grandparent or party to marriage ||£2,500|
|Other gifts on marriage (per donor)||£1,000|
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Neither Essex Abel Ltd nor the author accept any responsibility whatsoever for any action taken based upon the information included in this articles.