The complexities of Inheritance tax: and where to get help
Last week the Office of Tax Simplification (OTS) launched a review of inheritance tax, asking both professionals and taxpayers themselves to submit views by June 8th. The Scoping Document can be found here.
A record £5.2 billion of inheritance tax was paid to the taxman in the 2017-18 tax year, despite the fact that only 4% of estates or thereabouts are subject to the tax. A recent report by insurer NFU Mutual suggests that many are missing out on complex available reliefs due to lack of awareness.
Everyone is given a basic inheritance tax threshold of £325,000 (the ‘nil rate band’) which has not changed since 2009, despite rising house prices and inflation. However, since last year, those passing on a family home have also benefited from an additional Residence Nil Rate Band allowance (currently £125,000). This allowance is increasing each year and by 2020/21 will be worth an extra £175,000 – allowing couples to pass on up to £1 million to their children.
A 40% tax is generally applied to the difference between the value of the estate and the available thresholds. However, inheritance tax is not only due on death: transfers made during a person’s lifetime can also attract the charge. Gifts made within seven years of a person’s death will be subject to IHT, unless they fall within one of the numerous gifts that are ‘exempted’. There are a number of generous gifting allowances that make gifts exempt, including the ability to make unlimited gifts out of income provided that your standard of living is not affected – and those administering estates need a good understanding of how these work.
Gifts that are not exempted are called ‘potentially exempt transfers’, because when the gift is made, no IHT is chargeable; the transfer is ‘potentially exempt’. Provided that the person making the gift survives for seven years, the transfer becomes exempt – but if they die within seven years, the transfer becomes chargeable at a tiered rate.
Further, cumulation applies: so when a lifetime gift is made, it is necessary to look back over the seven years that immediately precede the transfer. If any chargeable transfers were made during this previous period, they must be taken into account in order to determine how much of the gift giver’s nil rate band is available.
More complications arise from the fact that some property falls outside the estate for IHT purposes; whilst other property is considered to be ‘excluded’. In addition, perhaps surprisingly, tax can be due on property to which the Deceased was ‘beneficially entitled’ immediately before their death – even if they did not own it.
Preparing the estate accounts and inheritance tax forms requires a thorough knowledge of inheritance tax rules without which, mistakes can be made and too much tax can be paid. The Inland Revenue do not check to see if a particular exemption has been claimed: this is the responsibility of those preparing and submitting the accounts. Even if Executors decide to complete the administration of an estate themselves, it is advisable to have the accounts and tax forms checked by a competent solicitor to minimise the likelihood of liability for an error.
For those wondering how the inheritance tax rules will apply to their own estate, the advice of an experienced solicitor can be invaluable. Steps can be taken to minimise liability which may include using gifting allowances and/or the creation of trusts. There are many different options available, depending on your assets and circumstances. Contact our Later Life Planning department for more information.