When do you pay Inheritance Tax (IHT)?
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Inheritance Tax (IHT) falls due on our net residuary estate when we die.
Inheritance Tax (IHT) is paid on the net assets of a UK estate at 40%. Various exemptions and reliefs apply – depending on your circumstances, and the beneficiaries set to receive your estate. As to timings, IHT must be paid before the Grant of Probate is issued to your executors. The IHT payable against property can usually be delayed until the property is sold.
What is Inheritance Tax (IHT)?
Inheritance Tax (sometimes called ‘death duties’) is paid against the net value of someone’s estate. That net estate is calculated with exact ‘date of death’ figures being gathered to create a snapshot of the deceased’s wealth at close of business on the day they die.
Gifts made within 7 years of your death may also be chargeable to IHT (subject to reducing relief), as may ‘gifts with reservation of benefit’ (GROB). A GROB is a gift you purport to make, but where you continue to ‘enjoy’ that asset. So, you announce that you gift a painting to a certain person, but it stays in your hallway until you die where each morning you enjoy looking at the fine piece of art!
Find out more about Lifetime Gifts and IHT – Gifts with Reservation of Benefit (GROB).
The vast majority of estates in the UK pass without IHT being paid – over 90% currently.
When do executors pay IHT?
The executors of an estate must pay all of the IHT due against the free estate (cash assets), plus a portion of the IHT due against property before the grant of probate is issued. This creates an issue, as without the grant of probate, executors can not realise cash assets! This is generally overcome either by one of the deceased’s banks making a payment direct to HMRC (and perhaps with guarantees from the executors), or, executors sometimes take out a loan on behalf of the estate.
How is IHT worked out?
As with so many things, the IHT account (detailing all assets and liabilities) can be submitted online, and it will calculate the amount of tax due. Those calculations are based on the value of all assets (the gross estate), less all liabilities to date of death (giving the net estate). The main exemptions and reliefs:-
- Nil rate band – currently £325,000 and applies to all estates
- Residence nil rate band – a further £175,000 where couples are passing property to children
- Spouse exemption – gifts to a surviving married or civil partner are free of tax come what may
- Charity exemption – as per the spouse exemption, gifts to charity attract full relief from IHT
What is the Nil Rate Band?
This potentially applies to all estates. Like income tax basic rate, tax is not paid against this amount – ie at the moment the first £325,000. Thereafter, unless any other reliefs of exemptions apply, tax becomes payable on amounts over that at 40%. So for example, if an estate is value at £425,000 with no other reliefs or exemptions, then there is a chargeable amount of £100,000, and so a tab bill at 40% of £40,000.
Inheritance Tax (or some of it) must be paid before the grant of probate is issued.
What is the Residence Nil Rate Band?
Married couples (and civil partners) have a further ‘nil rate band’ that applies to property set to pass to children. This can add a further £175,000 making the effective nil rate band for each of a married couple £500,000.
This is a very simple overview of the residence nil rate band.
How does the Spouse Exemption work?
The spouse exemption applies come what may, in effect leaving the nil rate band and residence nil rate band sort of defunct. This however is a good thing! Current rules mean that where an estate passes in whole to a surviving spouse (‘first death’), then the nil rate band (and residence nil rate band) of the first to die is deemed to have not been used. This amounts to £500,000 (£325,000 and £175,000). Critically, what follows is that, on second death, if the then combined estate is passing to children, the allowances from the death of the estate of the first to die can be claimed back and added to the allowances of the second to die. In simple terms, this means in effect that a married couple will have an overall IHT exemption of up to £1mil.
Do I pay IHT on gifts to Charity?
No. Gifts to charities are free of IHT.
When preparing a will, if your residuary estate passes in part to charity and in part to ‘chargeable beneficiaries’ you should be careful to ensure that your will is clear as to how any IHT liability is to be shared across the estate.
These rather complex rules emanate from two famous tax cases: Re Benham and Re Ratcliffe. In its simplest form, they dictate whether any IHT liability is benefited across all beneficiaries, or that the charities receive all of their share of residue free of tax. Put another way, whilst the overall IHT burden is reduced by the fact that charities feature in the residuary estate, it must be clear if the charities receive all of that benefit, or is it to be shared across the whole of the residuary estate (making the chargeable beneficiaries better off.
Read more about IHT – Grossing up (Re Benham v Re Ratcliffe).
Cash legacy gifts to a charity are also free of tax. The Benham/Radcliffe rules to do not apply – ie they only apply to a share of your residuary estate.
Can my Will be changed to reduce IHT?
The beneficiaries of your estate may want to divert the share of your estate passing to them for their own tax planning reasons. This is done by a deed of variation, and it means in effect that the gift is never deemed to have been theirs. Even if they then die within 7 years, it falls outside of their own estate. If you would like to know more about deeds of variation, read our guide What is a Deed of Variation (change your inheritance in a will)?
Need more help with Probate?
We hope you found this guide helpful. NB – it is not intended to be specific legal advice, and it (and any comments left against it) should be taken as such. Do reach out QLAW’s expert probate solicitors if you would like independent legal advice on this or any other probate matter.
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