In 1986, Roy Jenkins, former Labour MP and Chancellor of the Exchequer, said that Inheritance Tax (IHT) is “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.
Given the plethora of opportunities available to those seeking to reduce the IHT exposure on their estates, that would seem to remain the case. The purpose of this article is to provide an overview of the current IHT regime and consider some aspects of IHT planning.
IHT can be triggered when someone dies, but can also be triggered during their lifetime.
On death, IHT is charged on the value of a deceased’s worldwide estate if they are UK domiciled, or on their UK situs assets only if they are not deemed domiciled in the UK. The taxable estate includes property, possessions, money and investments, less any debts the deceased may have owed, such as mortgages, household bills and funeral expenses. Moreover, an estate also includes the value of any assets not owned directly, but in which the individual had a beneficial entitlement, such as life interests in trust property.
During life, a charge to IHT arises on non-relieved transfers into relevant property trusts, which, following an overhaul of the taxation of trusts in 2006, encompasses all trusts other than bare trusts and those for disabled people. Relevant property trusts are also subject to IHT, in the form of 10-year periodic and exit charges.
How IHT is calculated
Within 12 months of the date of death, the executors are required to submit an IHT account to HMRC (IHT400 plus schedules) confirming the gross value of the estate and the deductions/reliefs that are being claimed to determine the taxable value of the estate, which is then subject to IHT at 40 per cent.
The rate of tax on chargeable lifetime transfers is 20 per cent, while the periodic and exit charges applicable to relevant property trusts are up to 6 per cent of the trust assets.
HMRC may require independent valuations for some assets in an estate, such as valuable art, jewellery and property.
When it is payable
IHT must be paid six months after the end of the month in which the deceased died; otherwise HMRC will charge interest on the tax owed. In order for the assets of an estate to be distributed, a grant of representation is required and can only be obtained once the IHT liability has been settled.
Where an estate comprises land, buildings or unquoted shares that cannot be sold immediately, HMRC permits the IHT to be paid in annual instalments over up to 10 years or until the asset is sold (if sooner). Interest is charged on the outstanding tax liability.
For chargeable lifetime transfers, the tax is payable within six months of the month in which the transfer occurred, or by 30 April in the following year if the gift was made between 6 April and 30 September.
Who is responsible
