Inheritance tax (IHT) is charged on the value of a person’s property when they die, and in certain circumstances on gifts (“transfers of value”) made during a person’s lifetime.
The first form of tax on the value of an estate at death was Estate Duty, introduced in 1894 (almost immediately followed, it is said, by a sharp increase in the life expectancy of millionaires living in the UK!).
Inheritance tax is charged at 40% on the value of a person’s estate over £325,000, and in addition to the estate at death, the value of any gifts made in the seven years before death is included in the calculation.
Payment of IHT
Generally speaking IHT is payable six months after the date of death, although in certain cases it can be paid by annual instalments over ten years.
A calculation of the IHT due together with payment of that IHT has to be sent to HM Revenue & Customs in order for the deceased person’s executors to obtain probate (“probate” means the legal authority to take over the deceased’s assets and distribute them according to his wishes).
It is possible to plan to reduce the burden of inheritance tax on one’s estate but it is absolutely essential to have proper specialised advice when attempting to do this. Ill-advised IHT “planning” can have serious consequences not just for IHT but for other taxes as well. To take a simple example, there is a common misconception that parents can give their home to their children in order to avoid its value being included in their estate when they die.
This is only true in a case where the parents also stop living in the property or start paying a market rent to their children, as otherwise the gift is ignored for the purposes of IHT and the value of the property is still regarded as being within the parent’s estate. Unfortunately, for the purposes of capital gains tax, giving the property to the children whilst continuing to live there means that on a future sale of the property the normal exemption from capital gains tax for a “main residence” would no longer apply.
The result of this exercise has therefore been to make no difference to the IHT payable on death and to increase the CGT payable should the house be sold during the parents’ lifetime.
By contrast, properly executed IHT planning can dramatically reduce the liability on the person’s estate and thus dramatically increase the value they are able to pass down to their children and loved ones.
Post death planning
Even after a person has died it is possible in the right circumstances to amend their will in order to produce a more tax efficient result, provided this is done before the second anniversary of the death of the individual concerned.
Our services for inheritance tax:
- We can review your current IHT position and offer you an estimate of the IHT that would be payable on the basis of your current arrangements – this service is called our “IHT health check” and is free. Please contact our Tax Team to obtain a questionnaire for completion.
- IHT planning review/advice. Even if you have already taken advice about IHT and have the appropriate arrangements in place, if this was done more than two or three years ago it is quite possible that subsequent legislation has meant that the advice and therefore the planning is now out of date. It is wise to review one’s IHT arrangements on a regular basis.
- Assistance with executorships. Being an executor can be a very burdensome task with a great many obligations to report to various authorities and forms to complete in order to give effect to the deceased’s wishes. We can advise and support you in this task and take much of the burden of form filling off your hands.
- Negotiations with HM Revenue & Customs. Like all taxes there are many “grey areas” within IHT and we have considerable experience of negotiating with HMRC in cases where we do not agree with the view they take of the legislation.
If you would like to take advantage of our free IHT health check, or if you wish to discuss IHT more generally, please telephone 01872 276116.