From: Kings Court Trust
When estate planning or dealing with the estate of someone who has died, you may have to handle Inheritance Tax (IHT).
The different forms, rates, and requirements can be confusing, especially if you haven’t come across them before. This blog summarises IHT and gifting so that you can better understand the next steps.
What is Inheritance Tax?
Inheritance Tax is a tax paid upon the estate of someone who has died. It is not applicable on all estates, and it’s important to understand whether the estate you are dealing with is taxable before proceeding with the estate administration process.
IHT should be paid to HM Revenue & Customs (HMRC) by the sixth month after the person has died or it will be subject to interest. For example, if the date of death was 15 January, the IHT is payable from 1 August. A payment plan can be set up (HMRC allows payments to be paid over 10 annual instalments in certain circumstances) but payment made after the end of the sixth month will be charged an interest rate of 2.5% over Bank of England base rate.
What is the Nil Rate Band?
The Nil Rate Band (NRB) is the tax-free threshold that the estate value can hit before IHT is payable. IHT is paid on estates that exceed the NRB. This was set at its current rate of £325,000 in 2009; it is set to remain at this figure until 2028. Estates that exceed this are subject to a tax of 40% on the portion of the estate that surpasses the NRB.
Residence Nil Rate Band
There is also a Residence Nil Rate Band (RNRB), which is presently £175,000. This provides some relief when the main residence of the deceased is being passed directly to direct descendants as per the Will or the rules of intestacy.
An example of this is provided on GOV.UK:
Someone dies in the tax year 2020 to 2021 and leaves to their children:
- a home worth £300,000
- other assets worth £190,000
The maximum available RNRB in the tax year 2020 to 2021 is £175,000.
| RNRB for the estate | £175,000 |
| Basic IHT threshold (NRB) | £325,000 |
| Estate value | £490,000 |
| Estate value less RNRB (-£175,000) | £315,000 |
| Estate value less basic IHT threshold (-£315,000) | £0 |
| Amount of the estate that IHT is due on | £0 |
In this example, the full RNRB has been used up, but the unused £10,000 of the NRB would be available to transfer to the person’s spouse or civil partner.
Transferable Nil Rate Band
The NRB can be transferred between spouses and civil partners after the first death. This is referred to as the Transferable Nil Rate Band (TNRB). This means that if the first partner passes away and their estate is valued lower than the NRB or they have not used a portion of their NRB, the remaining amount will be added to the surviving partner’s threshold.
An example of this can be seen in the above case; the remaining £10,000 of NRB can be transferred to the partner of the deceased and added to their threshold. This would bring their NRB to £335,000 at the time of their death.
The TRNB is not automatically applied – a form must be filled in to make a claim to transfer it.
The different forms, rates, and requirements can be confusing, especially if you haven’t come across them before. This blog summarises IHT and gifting so that you can better understand the next steps.
What is Inheritance Tax?
Inheritance Tax is a tax paid upon the estate of someone who has died. It is not applicable on all estates, and it’s important to understand whether the estate you are dealing with is taxable before proceeding with the estate administration process.
IHT should be paid to HM Revenue & Customs (HMRC) by the sixth month after the person has died or it will be subject to interest. For example, if the date of death was 15 January, the IHT is payable from 1 August. A payment plan can be set up (HMRC allows payments to be paid over 10 annual instalments in certain circumstances) but payment made after the end of the sixth month will be charged an interest rate of 2.5% over Bank of England base rate.
What is the Nil Rate Band?
The Nil Rate Band (NRB) is the tax-free threshold that the estate value can hit before IHT is payable. IHT is paid on estates that exceed the NRB. This was set at its current rate of £325,000 in 2009; it is set to remain at this figure until 2028. Estates that exceed this are subject to a tax of 40% on the portion of the estate that surpasses the NRB.
Residence Nil Rate Band
There is also a Residence Nil Rate Band (RNRB), which is presently £175,000. This provides some relief when the main residence of the deceased is being passed directly to direct descendants as per the Will or the rules of intestacy.
An example of this is provided on GOV.UK:
Someone dies in the tax year 2020 to 2021 and leaves to their children:
a home worth £300,000
other assets worth £190,000
The maximum available RNRB in the tax year 2020 to 2021 is £175,000.
RNRB for the estate
£175,000
Basic IHT threshold (NRB)
£325,000
Estate value
£490,000
Estate value less RNRB (-£175,000)
£315,000
Estate value less basic IHT threshold (-£315,000)
£0
Amount of the estate that IHT is due on
£0
In this example, the full RNRB has been used up, but the unused £10,000 of the NRB would be available to transfer to the person’s spouse or civil partner.
Transferable Nil Rate Band
The NRB can be transferred between spouses and civil partners after the first death. This is referred to as the Transferable Nil Rate Band (TNRB). This means that if the first partner passes away and their estate is valued lower than the NRB or they have not used a portion of their NRB, the remaining amount will be added to the surviving partner’s threshold.
An example of this can be seen in the above case; the remaining £10,000 of NRB can be transferred to the partner of the deceased and added to their threshold. This would bring their NRB to £335,000 at the time of their death.
The TRNB is not automatically applied – a form must be filled in to make a claim to transfer it.
What forms are needed to pay Inheritance Tax?
Estates that do not need to pay IHT will have to complete an IHT205 form if the death was before 2022.
Deaths from 1 January 2022 onwards will not need this form, as HMRC changed the requirements from this date. Such estates are known as excepted estates. Estate details must still be reported to HMRC for excepted estates.
Estates that are subject to IHT require a IHT400 form. However, some estates that do not require an IHT payment will still need to fill out this form depending on certain circumstances as set out by HMRC. This is known as a NIL400.
Who pays Inheritance Tax?
Funds from the estate are usually used to pay IHT to HMRC. This should be actioned by the Executor or Administrator dealing with the estate. Beneficiaries do not normally pay IHT on their inheritance.
Who pays IHT on gifts?
People who you gift to in the seven years before your death may have to pay IHT on the value of their gift.
A summary of gifting
What is a gift?
In the context of estate administration, a gift is anything that has value, such as money, property, and possessions. A loss in value also counts as a gift; for example, if you sell your house to your children below market value, the difference in value is considered a gift.
Outright gifts do not count towards the value of your estate after seven years.
Exempted gifts
There are some exceptions to gifting:
- Up to £3,000 worth of gifts in any singular tax year will not be counted in your estate value. Any unused amount of this can be carried forward to the following year, but only for one year.
- Wedding or civil ceremony gifts of up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to any other person.
- Payments to help with another person’s living costs, such as an elderly relative or a child under 18.
- Gifts to charities and political parties.
You can utilise more than one of these exemptions on the same person. For example, you could give your grandchild gifts for their wedding and their birthday in the same tax year. You can give as many gifts of up to £250 per person as you want during the tax year if you have not used another exemption on the same person.
Deaths from 1 January 2022 onwards will not need this form, as HMRC changed the requirements from this date. Such estates are known as excepted estates. Estate details must still be reported to HMRC for excepted estates.
Estates that are subject to IHT require a IHT400 form. However, some estates that do not require an IHT payment will still need to fill out this form depending on certain circumstances as set out by HMRC. This is known as a NIL400.
Who pays Inheritance Tax?
Funds from the estate are usually used to pay IHT to HMRC. This should be actioned by the Executor or Administrator dealing with the estate. Beneficiaries do not normally pay IHT on their inheritance.
Who pays IHT on gifts?
People who you gift to in the seven years before your death may have to pay IHT on the value of their gift.
A summary of gifting
What is a gift?
In the context of estate administration, a gift is anything that has value, such as money, property, and possessions. A loss in value also counts as a gift; for example, if you sell your house to your children below market value, the difference in value is considered a gift.
Outright gifts do not count towards the value of your estate after seven years.
Exempted gifts
There are some exceptions to gifting:
Up to £3,000 worth of gifts in any singular tax year will not be counted in your estate value. Any unused amount of this can be carried forward to the following year, but only for one year.
Wedding or civil ceremony gifts of up to £5,000 to a child, £2,500 to a grandchild, or £1,000 to any other person.
Payments to help with another person’s living costs, such as an elderly relative or a child under 18.
Gifts to charities and political parties.
You can utilise more than one of these exemptions on the same person. For example, you could give your grandchild gifts for their wedding and their birthday in the same tax year. You can give as many gifts of up to £250 per person as you want during the tax year if you have not used another exemption on the same person.
Potentially Exempt Transfers
Potentially Exempt Transfers (PETs) are gifts that you make during your lifetime that fall outside of your gifting allowances. If you live for seven years after making a PET, the gift will be free from IHT.
If there’s IHT to pay, it’s charged at 40% on gifts given in the 3 years before you die. Gifts made three to seven years before your death are taxed on a sliding scale known as taper relief, which is calculated on the tax to be paid (not the gift amount).
| Years between gift and death | Taper relief applied to tax due | Effective rate on gift |
| 0 to 3 | 0% | 40% |
| 3 to 4 | 20% | 32% |
| 4 to 5 | 40% | 24% |
| 5 to 6 | 60% | 16% |
| 6 to 7 | 80% | 8% |
| 7+ | N/A | N/A |
Gifts with reservation of benefit
Gifts with reservation of benefit (GROB) refer to any assets that will be treated as ‘subject to reservation’ if:
- The person receiving that gift did not take full possession of the ‘property’ or enjoy the full use of the ‘property’, or
- The ‘property’ was not enjoyed by the person to the entire exclusion of the person gifting.
|
Example 1: You transfer your house into your children’s names in 2017. You continue to live there until you die in 2027 and pay no rent. This is a GROB, and the house value will form part of your estate for IHT purposes. |
|
Example 2: You transfer your house into your children’s names in 2017 and pay no rent. You move out in 2019. At this point the gift becomes a PET. You die in 2027. As you survived for 7 years, the property will not form part of your estate for IHT purposes. |
Do I have to deal with the Inheritance Tax myself?
Dealing with IHT as part of the estate administration process can be time consuming and overwhelming. Some people decide to administer the estate by themselves, but this involves a lot of complex paperwork and responsibility. If you decide to undertake the work yourself, you must complete a wide range of tasks, and you are personally liable for any mistakes made during the process.
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