Key questions when it comes to inheritance tax

Inheritance tax (IHT) is a complex and often misunderstood aspect of tax law that can have significant implications for your estate. The new Labour government is likely to have plans to change the rules around inheritance tax and so we in this article, we look at the current rules.

How much do you inherit without paying tax?

The amount of tax that must be paid depends on the value of the estate (the house, shares, cash and personal property) of the person who has died. The amount of tax also depends on the type of assets in the estate, because some assets, such as a trading business can be exempt from IHT altogether.

Normally, if a person’s estate is valued at less than £325,000 threshold; the nil rate band (NRB), or everything is left to the deceased’s spouse, civil partner, no tax will be payable.

If the deceased bequeaths their home to their children (including adopted, foster or stepchildren) or grandchildren and their estate is less than £2 million, the threshold can increase to £500,000 by use of the residence nil rate band (RNRB).

In addition, if a person received the whole of their spouse’s estate on the first death, then on the second death, their estate would benefit from two lots of NRB and potentially two lots of RNRB, increasing the tax free amount to £1,000,000.

What is the 7 year rule?

Gifts made during the life of the donor are generally exempt from IHT provided that the donor survives for more than 7 years.  This is known as a potentially exempt transfer or a PET.  If the donor dies before the 7 years are up, then the gifts will attract IHT, the amount will be dependent on who received the gift, their relationship with the donor, the value of the gift and when the gift was made.

Who is legally responsible for paying inheritance tax?

The money in the deceased’s estate is used to pay the IHT which is due within 6 months of the date of death.  If there is insufficient cash in the estate, the executors may need to sell assets or raise a loan, although alternative provisions can sometimes be agreed with HMRC if the bulk of the estate is held in property for example.

Anyone who received gifts from the deceased while they were alive might also have to pay IHTif the deceased gave away more than £325,000 and died within 7 years of making the gift.

Can you put your house in child’s name to avoid inheritance tax?

You could gift your house to your children to remove that asset from your estate, so that it will not attract IHT.  However, once you have given the property away, you cannot continue to benefit from it.  This means you can’t live in it unless you pay a market rent.

If you continue to live in the house without paying rent, the house will still be treated as yours for IHT purposes and if you die within seven years, the gift may still attract IHT.

Can inheritance tax be avoided through trusts?

Putting an asset into a trust may mean that it no longer counts as yours for IHT. However, there is a specific set of rules for IHT on trusts and IHT is payable:

• When assets are transferred into a trust
• Every 10 years on the anniversary of the trust being set up
• When assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
• When someone dies and there is a trust.

If you are considering using a trust to avoid IHT it is important to take specific advice.

What are the deadlines for reporting and paying inheritance tax?

You must report the value of the estate to HMRC within 12 months of the death.  You must pay the IHT due by the end of the sixth month after the person dies. For example, if the person dies in December, the inheritance tax must be paid by 30 June. There are different due dates if a trust is involved.  If in any doubt you should consult a tax advisor.

How does inheritance tax work for overseas assets?

If the deceased person was domiciled in the UK, that person’s worldwide assets would be within the scope of IHT. If the deceased was domiciled outside the UK, IHT is only payable on their UK assets and not paid on their ‘excluded assets’ such as:

• Foreign currency accounts with a bank or the Post Office
• Overseas pensions
• Holdings in authorised unit trusts and open ended investment companies

What happens if inheritance tax is not paid on time?

HMRC will charge interest on late payments of IHT.

The information above should be treated as a high level introduction to the various IHT topics mentioned.  If you have any questions or queries about IHT please get in touch with your Swindells’ partner who will be able to advise you further.