Inheritance Tax (‘IHT’) is a type of UK taxation that generally applies upon someone’s death but can also become chargeable at other times.
IHT is a very complex type of tax that is chargeable at different rates, at different times and to different people.
The current general rule (in October 2024) is that UK IHT is chargeable upon the worldwide ‘estate’, (being all assets (including certain types of trusts that they are deemed to own) less liabilities at the date of charge)) of someone who is ‘domiciled’ in the UK for IHT purposes.
IHT can also become chargeable upon the estate of a person who is not domiciled in the UK, but who has assets situated in the UK at the date of charge.
When does IHT become chargeable?
On the most common occasions:-
- On death: a person is deemed by the IHT legislation to make a ‘transfer of value’, which is equal to the value of their estate on the date of their death.
- On lifetime gifts: generally, gifts made within 7 years of the date of someone’s death (such as a deathbed gift) are deemed to still be within their estate for IHT purposes.
- On trusts: certain types of trusts incur a charge to IHT on their assets (less liabilities) on various occasions.
Who is responsible for paying IHT?
- The ‘Personal Representatives’ of a deceased person: these are the person/s either appointed by a deceased person in their Will as ‘Executors’ or, if the deceased did not make a Will, the person/s entitled by legislation to apply to manage a deceased person’s estate as ‘Administrators’. However, Personal Representatives are generally only liable to pay IHT on assets that were actually owned by the deceased at the date of their death.
- The recipient of a lifetime gift: the person/s who received gifts from the deceased within 7 years of the date of death have the burden of the payment of any IHT on the value of gift (at the date it was made). This is very important for both the deceased and the recipient to know when making lifetime gifts, as the recipient should always be advised to retain enough value (particularly if the gift was cash) to pay or insure against any IHT that may become chargeable on the gift on the deceased’s death, particularly if the recipient is not a beneficiary of the deceased’s estate, as the beneficiaries of the estate are unlikely to agree to pay IHT on the value of a lifetime gift that they are not going to receive as part of the estate.
- The trustees of a trust: the trustees of certain types of trusts must pay IHT when a charge arises and which can be on various occasions. IHT chargeable upon a type of trust which the deceased is deemed to own at their date of death must be apportioned between the estate and the trust.
- The person who makes a lifetime gift: some gifts made during lifetime, such as to trusts, are chargeable for IHT purposes on the person making the gift. Additional IHT can then also become payable by the recipient trustees if the deceased dies within 7 years of making the gift.
What are the rates of IHT?
- 0%: this rate generally applies to the initial £325,000 of a deceased person’s estate, which is often referred to as the ‘Nil Rate Band’.
- 20%: this rate generally applies to occasions on which a charge to IHT arises to a person who makes a lifetime gift to a trust.
- 36%: this rate applies to the estates of deceased persons who leave a certain proportion of their estate to charity and the rest to non-charity beneficiaries.
- 40%: this rate generally applies to the estates of deceased persons above the Nil Rate Band.
Can any reductions be claimed to lower the rate of IHT?
Yes, there are many types of reductions, which are classed as either a ‘Relief’ or an ‘Exemption’. The most common types are as follows:-
- ‘Spouse/Civil Partner Exemption’: generally, gifts between Spouses/Civil Partners are exempt from IHT.
- ‘Charity Exemption’: generally, gifts to charities are also exempt from IHT.
- ‘Business Relief’: IHT chargeable on certain types of businesses (including shares thereof) and assets owned by the person to whom the charge to IHT arises, but used by such a business, can be reduced by 50% or 100%.
- ‘Agricultural Relief’: subject to various conditions, IHT chargeable on ‘agricultural property’ owned by the person to whom the charge to IHT arises can be reduced by 50% or 100%.
Conclusion
This is an extremely basic summary of IHT and is no substitute for the expert IHT advice we can deliver. Please contact us if you wish to receive a detailed analysis of how IHT may specifically apply to you.
Please email stephen.roberts@edmondsonhall.com or telephone 01638 560556 for any further information.
