Inheritance Tax – An overview

As a general rule, Inheritance tax is payable on a person’s estates after they die where the net assets exceed the Inheritance Tax threshold, or nil rate band, currently £325,000 for 2011/12.

Inheritance Tax can also sometimes be due on lifetime gifts, where for example assets are put into trust.

What is Inheritance Tax?

Inheritance tax on death is charged at 40% on the amount in the estate over £325,000. Although there are various exemptions which can help to reduce the amount of Inheritance tax payable which are highlighted at the end.

One of the main exemptions is the spouse or civil partner exemption where assets can pass from spouses or civil partners without being subject to Inheritance tax. Married couples or couples in registered civil partnerships can now also make use of the transferable nil rate band. This means that on the second death the Personal Representatives can utilise any unused nil rate band from the first spouse or civil partner’s estate.

So, for example, if the first person to die leaves everything to their spouse or civil partner, there will be no inheritance tax to pay on their death because of the spouse exemption. Then on the survivor’s death, the personal representatives will be able to transfer the unused portion of the nil rate band to use against the survivor’s estate, so in this case the nil rate band would be effectively doubled from £325,000 to £650,000.

Who pays it and when?

Generally the Personal Representatives will pay the inheritance tax due on death from assets in the estate of the deceased. Occasionally where the deceased has made large gifts shortly before death, the person who has received the gift may have to pay inheritance tax.

Inheritance is due 6 months from the end of the month of the date of death. The Inheritance tax due on an estate generally needs to be paid before the Personal Representatives can obtain the grant of representation to administer the estate. A notable exception to this is where there is a property in the estate, the proportion of inheritance tax due on property can be paid in ten yearly instalments (although if the property is sold within those ten years, the whole balance has to be paid off when the sale completes).

Valuing an Estate for Inheritance Tax

If you are the Personal Representative of an estate, you have an obligation to correctly value the assets and liabilities in the estate at the date of death. For example if there is a property in the estate you will generally need to obtain three market valuations at the date of death. These figures are used in the HM Revenue & Customs Inheritance Tax Account which must be competed in order to obtain a grant of probate.

Other Exemptions

In addition to the spouse and civil partner exemption the following are relevant to calculating the amount of Inheritance tax due:

• Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax
• Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
• Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.
• Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
• Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
• Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

For more information about Inheritance Tax please contact me or the Wealth & Estate Planning team.