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Inheritance Tax

Since 1996 when a system of self assessment was introduced the onus has been on the tax payer to inform HM Revenue and Customs of any tax liability. This duty falls on the executor of the deceased’s estate and usually means paying out money to cover the liability.

Should you feel reticent to deal with what can be large amounts of money and also run the risk of incurring penalties for the late return of self assessment forms then you can always employ the services of a Tax Consultant – preferably an Inheritance Tax specialist who will do it all (or nearly all) for you in return for a fee.

Rate of IHT

Allowable expenses

When to pay IHT

Paying IHT in Instalments

Suggestions to help reduce the tax bill

Rate of IHT

The rate of Inheritance tax is the same rate as for higher income tax payers i.e. a massive 40%. The sweetener is that this only applies to assets above the IHT threshold or nil band which is currently £312,000 (2008-2009). So, looking on the bright side anything under the threshold is tax free!

Allowable expenses

It is possible to deduct certain expenses from the value of an estate before calculating IHT. Allowable expenses include

Funeral costs
Debts owed in the UK
Tax owed at time of death

Probate fees and executors expenses are not deductable

When to pay IHT

The rule is that tax due on an estate has to be paid within six months of the deceased’s death and before the Grant of Probate is issued. This can cause difficulties as assets are not usually released until Probate has been granted and may mean you as the executor will need to borrow money in order to foot the bill!

Again there is a sweetener in that the IHT due on property or land can be paid in instalments.

Sometimes the Deceased’s bank or building society will agree to pay IHT directly out of the assets by issuing a cheque payable to HMRC. (Funeral expenses are often dealt with in this way).

Paying IHT in Instalments

It is possible to pay the IHT on certain assets including property and land by instalments. The first payment can be delayed for as long as six months (although you will then be charged interest) and subsequent instalments can be spread over a period of up to ten years. If the asset is sold the IHT must then be paid in full.

Clearance Certificate

Hoorah! When you have done all the hard work and satisfied HMRC that they have received their due you can apply for your Clearance Certificate which will confirm that you have paid all necessary IHT.

Suggestions to help reduce the tax bill

First and most importantly - there are a number of ways to reduce your IHT bill – this is not Tax avoidance which is illegal but the use of legitimate means to keep your assets in the family.

Of course everyone has different personal circumstances and as the subject is complex and often large sums of money are involved it is always recommended to seek professional advice - ideally consulting an Inheritance Tax Specialist -although these individuals are rather few and far between.

Family Home

The family home is usually most people’s largest asset and may cause many people to fall into the IHT payers’ bracket.

Merely changing the title deeds of your property to your adult child’s name is not a valid way of reducing Inheritance tax. For this to be effective you would have to pay them full rent on which Income Tax would be payable.

There is an option of changing the title deeds so you and your child jointly own the property and your child resides in the family home and contributes to not more than half of all related expenses. This will be classed in the Tax speakers jargon as a PET.
You can move out of your house and give it away and as long as you live another seven years the gift will have escaped IHT.

Other schemes are also available to avoid IHT but they are complex and should be discussed thoroughly with a financial advisor as the government has introduced new rules to combat losing out on tax revenue in this area.

Gifts

There are tax free gifts and (as nothing related to tax is seemingly straightforward!) potentially tax free gifts – PET.

Tax frees include

Gifts to spouses or civil partner
£3000 per annum
Any number of smaller gifts of up to £250 per annum to different individuals from the above limit.
Any gift to a registered charity
Political parties providing there are at least two MP’s or 150,000 supporting voters
Gifts in respect of marriage
Gifts to Housing Associations

Potentially Exempt Transfers (PET)

These are called potentially exempt gifts as no IHT is payable on them provided you can survive for seven years after giving them!

This means that PETs given in the last seven years of your life are not yet tax exempt.

If for example you die within three years of giving the gift the beneficiary will be liable to pay the tax due. Again the sweetener is the Tapered relief which is applicable after three years which can reduce the tax up to a maximum of 80%.

Gifts to individuals that are not exempt
Gifts to a trust for the disabled.

Insurance policies

Some life insurance policies will include cover for IHT liability but it is essential to keep abreast of new government legislation in this area.

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