Inheritance Tax
Reducing the amount of money beneficiaries have to pay
IHT is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from IHT. The exception is if a spouse or registered civil partner is domiciled outside the UK. The maximum a person can give them before IHT may need to be paid is £325,000. Unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules. However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if IHT affects them.
Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), IHT will be payable on the amount that exceeds the £325,000 nil-rate threshold. The threshold usually rises each year but is currently frozen at £325,000 until the tax year 2020/21.
IHT is payable at 40% on the amount exceeding the threshold
Every individual is entitled to a nil-rate band (that is, every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring IHT). If a widow or widower of the deceased spouse has not used their entire nil-rate band, the nil-rate band applicable at the time of death can be increased by the percentage of the nil-rate band unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.
To calculate the total amount of IHT payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made within seven years of death plus the value of the element of the estate left to non-exempt beneficiaries exceeds the nil-rate threshold, IHT is payable at 40% on the amount exceeding the threshold.
Certain gifts made could qualify for taper relief
This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, IHT can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of IHT payable.
From 6 April 2017, an IHT residence nilrate band was introduced in addition to the standard nil-rate band. It’s worth up to £100,000 for 2017/18, £125,000 for 2018/19, £150,000 for 2018/20 and £175,000 for 2020/21. It starts to be tapered away if an IHT estate is worth more than £2 million on death. Unlike the standard nil-rate band, it’s only available for transfers on death. It’s normally available if a person leaves a residential property that they’ve occupied as their home outright to direct descendants.
Property, land or certain types of shares where IHT is due
It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the residence nil-rate band on first death – even if this was before 6 April 2017 – there are transferability options on the second death.
Executors or legal personal representatives typically have six months from the end of the month of death to pay any IHT due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the IHT can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.