PLANNING FOR THE FUTURE Inheritance Tax What is Inheritance Tax? Inheritance Tax is tax paid on an estate when a person dies. It is sometimes payable on trusts or gifts made during a person s lifetime. What is an estate? In basic terms, a person s estate is the value of the assets, which he or she owns at the date of death which are not necessarily the same as the assets owned by the person as at the date of making the Will. The assets include the value of the house, the value of any other property, possessions, money and savings accounts, National Savings and Premium Bonds and investments including shares and ISAs. If the person was a beneficiary of a trust, the value of the assets in the trust is normally included. Certain debts are deducted from the value of the estate such as funeral expenses, cost of memorial stone, debts owed by the deceased as at the date of death but not future expenses such as legal, probate or estate agencies fees in connection with the sale of the property. The value of any lifetime gifts made in the last 7 years may effect the calculation of Inheritance Tax by reducing the nil rate band or being brought into the estate in certain circumstances. There are further rules regarding overseas property and other property which requires specialist advice. What about Joint Property? The value of the deceased person s share forms part of the estate for Inheritance Tax purposes. For example Jules and Jim own a house valued at 200,000 as joint tenants. Jim dies and the title passes automatically to Jules. For Inheritance Tax purposes half of the value is included in the estate being 100,000. 1
Who is responsible for calculating and paying the Inheritance Tax? Generally, the personal representatives of the estate are responsible for dealing with tax matters. The personal representatives are the executors appointed in a Will or the administrators entitled to take a Grant of Letters of Administration upon intestacy. How are the funds obtained to pay the Inheritance Tax? Inheritance Tax needs to be paid before the Grant of Representation being the Grant of Probate in the case of a Will and the Grant of Letters of Administration in the case of an intestacy or partial intestacy. This will be at a stage before the assets have been liquidated. The personal representatives may contact a bank where the deceased held funds and the bank will normally release the funds for the sole purpose of paying the Inheritance Tax. In former times, the banks gave special loans to pay the Inheritance Tax nowadays funds are generally released by way of a straightforward payment without the need to enter into a loan arrangement involving the payment of interest. Inheritance Tax needs to be paid no later than 6 months after the end of the month in which the person died. For example Florence died on the 5 th January, the due date would be 31 st July of the same year. Interest and penalties are paid on any Inheritance Tax which has not been paid by the due date. Some Inheritance Tax may be payable by instalments which is dependant upon the type of asset and includes the deceased person s house. The Inheritance Tax may be paid by annual instalments over 10 years and interest is charged. When is Inheritance Tax payable on an estate? There is an exempt limit up to which no Inheritance Tax is payable and this is called the nil rate band. Since 6 th April 2009, the nil rate band has been 325,000.00 and will be frozen for the next 2 years. Inheritance Tax is payable at the rate of 40% on the balance over the nil rate band. In relation to deaths after 6 th April 2012, if a person leaves at least 10% of his or her net estate to charity, the rate of Inheritance Tax paid is reduced to 36%. 2
EXEMPTIONS AND RELIEFS What are the exemptions and relief, is Inheritance Tax always payable? Even if the estate is over the nil rate band, no Inheritance Tax is payable in respect of gifts to a lawful spouse or lawful civil partner or to a qualifying charity. For example, 1 John and Mary married on 1 st January 2012 and John died on 5 th February 2012 leaving and estate of 500,000 which includes the matrimonial home. John made a will benefitting Mary and there is no Inheritance Tax payable because of the spouse exemption. For example, 2 Jim and Eileen have been living together as if they were man and wife for 25 years. Jim dies leaving an estate of 500,000 including the house and life insurance. Jim had made a will naming Eileen as the sole beneficiary. Jim s estate is taxable and 70,000 tax is payable. Business relief Business relief allows some business assets to be passed on free of Inheritance Tax and business relief may be claimed on:- A business or interest in a business (100% relief) Unlisted shares, including shares that are traded on the alternative investment market. (100% relief) A holding of shares or securities giving control of a company that are fully listed on a recognised stock exchange. (50% relief) Any land, buildings, plant or machinery owned and used wholly or mainly in the business during the last two years before the business was passed on (50% relief) Any land, buildings, plant or machinery used in the business and held in trust in that the deceased s person had a right to benefit from (50% relief) Generally, assets must have been owned by the deceased person for at least two years before the date of death. There is also agricultural relief, woodland relief and relief for national heritage assets. Transferable nil rate band You may have heard about a husband and wife (or lawful civil partners) being entitled to a double nil rate band and this partially correct but not wholly correct. 3
Each individual person has a nil rate band of 325,000.00. If upon the death of the first spouse (or civil partner), the entire estate is passed to the surviving spouse (or surviving civil partner) then on the death of the survivor the whole nil rate band on the first death is applied to the second death. Therefore, there is a double nil rate band available. Under present rules this would mean that Inheritance Tax was charged on the estate over 650,000.00. However, if only part of the estate is left to the surviving spouse or surviving civil partner then only half of the nil rate band is transferred and therefore double nil rate band is not available. For example 1 Harold and Wilma are a married couple. Harold dies and leaves his estate ( 400,000) to Wilma. Wilma then dies leaving the estate to the children. There is no tax to pay when Harold dies because of the spouse exemption. Wilma s estate is 800,000. The double nil rate band is applied to leave 150,000 liable to Inheritance Tax at 40% producing 60,000 tax. For example 2 Harold leaves half of his estate to the children and half to Wilma. There is no tax to pay because the gift to the children is 200,000 being less than the nil rate band of 325,000. Wilma dies leaving an estate of 600,000. Wilma s estate has its own nil rate band of 325,000 plus half of Harold s nil rate band being 162,500 making a total of 487,500. This is deducted from Wilma s estate leaving 112,500 taxable at 40% producing 45,000 tax. The Government is introducing a residential nil rate band and the details will follow once they have been finalised by Government. This is a basic introduction to Inheritance Tax and further information and advice is available to meet your circumstances. Contact details for Wills & Probate Department:- Naomi Pinder Solicitor - Head of Department npinder@jacksoncanter.co.uk Lucy McNally Paralegal lmcnally@jacksoncanter.co.uk Emma Beckett Solicitor ebeckett@jacksoncanter.co.uk Bren Hudson Senior Secretary bhudson@jacksoncanter.co.uk 4
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