Inheritance tax (IHT) is a tax on the estate of someone who has died and includes their property, money and possessions. IHT is often a complex area and without appropriate planning and advice can result in underpaying or overpaying what is owed.
Our IHT FAQ guide seeks to demystify some of the key and common questions surrounding IHT to provide you with clarity on the fundamentals and ensure you avoid common pitfalls.
If you have any other questions not answered below or would like to speak to one of our specialist IHT advisors, please get in touch to discuss your own personal situation.
Inheritance Tax (IHT) FAQs
What is IHT?
IHT is a tax on the estate of someone who has died. This includes their property, money and possessions. As an estate owner, you do not pay IHT. IHT is paid by your executors after you pass, and before the balance is paid to your beneficiaries.
On certain occasions, IHT is also payable on certain lifetime gifts, such as a gift into a trust.
Who is responsible for paying IHT?
As an estate owner, you do not pay IHT. The person responsible for paying IHT is the Executor/Administrator of your estate. Your beneficiaries and Executors/Administrators can be the same person, or different.
When is IHT due to be paid?
IHT is due to be paid within six months of the donor’s death. If IHT is not paid within six months, then HMRC will begin charging interest on the outstanding amount.
It is possible to pay IHT in instalments on certain types of asset.
How can I pay an IHT bill?
Given the short time frame of six months to pay an IHT bill, finding the funds to pay the amount due can be stressful, particularly if the estate’s value is tied up in property and possessions.
Different ways you can consider paying an IHT bill include:
- Using your own funds
- Paying the bill from the accounts owned by the deceased
- Taking out an IHT loan
- Paying in yearly instalments
No matter how you decide to pay, it is important to seek professional and personalised advice due to the different complexities of these routes.
Speak to us for further advice and support.
Who is exempt from paying IHT?
Married partners and civil partners are allowed to pass their estate to their spouse without paying IHT when they die. Legacies to charity are also usually exempt from IHT.
On what amount is IHT payable?
IHT is often payable at 40% on estates over the Nil Rate Band (NRB) of £325,000.
However, there is also an additional allowance, which is known as the Residence Nil Rate Band (RNRB), which, if you are eligible, could entitle you to an extra £175,000 tax free, meaning IHT is sometimes not payable on allowances up to £500,000.
Married couples and civil partners are able to transfer their unused Nil Rate Band and Residence Nil Rate Band between them, in certain circumstances.
Is the Residence Nil Rate Band available to everyone?
The main requirements to be able to make use of RNRB are that:
- Your home forms part of your estate,
- The total value of your estate is under £2million, and
- You have left your home to your ‘direct descendants’.
IHT is paid at 40% over the Nil Rate Band. Is it 40% even if you are a basic rate taxpayer?
Yes. IHT is a flat rate of 40% on death.
Is there anything I can do before I pass, to help mitigate the tax bill?
The IHT due is based on what you own at death. So yes, there are steps you can take to reduce the size of your estate before you pass.
This includes gifting if you can afford to do so. Everyone is entitled to gift up to £3,000 per year, also known as the ‘annual exemption’.
You are also entitled to gift £250 to any number of people per year, which is a good way to reduce the size of your estate if you have grandchildren etc.
If you have surplus income, you can give that surplus income away which is usually based on regular gifting.
These are known as lifetime exemptions, and you do not have to survive 7 years after making these gifts.
Gifting larger amounts to individuals will generally require you to survive 7 years in order to become fully exempt.
You can watch our recent series on life and estate planning, or speak to us for advice on your Inheritance Tax planning.
Can you only give away cash gifts?
No, it does not have to be cash gifts. You could consider giving away property, but you should bear in mind that there may be other tax liabilities if you gift other items. For example, you could gift a rental property, however, you may be subject to Capital Gains Tax (CGT) because the property would be a chargeable asset for CGT. Whereas gifting cash has no other tax implications.
Can I use Business Property Relief (BPR) or Agricultural Property Relief (APR) to reduce the IHT bill?
Yes, you can. BPR and APR look at the nature of the assets you own within your estate when you pass away.
You do not necessarily have to own a business to qualify for BPR, it may, for example, be shares you have in a trading company. APR may be land you own that is used for agricultural purposes. The length of time you have owned these assets will impact whether you qualify for BPR/APR, together with a range of other conditions.
For further information on BPR, you can read our recent article.
Is a pension fund subject to IHT?
In the majority of cases, no. It’s important to understand though that pensions are complicated, and there are often limits as to how much you can deposit and there are tax implications to withdrawing funds.
Can I choose who inherits my pension savings?
You can make your beneficiary wishes known to your pension provider, and they will take this into account when deciding whom to pay your pension pot to. However, it is not always guaranteed and can depend on the type of pension you have. You can also consider adding a family trust or a charity as a beneficiary.
Can I use a life insurance policy to mitigate IHT?
Yes, life insurance policies are effective ways of managing your IHT. They will pay out a lump sum on your death, and this lump sum could help towards, or completely pay, the IHT bill due.
Life insurance policies are often held on trust so that they do not form part of your estate.
Speak to us for advice on your Inheritance Tax bill.
Does a pension fund or life insurance policy fall within the estate?
A pension fund will always fall outside of your estate and does not pass in accordance with your Will. The same is true for life insurance policies that are held in trust. You can still contact your providers and let them know who you wish to be your beneficiaries.
Our recent life and estate planning video provides further detail on this area.
If I leave money to a charity, will I still have to pay IHT?
Any cash or tangible assets left to a UK charity will be exempt from IHT. It is also worth noting, that if you gift a charity at least 10% of your ‘net estate’ at the date of death, then the overall IHT rate on death would reduce from 40% to 36%.
‘Net estate’ is defined as the value left over after deducting exemptions, including the Nil Rate Band, and any other reliefs available to you.
Are donations left to EU/EEA charities free from IHT?
This used to be the case however, HMRC has declared that some reliefs on gifts made in Wills to non-UK charities would be removed.
This now means that donations will now be classified as chargeable lifetime transfers for IHT purposes.
Will I have to pay Capital Gains Tax (CGT) on an inherited property?
If inheriting a property means you own two or more properties, then you will be liable to pay CGT if you make a profit when you sell a property that is not your main home.
Can I create a Trust to avoid paying IHT?
You will likely not be able to avoid IHT even if you create a Trust, as Trusts are liable to pay their own type of inheritance charges. Trusts are, however, an effective method of estate planning as assets remain outside the beneficiaries’ estates for Inheritance Tax purposes, and are not included in any calculation for means-tested benefits.
You will, however have to pay an entry charge, exit charge and ten-year charge if you set up a Trust during your lifetime.
Trustees will need to seek professional advice in relation to Trusts.
Speak to us for advice on your IHT and end-of-life planning.
What is ‘Taper Relief’?
A relief that only applies on gifts, if the donor passes away within three to seven years after making a donation and the entire value of their gifts exceeds the IHT threshold (£325,000), then the IHT owed on the gifts is reduced gradually.
|Time between the date the gift was made and date of death||IHT due|
|Under 3 years||40%|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 years +||0%|
Can I give away my home and continue to live in the property?
There are anti-avoidance measures in place that prevent an individual from giving away an asset and continuing to benefit from it, such as receiving the income the asset produces, or using the asset personally. It is not therefore possible to reduce your IHT exposure by giving away the property you live in and continuing to live in it unless additional measures are taken. This is a complex area and more detailed advice is recommended.
I am not domiciled in the UK, do I still have to pay IHT?
Domicile is a legal concept that for tax purposes is used to determine your permanent home – this is generally the country you have the most ties too, rather than the country you are currently living in. Your domicile status impacts on the scope of UK inheritance tax, as generally UK IHT is limited to assets situated in the UK only for a non-domiciled individual. This is a complex area and more detailed advice is recommended.
Will a deed of variation affect my IHT position?
Deeds of variation are used to vary the terms of a Will to alter the terms of the will, such as to redirect an asset to a new beneficiary. A deed of variation must be filed within two years of death and certain clauses are required to the make the deed effective for tax purposes. Providing the deed has been properly drafted and within the time limit, it can be used to re-calculate the IHT position of the deceased – this may increase or decrease the IHT exposure depending on where and how the assets are distributed.
Are IHT rules different in Scotland, Wales or Northern Ireland?
No. UK IHT laws apply to England, Scotland, Wales and Northern Ireland.
For other questions related to Inheritance Tax, please contact us on the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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