Inheritance Tax
NB These notes are intended for guidance only and do not constitute legal or professional advice. In all matters of a legal or financial nature we strongly recommend that you discuss your plans with your professional advisors.
What is IHT?
Inheritance Tax, which is usually abbreviated to “IHT”, is a successor to Capital Transfer Tax, often referred to as “death duty”. It is governed principally by the Inheritance Tax Act 1984. It is a tax which is levied primarily on death and is charged on the net value of the deceased’s estate. There are a number of reliefs and exemptions available to help reduce the IHT liability.
Who pays IHT?
The estate of anyone domiciled in the United Kingdom is liable to IHT on their entire worldwide assets.
When is it payable?
The due date for IHT is six months after the end of the month in which the death occurs, and interest charges will be levied for late payment.
Items within an estate are categorised as either Instalment Option Property (IOP) or Non-Instalment Option Property (NIOP).
For IOP items, which include land, buildings, business interests and certain shares and securities, you can choose to pay the IHT in instalments. If this option is chosen, the first instalment is payable on the due date (see above) and nine further instalments are due on successive anniversaries of that date. However, you can choose to pay the whole balance at any time. Note that if the asset is sold, IHT becomes due in full. It is also important to note that interest is likely to be payable if you choose to pay IHT by instalments.
For NIOP items, which include money, chattels, and most stocks and shares, IHT is payable on the due date, or when the application for grant of representation is made, whichever comes first.
Is anything exempt from IHT?
Some items are exempt from IHT, the main ones being:
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Gifts to a spouse or civil partner (the entire gift is exempt if the spouse or partner is domiciled in the UK);
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Gifts to Registered Charities (ALL gifts to UK charities are exempt, but this does not apply to foreign charities);
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Gifts for “National Purposes”, such as a gift to a national museum;
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Gifts to political parties.
In some estates, businesses, business interests, unquoted shares and agricultural property are exempt from IHT if they qualify for business relief or agricultural relief.
How is IHT calculated?
There are currently (2008-09) two rates of tax applicable for IHT: nil and 40%.
The “Nil Rate Band” is usually reviewed annually and has gradually increased over the years. The current Nil Rate Band (for tax year 2008/09) is £312,000. In the last budget, it was announced that the figure would rise to £350,000 by 2010.
The effect of IHT can best be illustrated by a simple example. If a widow or widower dies, leaving their children:
| A house, valued at: |
£270,000 |
| Other assets (savings, life insurance policies, etc.): |
£60,000 |
| The value of the estate is: |
£330,000 |
|
|
|
| Less Nil Rate Band level: |
£312,000 |
| Amount liable for IHT: |
£18,000 |
| IHT Payable (at 40%): |
£7,200 |
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £624,000 (2008-09). Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die. The procedure is not straighforward and it is strongly recommended that you seek the advice of a qualified professional in this matter.
Further information may be found by searching the websites of the following organisations: