IHT - Frequently Asked Questions
Inheritance Tax - your questions answered
Here are answers to some of the questions that are regularly asked by our clients and people trying to find out more about IHT.
Who pays an Inheritance Tax bill?
The ’personal representative’ (the person nominated to handle the affairs of the deceased person) arranges to pay any Inheritance Tax that is due.
You usually nominate the personal representative in your will (you can nominate more than one), in which case they are known as the ’executor’. If you die without leaving a will a court can nominate the personal representative, in which case they are known as the ’administrator’.
Is there a Deadline for paying Inheritance Tax?
In most cases, Inheritance Tax must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing.
Tax on some assets, including certain land and buildings, can be deferred and paid in instalments over 10 years.
Can trusts be used to mitigate Inheritance Tax?
You may decide to use a trust to pass assets to beneficiaries, particularly those who aren’t immediately able to look after their own affairs.
Transfers of assets into certain trusts are subject to an immediate Inheritance Tax charge if they exceed the Inheritance Tax Nil Rate Band (taking into account the previous seven years’ chargeable gifts and transfers).
If you do use a trust to give something away this removes it from your estate, provided you don’t use it or get any benefit from it. But, bear in mind that gifts into trust may be liable to IHT. Trusts are complicated and it’s best to get specialist professional advice.
Could I gift my home to my children to help mitigate my IHT problem?
If you want to give your home away to your children while you’re still alive, you might want to bear in mind that:
If you keep living there without paying a full market rent (which your children pay tax on) it’s not an ’outright gift’ but a ’gift with reservation’ so it is still treated as part of your estate - and so liable for Inheritance Tax.
From 6 April 2005 onwards you may be liable to pay an Income Tax charge on the ’benefit’ you get from having free or low cost use of property you formerly owned (or provided the funds to purchase).
Once you have given your home away your children own it - where it becomes part of their assets - so if they are bankrupted or divorced your home may have to be sold to pay creditors or to fund part of a divorce settlement.
If your children sell your home as it is not their main residence, they will have to pay Capital Gains Tax on any increase in its value.
Is there anything I can do which may help the beneficiaries of my estate to pay the IHT bill?
The simple answer to this question is yes. Life Assurance, such as a whole of life plan, could be placed into trust for your beneficiaries. They could then use this money to pay the inheritance tax bill. Advice should always be sought when considering Life Assurance especially when placing these types of policies within a trust wrapper.
The representatives of your estate could also use National Savings, Gilts and participating deposit accounts to pay the Inheritance tax bill.
What do you mean by a Transferable Nil Rate Band?
Transferable Nil Rate Band arises when one party to a marriage or civil partnership dies and the amount of their estate that is chargeable to IHT does not use up the entire Nil Rate Band they are entitled to. Where this happens, the unused part can now be transferred to the surviving spouse or civil partner when they die.
How does the Transferable Nil Rate Band work?
Everyone is entitled to a Nil Rate Band for IHT. Assets that pass from one spouse or civil partner to another are exempt from IHT. So, if on death, someone leaves everything they own to their spouse or civil partner it is exempt from IHT and they have not used any part of their own Nil Rate Band. That unused Nil Rate Band can now be transferred to their surviving spouse or civil partner and used in working out the IHT liability on their estate when they die.
With regard to the Transferable Nil Rate Band will it matter when the deaths occurred?
Yes - this applies where the surviving spouse or civil partner died on or after 9 October 2007. But it does not matter how long before them their spouse or civil partner died.
With regards to the Transferable Nil Rate Band what would be the case if both deaths occurred before 9 October 2007?
Where both spouses or civil partners have died before 9 October 2007, no allowance may be transferred.
What is Probate?
The term ’probate’ means the issuing of a legal document to someone authorising them to carry out these tasks. When a person dies somebody has to deal with liquidating their estate by collecting in all the money due to them, paying off any debts they may have and then distributing their net estate to the beneficiaries.
The Probate Registry issues a probate document called a ’Grant of Representation’. There are two types of grant of representation:
1. Probate - issued to one or more of the executors named in the deceased’s Will.
2. Letter of Administration - issued when there is a Will with no named executor, or when the executors do not wish to administer the estate. This is also issued when the deceased has either not made a Will or the Will is not legally valid.
I have heard that AIM shares qualify for business property relief; therefore will an investment in this type of product be IHT free after two years?
Yes - an investment in these types of shares would qualify for business property relief; however these types of products would need to be considered with caution as they are generally high risk as the AIM market is made up of fledgling companies.
Could I sell my assets for less than they are actually worth to my children?
You could sell the assets to your children, but for the Inheritance tax calculation on your death the actual market value of the asset sold will be used rather than the amount in which you sold it for - this is known as gratuitous intent.
What is a Deed of Variation?
A Deed of Variation can be used by beneficiaries to change entitlements under a Will or intestacy for tax purposes within two years of the date of death.
There are many reasons why beneficiaries may wish to vary or redirect inheritances. The main reasons are:
- To save on IHT
- To alter the interests under a Will
- To redirect an asset held in a joint tenancy which would otherwise pass to the surviving joint tenant
- To provide for someone who has been omitted from a Will or who has not been given adequate financial provision in a Will
- To resolve any uncertainty or defect in a Will
The beneficiaries must be certain that they want to re-direct their inheritances as once they have done so, they cannot get them back. Children under the age of 18 cannot agree to a Deed of Variation, though in certain cases a court can be asked to approve any variation that affects them.
If I am making gifts or gifts into trusts which order should I do them in?
This website article will not do justice to the complexity of this question. The difference relates to gifts into a discretionary trust, a gift straight into a bare trust or a direct gift of an asset.
A discretionary trust is normally used where you want the flexibility to change beneficiaries at a later stage. A bare trust won’t give you that flexibility.
We would strongly advise seeking financial advice in this area as gifting these in the incorrect order could lead to you paying more tax than would otherwise be necessary.
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